The Act requires a report be filed with the Financial Crimes Enforcement Network (FinCen) that identifies each beneficial owner of an applicant forming a reporting company. While questions remain as to the full implications of the Act, it represents an important step in the right direction for the United States in the battle against money laundering and terrorist financing.
The current measure, if enacted, brings the United States closer to parity with other developed nations, which have enacted similar mandates.
What is a reporting company?
A reporting company is defined as a corporation, limited liability company or other similar entity that is created by filing a document with the secretary of state (or an equivalent office) of any state, or formed under foreign law and registered to do business in the United States in a like manner. The Act exempts many categories of companies from the reporting requirement, specifically:
- Companies that are already subject to supervision or otherwise closely regulated by the federal government (e.g., banks)
- Dormant companies
- Companies that employ more than 20 people, filed a tax return reporting gross receipts in excess of $5 million, and have a physical presence in the United States
- Any entity owned by an entity otherwise exempt
A beneficial owner is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over an entity or (ii) owns or controls at least 25% of the ownership interests in an entity. A few notable exceptions from the Act include:
- Minors, provided that information with respect to a parent is otherwise reported
- An individual acting as nominee, intermediary, custodian or agent on behalf of another individual
- Persons who control an entity solely because of their employment
- An individual whose only interest in a reporting company is through a right of inheritance
An applicant is defined broadly as an individual who files an application to form an entity.
What information must be reported and when?The report shall include the name, date of birth, current address (business or residential) and unique identifying number from an acceptable document for each beneficial owner and/or an applicant, with an option for such individuals to request and use a FinCEN unique identifying number instead. Existing entities will be required to report this information within two years of the effective date, which regulations promulgated within one year of enactment will determine. The report will be required for newly formed entities at the time of formation. Finally, a reporting company will need to update the information provided to FinCEN upon a change in beneficial ownership.
Where is the information stored and who has access to it?
FinCEN will store the information received pursuant to the Act in a private database not accessible to the public. The information will be made available to Federal and state law enforcement agencies pursuant to an appropriate request—state law enforcement requests require court approval. The Department of the Treasury, the custodian of the records through FinCEN, has its own broad and separate authorization to use the information, including for purposes related to tax administration. Foreign law enforcement also may request information from the database through an appropriate agency of the federal government—but the information will not be subject to any automatic reporting or exchange of information. Finally, financial institutions will have access to the database for customer due diligence purposes.
Customer due diligence requirements for financial institutions will be updated to conform to the requirements of the Act and to take into account access by financial institutions to the information compiled under the Act. This means that the establishment of any entity account with a financial institution likely will require compliance, by the entity, with the Act—providing a practical barrier to non-compliance.
What are the penalties for violating the law?
The willful failure to provide complete and/or updated information required under the Act or willfully providing false or fraudulent information carry steep civil and criminal consequences. Violations carry civil penalties of up to $500 per day that the violation continues and criminal fines up to $10,000 and/or imprisonment for up to two years. The obligations under the Act apply to beneficial owners and to applicants. The unauthorized disclosure of information collected under the Act carries the same civil penalty but a higher criminal penalty of up to $250,000 and a higher maximum term of imprisonment of five years. Unauthorized disclosure includes both a disclosure by a government employee and a disclosure by a third-party recipient of information under the Act.
Unregistered foreign entities. Notably, the Act does not require disclosure of the beneficial owners of a foreign entity if the entity does not register to do business with a state. Presumably, an individual may still be able to access anonymously the US financial or real estate markets using a foreign entity that does not register to do business in a state. It will be interesting to see how the changes to the customer due diligence requirements for financial institutions will affect entities that are not required to file reports under the Act.
Impact. The Act goes a long way in preventing the misuse of entities to hinder the efforts of law enforcement to combat money laundering. The Act includes a provision prohibiting the issuance of any type of certificate evidencing ownership of such entity in bearer form—a longstanding target of anti-money laundering initiatives. The Act captures indirect ownership; for example, a limited liability company formed by a foreign corporation should have to report the information of a non-US person shareholder of the foreign corporation.
It remains to be seen how the regulations promulgated under the Act will deal with ownership of a reporting company by trusts, estates and other complex structures commonly used to meet the multijurisdictional requirements of private clients and their families. For example, if a corporation is wholly owned by a bank (which is exempt) as trustee, does the exception for entities owned by other exempt entities eliminate the disclosure requirements for the corporation?
How would ownership and/or control be measured with respect to discretionary beneficiaries of trusts?
Will the relatively new customer due diligence rules with respect to entities be looked to as a model or will the Report of Foreign Bank and Financial Accounts FBAR rules be used as a standard (31 C.F.R. § 1010.230; 31 C.F.R. § 1010.350)?
Using the customer due diligence regulations as a guide, if a trust owns more than 25% of the equity interest in a company, the trustee would be considered the beneficial owner, regardless of whether the trustee is a natural or legal person (31 C.F.R. § 1010.230(d)(3); see also Fin. Crimes Enf’t. Network, FIN-2018-G001, Frequently Asked Questions Regarding Customer Due Diligence Requirements for Financial Institutions (2018)). Presumably, the beneficial owner requirements in the Act will go further than the customer due diligence regulations; it will be interesting to see how they approach some of these questions.