New anti-money laundering legislation was included as part of the National Defense Authorization Act (NDAA) enacted by Congress on January 1, 2021, through the override of a presidential veto. The NDAA is a series of federal laws primarily specifying the annual budget and expenditures of the United States Department of Defense.
The NDAA for Fiscal Year 2021 includes the expansive Anti-Money Laundering Act of 2020 (AMLA), with the purpose of updating and amending the country’s anti-money laundering laws. It has long been acknowledged that the United States lags behind other developed countries in its safeguards designed to prevent the flow of illicit money—so much so that the Tax Justice Network, an independent institution that indexes countries’ financial secrecy, currently ranks the United States as the second most financially secretive jurisdiction, ranking behind only the Cayman Islands and just ahead of Switzerland.[1]
The AMLA bolsters existing anti-money laundering legislation through several amendments to the Bank Secrecy Act (BSA), which has been the primary statutory vehicle for financial institutions to assist the federal government in detecting and preventing money laundering since its passage in 1970. The amendments include the enhancement of whistleblower protections and incentives, as well as new oversight on rising channels for money laundering, such as antiquities and virtual currency.[2] Furthermore, the AMLA expands sharing of information with foreign authorities and financial institutions.[3]
The AMLA also provides one of the more notable additions to this anti-money laundering legal regime, the Corporate Transparency Act (CTA). Through the CTA, Congress directs the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to establish and maintain a national registry of beneficial owners of entities that are deemed “reporting companies.”[4] In so acting, Congress stated that bad actors seek to conceal their ownership of business entities through the use of shell companies in order to facilitate illicit activities, including money laundering, the financing of terrorism, human and drug trafficking, and securities fraud.[5] Congress observed that the lack of state laws requiring companies to identify their beneficial owners has arguably enabled such persons to exploit these entities to further criminal activities.[6]
REPORTING COMPANIES
The CTA broadly defines a reporting company as any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.[7] Pending implementing regulations, it is unclear whether limited partnerships are included. As the CTA’s focus is on shell companies and other entities with limited or no operations, the CTA provides numerous exceptions for entities from undergoing reporting, including those in a regulated industry (where existing regulatory regimens would already include beneficial ownership reporting), publicly traded companies, investment vehicles operated by investment advisors, nonprofits, and government entities.[8] Significantly, there is also an exception from required reporting for an entity that (1) employs more than twenty employees; (2) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (3) has an operating presence at a physical office within the United States.[9] Moreover, entities that are subsidiaries of such excluded companies are also exempted from these reporting requirements.[10]
BENEFICIAL OWNERS AND THE INFORMATION TO REPORT
The CTA defines a beneficial owner of an entity as any individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25 percent equity in the entity.[11] The phrase “substantial control” is not defined in the CTA, so further regulations should clarify its meaning.[12] The legislation expressly excludes certain individuals from the definition of beneficial ownership, including (1) a minor child (as long as the child’s parent’s or guardian’s information is reported); (2) an individual acting as an intermediary or agent on behalf of another; (3) a person whose control over a reporting company derives solely from their employment; (4) an individual whose only interest in a reporting company is through a right of inheritance; or (5) a creditor of a reporting company (unless they qualify as a “beneficial owner” through substantial control or equity ownership).[13]
In each report to FinCEN, a reporting company must provide each beneficial owner’s name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a state driver’s license or passport).[14]
The date on which a reporting company’s report to FinCEN is due depends on whether it is an existing entity or a newly formed one. After the effective date of FinCEN’s forthcoming regulations—which are due within a year after enactment of the CTA—new reporting companies will be required to report their beneficial owners’ information at formation.[15] Existing entities will need to provide such information within two years from the promulgation of the new regulations. A reporting company will also need to update its information within a year of any change to its beneficial ownership.[16]
STORAGE AND USE OF REPORTED INFORMATION
FinCEN will be responsible for storing the information collected pursuant to the CTA in a secure private database.[17] This database will not be publicly available. The beneficial ownership information will be available from a request only by (1) a federal law enforcement agency; (2) a state, local, or tribal law enforcement agency (if authorized by a court order); (3) a federal agency on behalf of a foreign country (if the request is pursuant to an international agreement); or (4) a financial institution for customer due diligence purposes and if authorized by the reporting company.[18]
The laws regarding customer due diligence requirements for financial institutions will also be updated to conform to the CTA, as the CTA will provide a new means for a financial institution to verify a customer’s “Know Your Customer” information.[19]
PENALTIES FOR VIOLATING CTA
Companies subject to the CTA and their counsel should be cognizant of the steep penalties for violating the reporting requirements of the Act. Willfully providing false information to FinCEN or failing to report complete information to FinCEN can result in fines up to $10,000 and imprisonment for up to two years.[20] The CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.[21]
CONCERNS FOR BUSINESS LAWYERS
The CTA raises a number of issues for business lawyers who cause the formation of business entities for clients. A primary concern is the need to balance requirements under the CTA with professional ethical responsibilities to their clients. The CTA defines the term applicant as any individual who files an application to form an entity or registers a foreign entity to do business in the United States.[22] Lawyers frequently undertake such acts, but it is unclear as to whether the reporting obligation will be imposed on the “applicant” or the entity itself.
The American Bar Association (ABA) has a long-stated opposition to a mandate that lawyers provide business entity beneficial ownership information because of these ethical obligations.[23] See the ABA Fact Sheet here. As the ABA argued when an earlier version of the CTA was introduced in Congress, the CTA and other similar anti-money laundering legislation create intrusive gatekeeper requirements on attorneys that risk undermining the attorney–client privilege, the confidential attorney–client relationship, and the right to effective counsel.[24] Unfortunately, the CTA, as enacted, leaves these concerns outstanding, and lawyers who file entity registration documents could be subject to severe penalties under the act if they are found to have willfully provided false information to FinCEN.
Furthermore, the CTA seems to expose business lawyers to privacy concerns of their own. Identifying personal information must be provided to FinCen for both the applicable reporting company and the applicant.[25] Thus, lawyers may be required to submit their date of birth and state driver’s license number or passport number in connection with each entity they form or register to do business in the United States.
In contrast, it seems clear that the obligation to report information for existing companies and to update reports falls on the reporting company itself.[26]
Hopefully, the forthcoming CTA implementing regulations will provide guidance on the applicability of the FinCen reporting regimen on lawyers and clear up the uncertainty as to how business lawyers may ethically represent their clients while ensuring compliance with the law.
CONCLUSION
The CTA is a clear step toward modernization of the United States’ anti-money laundering legal landscape. It will give law enforcement agencies greater access to the beneficial ownership information of entities than ever before. It will also shift the burden of financial institutions from needing to collect customer due diligence information to being able to obtain it from the federal government. These changes of course come at a cost. The anonymity that private company owners have long enjoyed will be rolled back, and the new compliance costs will be shouldered by companies that are often small businesses.
[1] Financial Secrecy Index—2020 Results, Tax Justice Network, https://fsi.taxjustice.net/en/introduction/fsi-results (last visited Dec. 29, 2020).
[12] See NDAA § 6403(a)(a)(3)(A).
[23] Gatekeeper Regulation and the Legal Profession: ABA Opposes Anti-Money Laundering Legislation that Imposes Burdensome Regulations on Small Businesses and Their Attorneys and Undermines the Attorney-Client Privilege, ABA, https://www.americanbar.org/content/dam/aba/administrative/government_affairs_office/gatekeeper-factsheet-july-2020.pdf?logActivity=true (last visited Jan. 14, 2021).