It has now been more than six months since Congress enacted H.R. 6395 — the National Defense Authorization Act of 2021. Included in H.R. 6395 is the Corporate Transparency Act (CTA). The CTA requires every corporation, LLC, or similar entity to make a filing with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), identifying certain information about its beneficial ownership and applicant - unless the entity qualifies for one of the CTA’s twenty-four exemptions. For more information about the CTA, see our article, The Corporate Transparency Act imposes new beneficial ownership reporting obligations on business entities.
The CTA is the United States’ first federal statute requiring business entities to report their beneficial ownership information. Many other countries already require beneficial ownership reporting, which is considered important for combatting money laundering and the financing of terrorism and other illegal activities.
The CTA itself lacks definitions of several important terms and fails to describe the reporting process in any detail. Instead, it directs the Department of Treasury to promulgate implementing regulations within one year of enactment. This article briefly summarizes where they are in the regulation drafting process.
FinCEN issues an advance notice of proposed rulemaking
On April 2, FinCEN issued an Advance Notice of Proposed Rulemaking (ANPRM). FinCEN stated:
“This ANPRM seeks initial public input on procedures and standards for reporting companies to submit information to FinCEN about their beneficial owners (the individual natural persons who ultimately own or control the reporting companies) as required by the CTA. This ANPRM also seeks initial public input on FinCEN's implementation of the related provisions of the CTA that govern FinCEN's maintenance and disclosure of beneficial ownership information subject to appropriate protocols.”
The ANPRM consisted of 48 questions, many with multiple parts, seeking comments on every aspect of the CTA. Written comments were accepted until May 5. FinCEN received 241 comments, of which 215 were made public and are available for reading at Regulations.gov.
A wide range of stakeholders and other interested parties commented. They include the following:
- Corporate service companies
- Lawyers, law firms, and lawyer associations
- Financial institutions
- Small businesses and small business associations
- Secretaries of State (and similar business entity filing offices)
- Indian tribes
- Law enforcement officials
- Congressional sponsors
- Technology companies
- Private citizens
With so many disparate groups responding, with different agendas and concerns, it is difficult to provide a summary that accurately describes all of the comments received. And it is probably best for those interested in knowing what the respondents had to say to FinCEN to read the comments on the regulations website.
However, a few general statements about the comments can be made.
FinCEN asked for comments about which terms needed clarification. Responses included the following:
- FinCEN should clarify the term “applicant”. Respondents noted that there are many people involved in the formation process whose roles are merely ministerial and who have no interest in the reporting company and requested clarification as to whether these people are “applicants”.
- FinCEN should clarify who is a “beneficial owner” and define the terms “owner”, “control”, and “substantial control”. Among other suggestions was to adopt the definitions of the Bank Secrecy Act’s Customer Due Diligence regulations.
- FinCEN should clarify what constitutes a “similar entity”. A list of entities that do and do not constitute a “similar entity” would be useful.
- Opinions differ as to whether filings beyond those specified in the CTA (the initial beneficial ownership report and a notice of changes) should be required. Some oppose further reporting obligations. Others suggest exempt entities should have a filing obligation and recommend all entities file an annual compliance report.
- FinCEN needs to provide details as to how business entities will be notified of the CTA’s reporting obligations.
- Some respondents advocated for a narrow construction of the CTA to reduce filing burdens while others wanted a broad interpretation to better further the anti-money laundering, national security goals.
This ANPRM is the first in a series of regulatory actions that FinCEN will undertake to implement the CTA. The proposed regulations are expected to be FinCEN’s next step. There should then be another comment period after FinCEN issues its proposed regulations. Final regulations are required to be issued by January 1, 2022, unless Congress grants FinCEN an extension.
What should entity officials and counsel do now?
Reporting for newly formed entities (and for new registrations of non-United States entities) will begin on the effective date of the final regulations, and for existing entities, within two years after the effective date. Therefore, the owners, managers, and legal advisors of existing entities, and those who plan on forming a new entity or registering a non-United States entity, should be prepared to carefully review the forthcoming regulations and guidance from FinCEN. They may also wish to begin gathering any information that their entities may be required to report.