AML Compliance Game Changer: A series on the Anti-Money Laundering Act of 2020. Part II: The Corporate Transparency Act and Beneficial Ownership Disclosure Requirements

Mar 03, 2021   

Anti-Money Laundering Compliance Game Changer: A series on the Anti-Money Laundering Act of 2020.

Part II: The Corporate Transparency Act and Beneficial Ownership Disclosure Requirements

On January 1, 2021, Congress overrode President Trump’s veto and passed the Anti-Money Laundering Act of 2020 (“AMLA”). The AMLA, included as Division F of the omnibus National Defense Authorization Act for fiscal year 2021 (“NDAA”), is widely considered the most comprehensive set of reforms to the Bank Secrecy Act since the USA PATRIOT Act of 2001. The reforms are wide-ranging covering a variety of areas including the creation of an enhanced whistleblower program, beneficial ownership disclosure requirements, clarification and expansion of the definition of “financial institutions” under the BSA’s reach, expanded ability of the US government to seek information from foreign financial institutions and share information with foreign regulators, streamlining and modernizing the SAR/CTR reporting process, and increased penalties for BSA violations. Part II of this series focuses on the Corporate Disclosure Act.

  1. General Overview

The Corporate Disclosure Act, found at sections 6401 to 6403 of the NDAA, will generally require a “reporting company” to disclose “beneficial owner” information to the United States Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). The beneficial ownership information requirement was implemented to deter the creation and use of shell companies which may facilitate money laundering or other illicit activities. The Act will take effect after the Secretary of the Treasury promulgates implementing regulations – which the Secretary must do no later than January 1, 2022.

  1. What is and is not a “reportable company”?

The Act defines a “reportable company” broadly as: “a corporation, limited liability company, or other similar entity that is – (i) created by the filing of a document with the secretary of state or similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state  or a similar office under the laws of a State or Indian Tribe….”

However, the Act also includes numerous exclusions, including publicly-traded companies; securities issuers; banks; credit unions; bank holding companies; money transmitters; broker dealers; exchanges; investment companies; investment advisors; public accounting firms; and pooled investment vehicles to name a few. Additionally, any entity that: i) employs 20 or more employees on a full-time basis in the United States; ii) gross sales or receipts over $5 million; and iii) an operating presence at a physical United States office are also exempt from the definition of a “reportable company.”

These exceptions make sense from an anti-money laundering and law enforcement perspective. On the one hand, public companies and other entities with more than 20 employees typically exist in broad daylight, and the nature of their business activities and revenues are readily discernible. On the other hand, “shell companies” often have no employees and a single, high value asset, and the nature of the operations, sources of funds, and beneficial owners are impossible to discern. Moreover, shell companies are often registered in jurisdictions that do not require the disclosure of beneficial ownership information, further adding to the difficulties associated with knowing who, exactly, is in charge. Again, it is that latter category of entity – the “shell corporation” – that the Corporate Disclosure Act was designed to address.

  1. What must be reported?

Under the Act, a “reporting company” must provide the following information for its “beneficial owners” and its “applicants”: i) full legal name; ii) date of birth; iii) current, as of the date the report is delivered, residential or business street address; and iv) a “unique identifying number from an acceptable identification document” which includes a driver’s license, US Passport, or other state-issued identification document.

An “applicant” is any individual who: i) files an application to form the entity under the laws of a State or Indian Tribe; or ii) registers or files an application to register a foreign formed entity to do business in the United States. A “beneficial owner” is any individual who directly or indirectly: i) owns or controls 25% of the entity; or ii) exercises “substantial control” over the entity. However, what constitutes “substantial control” is not defined by the Act. It is expected that the Secretary will define “substantial control” when it issues its implementing regulations.

  1. When must applicant and beneficial owner information be reported?

The deadline for a “reporting company” to report beneficial ownership information to FinCEN depends on whether the company is in existence at the time the Act is implemented. “Reporting Companies” in existence at the time the Act is implemented will have two years to submit the information to FinCEN.

“Reporting Companies” which are formed or registered after the Act is implemented will be required to submit the information at the time they are formed or registered. Additionally, should a change in beneficial ownership information occur, “reporting companies” must update their reports to FinCEN no later than one year after the change.

  1. Confidential reporting and agency information sharing.

Although “reporting companies” must report beneficial ownership to FinCEN, the Act requires that FinCEN keep such information confidential. However, FinCEN may share beneficial ownerhip information under certain circumstances, such as: i) in response to a request federal agency engaged in national security, intelligence, or law enforcement activity; ii) with state and local law enforcement upon court order; iii) upon request of certain foreign law enforcement agencies; iv) upon request of certain regulatory agencies; and v) upon request from a financial institution with consent of the “reporting company”.

  1. Penalties for non-compliance.

Under the Act, it is unlawful to willfully fail to report completed or updated beneficial ownership information. The Act also makes it unlawful to willfully provide or attempt to provide false/fraudulent beneficial ownership information. The Act provides for multiple penalties including a civil penalty of $500 per day for each day the violation continues; and a fine up to $10,000, imprisonment up to 2 years, or both.

  1. How to prepare?

Although the regulations implementing the Corporate Disclosure Act have not yet been promulgated, companies should take time to analyze whether they would qualify as a “reporting company” under the Act and if so, should begin to identify potential “applicants” and “beneficial owners.”

Fuerst Ittleman David & Joseph has years of experience assisting businesses with corporate governance and compliance. We also specialize in anti-money laundering law, and represent a wide array of financial institutions in matters involving anti-money laundering compliance. For more information about the Bank Secrecy Act, anti-money laundering compliance, or the new disclosure laws described in this article, contact us by email at info@fidjlaw.com or by phone at 305-350-5690.