FinCEN Moving Quickly to Regulate Beneficial Ownership of US Entities

On April 5th, the Financial Crimes Enforcement Network of the Treasury Department (FinCEN) issued an advance notice of proposed rulemaking (ANPRM) to solicit public comment on questions pertinent to the implementation of the “Corporate Transparency Act” (CTA), enacted into law as part of the National Defense Authorization Act for Fiscal Year 2021. The ANPRM seeks initial public input on procedures and standards for reporting companies to submit information to FinCEN about their beneficial owners.

Essentially, the CTA is in an attempt to quash money-laundering, financial crimes and tax evasion problems as well as to quiet the international critics of the corporate anonymity currently available in the US.  With the CTA we can essentially say good-bye to shell companies and say hello to far more regulatory burdens!

Beneficial Ownership of US Businesses – National Database on the Way

In January, soon after it was enacted, I blogged in detail about the new law mandating creation of a national database of beneficial owners of US businesses (and foreign businesses registered to do business in the US). You can read my earlier blog post for all of the features of the CTA.

The new law mandated that FinCEN issue regulations within one year of the enactment date – so, regulations must be issued by January 1 2022 but the regulations will have an effective date that is yet to be determined. The ANPRM is the start of this regulation process. The ANPRM gives us an idea of FinCEN’s focus, the areas of its concern and what’s to come.  In other words, we get a glimpse of the “hot spots” to be tackled by the regulations. That is the topic for today’s blog post.

CTA and FinCEN request for Comments

The CTA defines a beneficial owner of an entity as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity, or (ii) owns or controls not less than 25 percent of the ownership interests of the entity. The CTA defines a reporting company as a corporation, LLC, or other similar entity that is (i) created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe, or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian tribe.  As discussed in my earlier blog post, the CTA exempts certain categories of entities from the reporting requirement.

Based on FinCEN’s requests for comments, we unsurprisingly see a significant focus on defining the parameters of “beneficial owner”, what constitutes an “other similar entity” and the type of information that should be mandated so that the ownership database is of maximum use.  Here are some of FinCEN requests for comments in these areas —

1. How should FinCEN interpret the phrase “other similar entity,” and what factors should FinCEN consider in determining whether an entity qualifies as a similar entity?
2. What types of entities other than corporations and LLCs should be considered similar entities that should be included or excluded from the reporting requirements?
3. If possible, propose a definition of the type of “other similar entity” that should be included, and explain how that type of entity satisfies the statutory standard, as well as why that type of entity should be covered. For example, if a commenter thinks that state-chartered non-depository trust companies should be considered similar entities and required to report, the commenter should explain how…such companies satisfy the requirement that they be formed by filing a document with a secretary of state or “similar office.”
4. Is the definition of “beneficial owner”, including the specified exceptions, sufficiently clear, or are there aspects of this definition and specified exceptions that FinCEN should clarify by regulation?
5. To what extent should FinCEN’s regulatory definition of beneficial owner in this context be the same as, or similar to, the current CDD rule’s definition or the standards used to determine who is a beneficial owner under 17 CFR §240.13d-3 adopted under the Securities Exchange Act of 1934?
6. Should FinCEN define either or both of the terms “own” and “control” with respect to the ownership interests of an entity? If so, should such a definition be drawn from or based on an existing definition in another area, such as securities law or tax law?
7. Should FinCEN define the term “substantial control”? If so, should FinCEN define “substantial control” to mean that no reporting company can have more than one beneficial owner who is considered to be in substantial control of the company, or should FinCEN define that term to make it possible that a reporting company may have more than one beneficial owner with “substantial control”?
8. What information should FinCEN require a reporting company to provide about the reporting company itself to ensure the beneficial ownership database is highly useful to authorized users?
9. What information should FinCEN require a reporting company to provide about the reporting company’s corporate affiliates, parents, and subsidiaries, particularly given that in some cases multiple companies can be layered on top of one another in complex ownership structures?
10. Should a reporting company be required to provide information about the reporting company’s corporate affiliates, parents, and subsidiaries as a matter of course, or only when that information has a bearing on the reporting company’s ultimate beneficial owner(s)?
11. What information, if any, should FinCEN require a reporting company to provide about the nature of a reporting company’s relationship to its beneficial owners (including any corporate intermediaries or any other contract, arrangement, understanding, or relationship), to ensure that the beneficial ownership database is highly useful to authorized users?

Other areas for comment were also set out in the ANPRM and interested readers can easily access it here.  Comments are due no later than May 5, 2021.

What about Trusts and Foundations?

Personally I am wondering how trusts and foundations will eventually be addressed by the CTA and the forthcoming regulations.  Trusts, for example, are prime vehicles for nefarious activities since the vast majority of trusts in the United States do not register with any State / government agency. Only a handful of States have enacted provisions for registering trusts: Alaska, Hawaii, Michigan, Nebraska, Colorado, Idaho, Missouri, North Dakota, Florida, and Maine. Even with these provisions in place, registering a trust is not mandatory in some of them. There are other nuances as well (e.g., Colorado initially does not require the registration of a trust, but does require it once the grantor of the trust passes away. Registration is still not required if all of the trust property is distributed to the beneficiaries upon death).  The CTA does require that studies be undertaken by the Department of the Treasury and submitted to Congress to determine the effectiveness of its provisions and identify other areas of risk.  Certainly, the risks posed by trusts will be on the agenda and we may see this issue addressed sometime soon.

As for foundations, which are very popular in civil law jurisdictions, these are newer creatures slowly being recognized in the USA and they do require registration. Two US states have now enacted “foundations” regimes, so it is possible to create a US “foundation”. The legislation is quite new. By recognizing foundations, families from civil law countries in which foundations are preferable to trusts as wealth management vehicles can benefit from having a US-based structure. You can learn more about foundations in my discussion with Jimmy Sexton LLM on his recent podcasts here and here.

In a foundation, the relevant parties include the organizer, founder, and director(s), and it may include a beneficiary(ies) and a protector. It is not clear to me who would be treated as the “beneficial owner” for purposes of the CTA.  Watch this space!

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