On December 11, 2020, an annual defense spending bill, the National Defense Authorization Act (the “NDAA”), was presented to the President, having passed both houses of Congress. Within the NDAA, nearly 1,500 pages is the Anti-Money Laundering Act of 2020 (the “AML Act”), which significantly reforms the Bank Secrecy Act (“BSA”) and other anti-money laundering (“AML”) laws. President Trump has until December 23rd to either sign or veto the NDAA. He has indicated plans to veto the bill based on opposition to other provisions in the bill pertaining to matters unrelated to AML, but given that the bill passed both the House and the Senate with majorities large enough to override a Presidential veto, enactment is likely.
Within the AML Act is the Corporate Transparency Act (“CTA”). The CTA will create a beneficial ownership database at the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to which “reporting companies” will be required to disclose information about their beneficial owners. Currently, financial institutions are the only ones tasked with identifying and verifying their customers’ beneficial owners pursuant to the BSA’s customer due diligence requirements; but this requirement will impose a new obligation on companies to identify and disclose their own beneficial owners.
The CTA defines a “beneficial owner” as “an 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 percent of the ownership interests of the entity.” Reporting companies are required to submit to FinCEN the following information about their beneficial owners: name, date of birth, address, and unique identifying number (e.g., driver’s license number or passport number).
The CTA defines “reporting companies” generally as entities registered to do business in the United States, but carves out numerous exemptions including for publicly traded entities; money transmitting businesses registered with the Secretary of the Treasury; and companies that (i) have more than 20 full-time employees, (ii) report more than $5 million in yearly revenue to the IRS, and (iii) have an operating presence at a physical office in the United States. The latter exemption points directly to the purpose of creating the database which is to increase transparency into shell companies to stop the facilitation of money laundering, terrorism finance, and other illicit activity.
The beneficial ownership reporting requirement will take effect on the date FinCEN prescribes implementing regulations, which must be promulgated no later than one year after the NDAA is enacted. Reporting companies in existence when the reporting requirement takes effect will have two years from the effective date to comply; and reporting companies formed after the effective date, must submit the required information at the time of formation.
The information reported to the FinCEN database will not be publicly available and is only permitted to be disclosed in certain circumstances, including pursuant to a request “from a Federal agency engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activity,” and a request “by a financial institution subject to customer due diligence requirements, with the consent of the reporting company, to facilitate the compliance of the financial institution with customer due diligence requirements under applicable law.”
In addition to the CTA, the AML Act includes several provisions intended to modernize the AML-CFT regulatory regime and keep pace with innovation and technology, including requiring that FinCEN establish streamlined, automated processes for filing noncomplex categories of suspicious activity reports. The AML Act also expands several BSA definitions to encompass “value that substitutes for currency,” including the definitions of “financial institution,” “money transmitting business,” and “money transmitting service.” This change expands the BSA regime to encompass virtual currency and codifies existing FinCEN guidance requiring virtual currency businesses to register with FinCEN as money transmitters.