The Corporate Transparency Act Puts Spotlight on Beneficial Ownership Information

For the ever-widening battle against money laundering and financial crime, new Corporate Transparency Act regulations are designed to shed light on illicit shell companies and other maneuvers, including suspected terrorist financing, that have eluded law enforcement.

For business entities in the U.S. that are required to register under the reporting rules for beneficial ownership information (BOI) – an estimated 33 million this year alone – the work has only just begun.

The act, which passed in 2021 with bipartisan congressional and considerable private-sector support, is implemented by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The agency’s BOI Regulation was formally adopted last September for reporting to begin January 1. A final rule in December laid out database protection and disclosure practices along with “two interagency statements to give banks and non-bank financial institutions guidance on the interplay between the final rule and FinCEN’s existing Customer Due Diligence Rule.”

 FinCEN Director Andrea Gacki

“This final rule is a significant step forward in our efforts to protect our financial system and curb illicit activities,” said FinCEN Director Andrea Gacki. “BOI can provide essential information to law enforcement, intelligence, and national security professionals as they work to protect the United States from bad actors who exploit anonymous shell companies to engage in money laundering, corruption, sanctions and tax evasion, drug trafficking, fraud, and a host of other criminal offenses with impunity, while legitimate businesses suffer from their misdeeds.”

Also on January 1, Gacki noted, FinCEN launched its “beneficial ownership information technology system to securely collect, process and store that information,” governed by access rules effective on February 20.

“Not a Haven”

“We’re closing a loophole and sending a clear message: The United States is not a haven for dirty money,” Secretary of the Treasury Janet Yellen said at FinCEN headquarters on January 8, when 100,000 BOI reports had already been filed.

Yellen stressed that corporate transparency, enhancing previous anti-money laundering, -crime and -corruption measures, has not only national security and law enforcement implications, but also brings economic benefits: “protecting our financial system, reducing due diligence costs, enabling fair business competition and increasing tax revenue.”

She added that FinCEN’s technology will make reporting “as easy as possible for the small businesses at the heart of the American economy,” an apparent acknowledgement of that sector’s criticism of the compliance burden and a lawsuit filed against her by the National Small Business Association.

Representative Patrick McHenry, chair of the House Financial Services Committee, late last year called for a delay in implementing the BOI rule, saying it was more costly and complex than Congress had intended. At a February 14 hearing, the North Carolina Republican complained that despite what was supposed to be a “silver bullet,” there was no end to FinCEN’s “requests for new authorities and more money.”

Stepping Up Enforcement

Tony Petrov, chief legal officer of identity verification service Sumsub, says that a transparent BOI registry can play a crucial role in promoting financial integrity and accountability.

“At its most basic, transparent registries enable law enforcement to investigate potential cases of illicit activities, including money laundering and fraud,” he explains. “At the same time, the beneficial ownership registry allows tax authorities to monitor and enforce tax compliance.

 Heather Olsson of K2 Integrity

“The authorities can rapidly take action in case of violations. The compliance requirements will benefit financial institutions without a significant cost, preventing economic crimes and upholding the integrity of the financial system in exchange for the disclosing of essential information for the greater good."

Many, however, regard the transparency requirements as one more layer of red tape. Secretary Yellen signaled sensitivity to such concerns by suggesting that the benefits “for all of us will far outweigh what should be a relatively straightforward effort to comply.”

Heather Olsson, managing director at risk and compliance advisory and investigative firm K2 Integrity, comments, “Criminals have historically been able to exploit the lack of uniform laws and regulations in the United States, and the Corporate Transparency Act aims to bridge this gap through making beneficial ownership information available to the federal government at the time of new-company formation and applying a national requirement on what beneficial information must be reported for certain company types.”

The BOI database is expected to “help facilitate law enforcement investigations and make it harder for criminal actors to hide behind corporate entities.”

Lines of Resistance

Eric Young, senior managing director at Guidepost Solutions, appreciates the intent of reducing the regulatory burden on both small businesses and regulated organizations such as banks and other financial institutions. Previously difficult-to-discern BOI data “from privately-held and other small entities such as LLCs would then be made available to U.S. and foreign enforcement and other agencies and financial institutions.”

But the data access rules make it technically challenging for small businesses to retrieve complete and accurate information pertaining to owners. This in turn can prevent banks and other financial firms from effectively and efficiently “knowing their customer” in a risk-based and compliant manner, which could work against the law’s intent.

 Eric Young of Guidepost Solutions

“The perpetual challenges will probably continue to exist,” says Ben Rayner, senior vice president of Silent Eight for the U.K., India, Middle East and Africa. “Those who have nothing to hide will report as per the act. Those who create opaque ownership structures will likely find another way to maintain that lack of transparency.” The latter group might try to exploit exemptions in the law or mount legal challenges, as has been done in Europe.

He cites contentions made in Luxembourg that a beneficial ownership registry was in conflict with the European Union’s Charter of Fundamental Rights. That argument might not fly in the U.S., where the beneficial ownership information will not be publicly accessible. Rayner is more concerned about the verification of BOI data to ensure its efficacy. Although submitting a false report is fraudulent, “rarely have regulations been enough for criminals to come out of the shadows with their hands up,” he observes.

Costs for Banks

Rayner adds that the reports are just a starting point, and financial institutions are naturally concerned that they will have to spend significant sums on validating the reports that have been submitted and are being relied upon for due diligence.

"Those that simply rely on what is submitted are likely to face scrutiny from the regulator," he warns. He is “not so sure” that investigation and validation of beneficial ownership will be equally or less costly than it currently is. “Now, if an institution finds that the report submitted is incorrect or incomplete, it has to determine whether that was intentional and therefore warrants submission of a Suspicious Activity Report [SAR].”

Michael Schmied, co-founder and lead financial consultant of Kredite Schweiz in Zurich, expects the requirements to be effective but “will likely introduce additional costs for financial institutions” – whether from having to implement new systems or processes, or from potential penalties for non-compliance.

 Michael Schmied of Kredite Schweiz

He still agrees with the notion that “the benefits of enhanced transparency and security outweigh the financial implications.”

Young of Guidepost Solutions envisions “major difficulties, burdens, and potentially significant costs” over the coming year for reporting entities – especially small enterprises – and financial institutions.

“The reporting entities must accurately and timely obtain sensitive information from multiple beneficial owners, which are already subject to strict data privacy laws,” Young says. ”Furthermore, the proposed rules compound, rather than leverage, longstanding customer due diligence (CDD) and Know Your Customer rules, because access to the BOI Registry by financial institutions remains restrictively narrow and redundantly requires the reporting entity’s consent.”

Even with a January 1, 2025, due date, “the risks of non-compliance could be significant, especially with a revised FinCEN CDD proposal. This will require additional IT and operational changes – and costs.”

Assessing the Bottom Line

As for the key question that arises with any new legal requirements – Will they have the intended effect? – Rayner believes that regardless of the bottom-line result, the Corporate Transparency Act is absolutely necessary.

“Transparency is at the heart of regulatory change, and it is only by every jurisdiction raising the bar and financial institutions responding in kind that any meaningful change can be effective," the Silent Eight executive says. “This can only be the start; the changes will be required without doubt as corporate entities exploit any loopholes that they identify.”

To Olsson of K2, the act is a huge step forward in closing loopholes in the U.S. legal framework and providing useful information for law-enforcement action against criminal activities:

“Consequences for non-compliance include sizable fines and possible jail time,” while “FinCEN is now positioned to collect and provide beneficial ownership information to financial institutions with a legal entity customer’s consent.”