Earlier this month, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) closed the first round of public comment ahead of the rulemaking on the historic, bipartisan Corporate Transparency Act (CTA), passed this year by Congress to end the abuse of anonymous U.S. shell companies. After fielding more than 200 comments – from civil society, financial institutions, large and small businesses, real estate trade groups, law enforcement, secretaries of state, and yes, even the congressional authors of the CTA – FinCEN has been given the mandate and expert guidance needed to stand up beneficial ownership disclosure requirements. It must now develop a meaningful rule by the January 2022 deadline prescribed by the law.
Background
The CTA directs FinCEN to take the simple but effective transparency measure of requiring businesses operating in the United States to name their true, “beneficial” owners to the U.S. government at the time of formation and provide updates as ownership information changes.
This reform upends a long history of financial secrecy in the United States, which the Tax Justice Network ranks as the second worst offender in that category in global comparisons. It requires less information to incorporate a U.S. company than it does to get a library card in all 50 states. Dictators, kleptocrats, arms traffickers, counterfeiters, and tax cheats have all been caught exploiting U.S. secrecy to hide profits and to launder the ill-gotten gains of crime and corruption.
The new policy is long overdue, bringing America into better alignment with its international allies in the U.K., Europe, and elsewhere that have similar directories – many of them public – to help combat money laundering through anonymous shell companies. During FinCEN’s comment period, Canada announced it would soon take steps to establish its own public registry.
Comments Point to Modern, Inclusive Reporting Standard
With such progress now cemented, FinCEN has a responsibility to craft a rule that delivers on the promise of the CTA and provides information useful for anti-money laundering purposes. Commenters wrote in broad agreement: to be effective, a final proposal should enshrine provisions that promote the investigative utility of and authorized access to beneficial ownership data reported under this law.
The FACT Coalition submitted a 157-page blueprint that outlines in detail the most critical areas in need of FinCEN’s careful review. These include recommendations around the definition of beneficial ownership, range of entities included as “reporting companies”, form of access to the database, and methods to ensure the quality of the data. Notably, a diverse coalition of 33 groups representing the interests of large businesses, consumer protection groups, environmental advocates, and human rights defenders likewise submitted a comment endorsing FACT’s top concepts to guide FinCEN’s approach.
Support for these provisions has likewise hailed from varied sources. For instance, business groups like the American Sustainable Business Council noted that they see the definition in law as a “simple and clear metric for determining who a business would need to identify to FinCEN” that “would not impose any undue confusion or cost for legitimate small business owners to comply.” Anti-corruption groups like Transparency International-US and national security experts like Josh Rudolph from the German Marshall Fund urged a step further in favor of providing greater clarity around the definition of “beneficial owner” in a way that clearly points to at least one human being who owns or controls an entity, including by providing direct examples of what constitutes “control”. Other groups like the National Resource Governance Institute – fluent in beneficial ownership standards via its work around the Extractives Industry Transparency Initiative – and investigators like the National District Attorneys Association likewise urged FinCEN to include in reporting requirements details of entities’ subsidiaries and parents, to help provide clarity around the nesting dolls of corporate ownership.
Commenters also urged FinCEN to require disclosure of a variety of entities, to avoid inadvertently creating loopholes through other secretive legal structures. Authors of the Corporate Transparency Act, Senator Brown, Chairwoman Waters, and Representative Maloney confirmed in their letter that, “…We intended for the scope of the bill to be construed as broadly as possible, and for the exemptions to be construed as narrowly as possible.” Likewise, four bipartisan senators noted, “…FinCEN should be mindful not to leave loopholes that could dilute the quality of the information collected or allow bad actors to evade reporting.” Industry groups – like the Bank Policy Institute and American Land and Title Association (ALTA) – have likewise urged broad definition of reporting companies to facilitate anti-money laundering due diligence activities, out of concern that the alternative “may increase illicit financial risk.” Their view is shared even by entities most likely to be doing the bulk of the reporting. For instance, Small Business Majority suggested that FinCEN could provide “clarity and predictability for businesses” by including a wide scope of entities not expressly exempt by the CTA, suggesting that “[e]ven-handling of various corporate entities will remove unnecessary confusion about whether an entity needs to file.”
The CTA includes a mandate that beneficial ownership data be “highly useful to law enforcement.” More than a dozen submissions underscored that, to fulfill that mandate, FinCEN must allow authorized users complete and timely access to records in the database. Of the categories of users authorized for access by the CTA, state and local law enforcement have some of the more complicated access provisions by law and are required to obtain authorization from a “court of competent jurisdiction” before running a database query. The Fraternal Order of Police, National Association of Assistant U.S. Attorneys (NAAUSA), and the National District Attorneys Association each urged FinCEN to craft the rule with timeliness and usefulness in mind and minimize unnecessary hurdles to use the data for law enforcement activities. The National Association of Attorney Generals – with 38 state attorneys general in support – further reiterated the need for “elasticity” in the provisions to gain access to the database. Large business groups, such as the U.S. Council for International Business, and small business groups, like Small Business Majority, likewise endorsed the idea, recognizing law enforcement’s role in protecting businesses from fraud and illicit commerce.
Nearly universally, the comments in favor of the rule agreed that the fate of the database rests on the accuracy of the information contained therein. Tens of comments urged FinCEN to take the needed step of establishing real-time verification protocols to check data as filers submit their details to FinCEN: to ensure the usefulness of data for investigations, reduce human error, and minimize the costs to small business.
The Path Forward
After reviewing the comments and consulting with other agencies, FinCEN will put pen to paper and draft a rule on the Corporate Transparency Act to be published likely this fall, if the process stays on course to meet the statutory deadline of January 2022.
Responsibility for successful implementation does not fall solely to FinCEN, but rather demands further attention from Congress. Congressional appropriators must fund FinCEN to ensure the agency can implement the provisions in the law. Just last month, nearly 40 representatives sent a letter to House appropriators underscoring the need to fully fund FinCEN, in part to stand up this new disclosure regime.
Most immediately, FinCEN needs funding to source the hardware and know-how to build a modern database that stands on equal footing with other global beneficial ownership directories. The Biden Administration’s topline budget request for FY2022 included $191 million for FinCEN, $64 million above the current fiscal year’s enacted level, to “help combat the use of complex corporate structures to shield illegal activity.” Congress should meet that request but consider moving even more quickly – perhaps attaching funds to another appropriations vehicle – to ensure the agency has the necessary resources.
Likewise, the Biden Administration has a key opportunity to weave beneficial ownership reform into its international anti-corruption agenda. Treasury and FinCEN should collaborate with its partners at the State Department to offer progress on beneficial ownership disclosure as a deliverable for key international anti-corruption milestones, whether at the UN General Assembly Special Session Against Corruption, the G7, or the yet-unscheduled Summit for Democracy.
The United States – as the world’s largest economy – has a huge opportunity to set a new standard for transparency and anti-corruption in delivering an outcome on this critical anti-money laundering issue. FinCEN must work with civil society, law enforcement, industry, and small businesses to deliver.