BSA Updates: Treasury preparing regulations related to new anti-money laundering and corporate transparency law

The National Defense Authorization Act (NDAA) of 2021, which includes the Anti-Money Laundering Act (AMLA) of 2020 and the Corporate Transparency Act (CTA), was enacted by Congress on January 1, 2021. These acts will bring extensive changes to Anti-Money Laundering/Combating the Finance of Terrorism (AML/CFT) reforms in the United States.

The law expands information-sharing requirements among agencies tasked with efforts to counter money laundering and financing of terrorism. The law authorizes training and technical assistance to facilitate these measures and new oversight on rising channels for money laundering such as antiques and virtual currency.

AMLA

According to a June 30, 2021, statement by the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN), the priorities established under the AMLA include:

1. corruption;
2. cybercrime, including relevant cybersecurity and virtual currency considerations;
3. foreign and domestic terrorist financing;
4. fraud;
5. transnational criminal organization activity;
6. drug trafficking organization activity;
7. human trafficking and human smuggling; and
8. proliferation financing.

The establishment of these priorities is intended to assist all covered institutions in meeting obligations under laws and regulations designed to combat money laundering and counter-terrorist financing. These priorities will be updated every four years as required by the Act.

Regulations within 180 days

The June 30, 2021 publication of these priorities do not create an immediate change to the Bank Secrecy Act (BSA) requirements or supervisory expectations for banks. The AMLA requires that, within 180 days of establishing the AML/CFT priorities, FinCEN shall announce regulations regarding the priorities. FinCEN states that "banks are not required to incorporate these priorities into their risk-based BSA compliance programs until the effective date of the final revised regulations. In preparation for any new requirements when those final rules are published, banks may wish to start considering how they will incorporate the AML/CFT Priorities into their risk-based BSA compliance programs, such as by assessing the potential related risks associated with the products and services they offer, the customers they serve, and the geographic areas in which they operate."

CTA

In 2016, FinCEN announced the Customer Due Diligence (CDD) Rule, which requires banks to collect beneficial ownership information when they open new accounts for legal entity customers, including corporations and LLCs. A beneficial owner is defined, both in the CDD Rule and the CTA, as an entity or individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over the entity, or (ii) owns or controls not less than 25% of the ownership interests of the entity.

However, one fault in the CDD Rule is that the beneficial ownership information is not made available to law enforcement. Because states have different practices governing the formation of a legal entity, the extent to which the beneficial owners of a legal entity may be available to law enforcement can vary widely from state to state. This issue is a long-standing fundamental risk that due diligence by U.S. financial institutions cannot completely mitigate.

Centralized reporting

The CTA establishes a new framework for the reporting, maintenance, and disclosure of beneficial ownership to: "set a clear federal standard for incorporation practices; protect vital U.S. national security interests; protect interstate and foreign commerce; better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity; and bring the U.S. into compliance with international AML/CFT standards." Through the CTA, Congress directs the FinCEN to establish and maintain a national registry of beneficial owners of entities that are deemed "reporting companies."

Defining a reporting company

A reporting company is defined as a corporation, LLC, or similar entity that is (i) created by the filing of a document with a secretary of state or a 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 U.S. by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian tribe. Certain categories of entities are exempt from the reporting requirements. It should also be noted that the definition of a "reporting company" covered by the CTA does not align with the definition of "legal entity customer" under the CDD Rule.

Reporting timing and information

The CTA requires the reporting of beneficial ownership information at the time of formation or registration. A reporting company must submit to FinCEN information that identifies the beneficial owner(s) and applicant(s) of the reporting company. The information must include the entire legal name, date of birth, current residential or business address, and a unique identifying number from an acceptable identification document or the individual's "FinCEN identifier."

Each reporting company will be issued a FinCEN identifier after submitting the beneficial ownership information if requested. This identifier may be used for subsequent reporting to FinCEN instead of providing certain other information. The FinCEN identifier was created to alleviate privacy and cybersecurity concerns. The filing must be completed on an annual basis.

Entities in existence before the effective date of the regulation must disclose their beneficial ownership information to FinCEN no later than two years after the regulation's effective date. This information will be maintained by FinCEN in a secure, non-public database for not fewer than five years after the date on which the reporting company terminates. The data will only be released by FinCEN (i) to a law enforcement agency, (ii) by request from a federal agency on behalf of a law enforcement agency, or (iii) by a financial institution with the businesses' consent.

Penalties

Significant fines and penalties are in place for failing to file or reporting false information.

FinCEN issued an Advanced Notice of Proposed Rulemaking on procedures and standards for reporting companies to submit beneficial ownership information to FinCEN. Comments were due May 5, 2021, and a final rule is expected to be issued by January 1, 2022. It is unclear, at this time, if the regulations will relieve financial institutions of any burden as the CDD rule will remain in place. Congress made clear that the CTA should not "be construed to authorize FinCEN to repeal the requirement that financial institutions identify and verify beneficial owners of legal entity customers under the CDD Rule."

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Baker Tilly US, LLP, trading as Baker Tilly, is a member of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities.© 2021 Baker Tilly US, LLP