U.S. officials finalized a rule Thursday crafted to prevent criminals from using legal entities to disguise themselves from financial institutions and transfer funds anonymously, launder their profits into real estate and exercise control over legitimate companies for nefarious purposes.
Under the rule, legal entities formed or registered before Jan. 1, 2024, must submit the names, birthdates, addresses and “unique identifying number[s]” of their true owners or controllers—their actual day-to-day managers—to Treasury’s Financial Crimes Enforcement Network within one year, while any entities registered or formed after that date must do so within 30 days.
“Collecting this information and providing access to law enforcement, the intelligence community, regulators, and financial institutions will diminish the ability of illicit actors to obfuscate their activities through the use of anonymous shell and front companies,” the bureau said Thursday.
After making their first disclosure, all entities must inform FinCEN of any changes in ownership within a month of their occurrence, according to the final rule, the first of three that the bureau must complete pursuant to the jointly passed Corporate Transparency Act, or CTA, and Anti-Money Laundering Act, or AMLA.
The two bills, which became law over the veto of then-President Donald Trump in January 2021, further require FinCEN to revise the due-diligence rule in effect since May 2018 and establish a new regulatory framework governing who can access ownership data and when, all while building the central digital repository necessary to collect, secure and share the data.
FinCEN must complete these tasks while also creating a new whistleblower program and developing several other anti-financial crime measures pursuant to AMLA and CTA. Together the bills mandate the most significant overhaul of the Bank Secrecy Act since October 2001, when Congress passed the Patriot Act in the wake of 9/11.
Theodore Greenberg, a former federal prosecutor now working as an attorney and AML consultant in Washington, D.C., described Thursday’s final rule as “long awaited, long overdue,” but warned that the effectiveness of the requirements will depend entirely on implementation and enforcement.
“We’ve got to get this right,” said Greenberg.
Others speculated as to what steps FinCEN will take, or even can take, to ensure that legal entities supply correct information after the rule comes into force, and questioned whether the bureau will have the necessary staff and resources to vet the huge amount of data coming its way.
FinCEN unveiled plans in March to add 135 full-time employees to its current staff of 285, and task 115 personnel with implementing the remaining provisions of AMLA and CTA.
Legislation now under consideration in the Senate would provide $189 million to FinCEN for the current fiscal year, $22 million more than the bureau’s previous budget but $31 million less than what the House approved in July.
Still, millions of corporations, limited liability companies and other legal entities form within the U.S. annually, according to the bureau’s own estimates, and profit-motivated criminals and their professional enablers can be expected to continue doing whatever they can to obscure themselves from AML compliance departments and law enforcement.
“It will be another tool in the toolbox, but it’s not going to be a panacea,” a federal investigator told ACAMS moneylaundering.com on condition of anonymity.
Thursday’s rule not only applies to domestic corporations, business trusts, limited liability corporations, limited liability partnerships, most limited partnerships and other U.S. companies formed by submitting paperwork to a state or tribal government, but also covers foreign companies registered to do business in the United States.
The bureau exempted 23 types of entities from qualifying as “reporting companies” under the final rule, which also excludes certain categories of trusts whose creation does not consist of the submission of a document to a “secretary of state or similar office.”
“FinCEN recognizes that in many states the creation of most trusts typically does not involve the filing of such a formation document,” the bureau said Thursday.
Any individual who “directly or indirectly” owns or wields “substantial control” over 25 percent or more of a reporting company qualifies as a beneficial owner under the rule, which exempts five types of individuals from the definition, including minor children; nominees, intermediaries, custodians or agents acting on behalf of other individuals; and creditors of reporting companies.
“It is anticipated that it will cost reporting companies with simple management and ownership structures—which FinCEN expects to be the majority of reporting companies—approximately $85 apiece to prepare and submit an initial BOI report,” the bureau said Thursday. “In comparison, the state formation fee … can cost between $40 and $500.”
FinCEN explicitly couched the final rule in the language of geopolitics and national security, citing ongoing attempts by Russian oligarchs, corrupt officials, organized crime syndicates and the Kremlin itself to either launder money or evade sanctions with the help of U.S. legal entities.
The bureau further noted that domestic fraudsters have made good use of U.S. entities, most recently to bilk and launder tens of millions of dollars from federal government-run financial-assistance programs designed to mitigate the economic impact of the COVID-19 pandemic.
“The United States is a popular jurisdiction for legal entity formation because of the ease with which a legal entity can be created, the minimal amount of information required to do so in most U.S. states and the investment opportunities the United States presents,” the bureau said in the 330-page rule.
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|Anti-money laundering , Counterterrorist Financing , Know Your Customer , Corruption/Bribery
|U.S.: Department of Treasury , U.S.: FinCEN
|September 29, 2022