In early December, the U.S. Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking implementing Section 6403 of the Corporate Transparency Act (CTA), which allowed the public until Feb. 7, 2022, to review and comment on the proposed rules. According to the proposed rulemaking, the ability to operate through legal entities without requiring the identification of beneficial owners is a key risk for the U.S. financial system. Therefore, the CTA seeks to set a clear federal standard for incorporation practices, protect vital U.S. national security interests, protect interstate and foreign commerce, better enable various law enforcement agencies to counter illicit activities and bring the U.S. into compliance with international standards. If enacted, these rules would add a number of government reporting requirements to certain entities, and financial institutions could have access to this information which could possibly ease the burden of customer due diligence.

The purpose of the CTA is to curtail illicit use of the U.S. financial system by forming a centralized government database of beneficial ownership information that certain institutions and the government could access. To create this database, the proposed rules would require certain entities to report specific information about their “beneficial owners,” as FinCEN looks to eventually create a beneficial ownership registry. Banks with customer due diligence requirements are very familiar with “beneficial owners” as they are currently required to collect such information at account opening.

FinCEN defines a “beneficial owner” as every individual who, directly or indirectly, through contract, arrangement, understanding, relationship or otherwise, exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interest of the reporting company. The proposed rules set forth three indicators of “substantial control:” (1) service as a senior officer; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body); and (3) direction, determination, or decision of, or substantial influence over, important matters of a reporting company. The proposed rules also include a catch-all provision clarifying that substantial control can take additional forms not specifically listed.

In addition to the beneficial owner information, the proposed rules require reporting companies to report identifying information about each “company applicant.” A “company applicant” is a person who files a document that creates a domestic reporting company or who first registers a foreign reporting company with a secretary of state or similar office in the U.S. Additionally, the proposed definition of a company applicant includes any person who directs or controls such filing by another person.

Any company newly formed or registered on or after the effective date of the regulations must file a report within 14 calendar days from its date of formation or registration. Companies that have been formed or registered prior to the effective date of the regulations are required to file a report within one year from the effective date (the proposed rules shorten this filing deadline from two years in the CTA). Further, companies have an affirmative obligation to update the information they provide to FinCEN within 30 days of any changes in the information. This includes changes with respect to the identity of a beneficial owner, as well as changes to the information reported for any beneficial owner or company applicant.

Collecting this information is intended to help prevent and combat money laundering, terrorist financing, tax fraud and other illicit activity, FinCEN said in its notice of proposed rulemaking. But how will these proposed reporting requirements affect community banks? Under FinCEN’s existing regulations, covered financial institutions have the requirement to collect and verify beneficial ownership information from their customers and maintain records of such information. But until now, their customers – including individuals and companies of varying sizes – did not have to report such information to the government. The CTA makes companies subject to such beneficial ownership reporting requirements, and financial institutions will have access to this information. The availability of beneficial owner information to financial institutions with customer due diligence obligations would be practical and useful. For instance, financial institutions could use beneficial owner information for other customer identifications purposes, and reporting companies could pre-approve specific financial institutions that should have access to their information.

Comments on the proposal were due February 7. FinCEN is planning additional rulemakings to implement the CTA, including establishing rules for who may access beneficial ownership information through the database and what safeguards will be put in place to secure and protect the data, and revising the customer due diligence rule to reflect the new beneficial ownership reporting requirements. FinCEN is also in the process of developing the database infrastructure that will house beneficial ownership information.