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December 31, 2017

ABA opposes beneficial ownership proposals that would impose new burdens on lawyers

ABA President Hilarie Bass expressed the ABA’s concerns last month about key provisions in the draft “Counter Terrorism and Illicit Finance Act” that she said would “impose burdensome and intrusive regulations on millions of small businesses and their lawyers.”

In a Nov. 27 letter to House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and Ranking Member Maxine Waters (D-Calif.), Bass said that Section 9 of the draft bill would require small corporations and limited liability companies (LLCs) and many of their lawyers to submit extensive information about the companies’ “beneficial owners” to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

FinCEN would then be required to disclose the information to many other federal and foreign governmental agencies and financial institutions upon request.

The draft bill, sponsored by Reps. Steve Pearce (R-N.M.), Blaine Luetkemeyer (R-Mo.) and Carolyn Maloney (D-N.Y.), includes language that mirrors many of the controversial beneficial ownership provisions in Maloney’s previous bill, H.R. 3089, which the ABA has long opposed.

Bass submitted her letter for the record of a Nov. 29 joint subcommittee hearing on various proposals that are intended to combat money laundering and terrorist financing. She emphasized that the ABA has worked diligently for years with the legal community, federal law enforcement authorities, and international stakeholders on reforms in this area but opposes the Section 9 provisions (“Transparent Incorporation Practices”) for several reasons.

First, she said the new regulatory regime created by Section 9, combined with the broad and confusing definition of beneficial owner in the proposal, would be costly, impose onerous burdens on legitimate businesses and their lawyers and subject them to harsh criminal and civil penalties for essentially paperwork violations, and sow confusion into the company formation process.

Second, Bass said the ABA believes that the proposed reporting requirements would weaken the federal government’s current anti-money laundering and counter-terrorist financing tools. FinCEN’s new Customer Due Diligence (CDD) rule, issued in May 2016 for banks and other financial institutions and set to take effect in May 2018, would be suspended until FinCEN could write new regulations transferring the banks’ existing beneficial ownership reporting duties to small businesses as required by the draft bill.

Third, Bass explained that the Section 9 reporting requirements are unnecessary because, in addition to FinCEN’s CDD Rule, the federal government and the legal profession have developed other tools and taken other steps that are much more effective and practical in fighting money laundering and terrorist financing. These include the Internal Revenue Service’s (IRS) current practice of collecting “responsible party” information from every business with at least one employee and then making that available to law enforcement, as well as the ABA’s development in 2010 of the “Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing” (Guidance). In addition, the ABA, the International Bar Association, and the Council of Bars and Law Societies of Europe jointly published the “Lawyer’s Guide to Detecting and Preventing Money Laundering” (Lawyers’ Guide) in 2014.

Bass emphasized that the ABA will continue its effort to disseminate the Guidance, the Lawyers’ Guide and other important education materials to lawyers in the United States and abroad and “to support efforts by federal law enforcement agencies and the states to detect and fight money laundering and terrorist financing in ways that minimize the impact on the confidential lawyer-client relationship, state regulation of the business formation process and legal profession, and the U.S. economy.”