US Treasury begins rule-making process for beneficial ownership reporting

The CTA was enacted on 1 January 2021 as part of the Anti-Money Laundering Act 2020, itself an addendum to the annual National Defense Authorization Act. The CTA amends the Bank Secrecy Act to require corporations, limited liability companies and 'similar entities' to report certain information about their beneficial owners. It also requires FinCEN to develop a secure database to house all this collected beneficial ownership information. This database will not be available to the general public, but FinCEN will be authorised to disclose it to several categories of recipients, including federal law enforcement.

Experts say that the primary legislation leaves many implementation details open to interpretation, including the 'similar entities' phrase cited above. Key issues to be resolved by FinCEN's guidance include whether the law will apply to partnerships and trusts, as well as the appropriate definition of 'reporting company' and 'beneficial owner'. Law firm Covington says it expects FinCEN to be ‘especially focused on the reporting obligations of entities (including investment vehicles) that operate through partnership or trust structures.’ One question raised by FinCEN’s consultation is if it should explicitly exclude from reporting requirements any group of entities that is not expressly exempted under the text of the CTA, such as the private funds industry and foreign public companies.

It is likely that trusts themselves will generally not be considered a reporting company because most trust formations do not require the filing of a state document, says law firm Kozusko Harris Duncan. However, it is unclear how the CTA will treat trust ownership of a reporting company.

The definition of 'beneficial owner' also needs to be clarified. FinCEN is asking whether the existing statutory 'ownership and substantial control' tests are sufficiently clear and whether they should be aligned with similar tests in other legislation. If the new regulations follow the same principles as FinCEN's current customer due-diligence (CDD) rule, which requires US financial institutions (FIs) to identify and verify beneficial ownership information for their legal entity customers at the time of opening a new account, the beneficial owner of a trust is usually the trustee.

FinCEN also needs to decide whether reporting entities with complex structures should have to disclose chains of ownership and other interrelationships, which would raise important confidentiality concerns, says law firm Covington. Relevant to this are the criteria FinCEN should employ before deciding to disclose beneficial ownership information pursuant to a law enforcement request and what additional security and privacy measures it should implement to protect its cache of beneficial ownership information.

FinCEN has not provided a timeline for when the rules would be finalised, but it is expected to happen by 1 January 2022.

Reporting companies, FIs and others interested in these topics should strongly consider submitting comments to FinCEN, either directly or through counsel or their trade associations, says Covington. Comments must be sent to FinCEN by 5 May 2021.

Sources

• FinCEN
• Buckley
• Covington & Burling
• Cadwalader
• Fried Frank