Once the Corporate Transparency Act comes into effect, U.S. companies will have to report their Ultimate Beneficial Owner (UBO) information to the Financial Crimes Enforcement Network (FinCEN). In 2022, any new incorporation or significant UBO change will need to be reported and any company formed before the effective date of the Act will have two years to report to FinCEN.
The use of anonymous shell companies, complex ownership structures that often make it difficult to identify true company ownership, has long been one of the critical weaknesses of Anti-Money Laundering efforts in the U.S. In its 2016 Mutual Evaluation Report (MER) of the U.S. government’s AML/CFT program, the Financial Action Task Force (FATF) noted that the “lack of timely access to accurate beneficial ownership information remains one of the most fundamental gaps in the U.S. context.”
Many states have no requirements for collecting beneficial ownership information. For example, incorporating in Delaware allows companies to form quickly, inexpensively and with no identity requirements. As a result, numerous shell companies were formed there, further resulting in many financial crime investigations. The federal Corporate Transparency Act will overlay all state-based UBO reporting obligations.
While regulated entities in the U.S. have had to identify and verify the identity of the beneficial owners of business customers at the time a new account is opened, as per the Financial Crimes Enforcement Network (FinCEN) Final Rule, it is now the responsibility of the entity itself to provide the beneficial ownership information.
U.S. UBO reporting requirements
When considering the FATF’s Best Practices on Beneficial Ownership for Legal Persons, the Corporate Transparency Act is best categorized as a registry approach. Each reporting company will need to provide FinCEN with four pieces of information:
(i) A beneficial owner’s full legal name
(ii) A beneficial owner’s date of birth
(iii) A beneficial owner’s current residential or business street address
(iv) A government-issued identifying number assigned to that beneficial owner from an acceptable identification document (such as passport, driver’s license or other U.S. state-issued identification document).
It’s important to note that the registry will not be publicly available, but the information will be available to law enforcement or financial institutions (with customer consent).
According to a National Law Review article, “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.” The fact that this UBO information is available to financial institutions implies that the checking and confirmation of UBO registry information will become a necessity for reporting companies. But not all companies will be required to report their UBO information to FinCEN. Exemptions include:
- Companies with more than 20 employees and gross receipts or sales of more than $5 million and a physical presence in the U.S.
- Reporting companies like banks, credit unions and registered brokers or dealers
- Dormant companies
- Unregistered foreign entities (companies that aren’t registered with a state)
The specific definition of a beneficial owner in the Act is:
“A natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
(i) Exercises substantial control over a corporation or limited liability company;
(ii) Owns 25% or more of the equity interests of a corporation or limited liability company; or
(iii) Receives substantial economic benefits from the assets of a corporation or limited liability company.”
Providing false or fraudulent UBO information carries penalties of up to $10,000 and two years in jail.
Improving AML practices
Many compliance experts are cheering this development as anonymous shell companies have historically been connected with enabling money laundering, corruption, fraud and tax evasion. According to the Bank Policy Institute (BPI), a nonpartisan public policy, research and advocacy group, the collection of UBO information has a direct connection on reducing crime. BPI points to a study that finds “after anonymity is no longer freely available to domestic and foreign investors, all-cash purchases by corporations fall by approximately 70%, indicating the share of anonymity-seeking investors using LLCs as ‘shell corporations.’”
The FATF best practices document, “A well-resourced and proactive company registry holding beneficial ownership information can be an effective mechanism because it provides a useful basis for competent authorities to access to such information.” But the FATF also notes that it is up to the registry to actively verify and monitor the UBO information for this approach to be successful.
There is also the consideration of how the regulations that result from the Act will deal with trusts, estates and other complex financial structures. While the passing of the law is an essential first step, the details of the regulations to come and how FinCEN operates the registry will be the telling factors of how successful the Corporate Transparency Act actually is. The law designed to curtail financial crimes by limiting anonymous shell companies is a significant development in the fight against money laundering. The results are sure to be closely monitored by AML experts around the world.