Action on Beneficial Ownership

April 18, 2018

In May 2016, the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) issued the Customer Due Diligence (CDD) Final Rule with an effective date of May 11, 2018. The rule requires covered financial institutions to collect and verify the identity of at least one controlling party and any beneficial owners who own a minimum of 25 percent equity interest in the legal entity, during the account opening process, and for periodic reviews. The Final Rule can be found here.

The final rule – designed to combat money laundering, terrorist financing and other illicit financial activity by clarifying and strengthening CDD requirements for banks and other financial institutions – requires covered institutions to disclose the beneficial owners of entities opening new accounts. The term “beneficial owner” is defined in the rule as (1) each individual, if any, who directly or indirectly owns 25 percent or more of the equity interests of a legal entity customer and (2) a single individual with significant responsibility to control, manage or direct the entity.

The CDD Rule requires firms to have “risk-based” procedures to verify the identity of beneficial owners “to the extent reasonable and practicable.” These verification procedures must contain the same elements required for verifying the identity of customers who are individuals under applicable Customer Identification Program (CIP) requirements. Firms may rely on the beneficial owner information as supplied by the customer, provided that the firm knows no facts that would reasonably call that information into question.

FinCEN initially proposed the CDD Rule in 2012, arguing that requiring financial institutions to identify beneficial owners of accounts would help protect the U.S. financial system from criminal abuse and guard against terrorist financing, money laundering and other financial crimes. The proposal sparked significant response from the industry, with FinCEN receiving a total of 231 comments, many raising concerns about the costs and challenges of obtaining and verifying beneficial ownership information, and of implementing necessary system changes and training within FinCEN’s initially proposed one-year deadline. In response, FinCEN modified its original proposal somewhat. For instance, while FinCEN had proposed requiring firms to use a standard certification form to obtain beneficial ownership information, the revised rule permits, but does not require, use of the standard form. FinCEN also extended the original one-year compliance deadline to two years.

Meanwhile, the Senate Judiciary Committee held a hearing on Feb. 6 on Sen. Sheldon Whitehouse’s (D-R.I.) S. 1454, the True Incorporation Transparency for Law Enforcement Act, which is the latest iteration of his beneficial ownership bill. This legislation is substantially similar to the draft House Financial Services Bill by Rep. Steve Pearce (R-N.M.), entitled the Counter Terrorism and Illicit Finance Act. Please click here to view the Discussion Draft language.

Of particular concern to NSBA is section 9 of this bill, titled “Transparent Incorporation Practices,” which is directed squarely at the smallest businesses – specifically, those firms with 20 or fewer employees would be subject to the rules. Section 9 imposes a new beneficial ownership reporting requirement, meaning that every business in America would either have to file these reports with FinCEN or file a report indicating which exemption applies. In turn, it requires FinCEN to disclose that information to federal and foreign government agencies and financial institutions on request. Any ownership changes would have to be reported within 60 days, and failure to comply could result in fines of up to $10,000 and prison sentences of up to three years.

This new federal regulatory regime created by section 9 of the draft bill, combined with the broad and confusing definition of beneficial owner, would be costly and would impose unreasonable regulations on certain small businesses; permit the government to disclose small-business owners’ personal information to banks and government agencies; and impose harsh penalties for failure to update it.

The bill exempts several groups from this reporting requirement including: publically traded companies, banks, credit unions, broker-dealers, insurance companies, accounting firms, utilities, governments, and tax-exempt organizations. Businesses with more than 20 employees would also be exempt, thus, the bill is solely targeted towards smaller-business owners.

These reports must include their current residential or business street address, and a unique identifying number of the firms’ shareholders or limited liability company members. The unique identifying number must come from a non-expired passport issued by the U.S. government or a non-expired driver’s license issued by a state. Partnerships, limited liability partnerships, business trusts, and associations would be exempt because the reporting requirements only apply to corporations and limited liability companies.

However, there is one notable difference that makes the Senate bill even more troublesome. S. 1454 requires states to amend their incorporation laws and the information is collected at the state level (as opposed to FinCEN in House bill), and since there is nothing in the legislation that would supersede “Right to know” laws in 40+ states, much of the beneficial ownership information collected under S. 1454 would end up in the public domain.

NSBA is working with a coalition led by the Center for Capital Markets Competitiveness (CCMC) at the U.S. Chamber of Commerce to address this issue, as well as signed onto a letter expressing NSBA concerns with S. 1454, the True Incorporation Transparency for Law Enforcement (“TITLE”) Act, as it related to beneficial ownership.