Rekindled Interest In Requiring Disclosure Of Beneficial Owner Information

The seemingly never-ending saga resumes as Congress shows renewed interest in requiring corporations and LLCs (referred to as “business entities” in this post) to name their beneficial owners upon formation. Many attribute this increased interest to the pending enhanced customer due diligence rules for financial institutions, which are due to go into effect in May 2018.

This growing interest is evident in the number of hearings being held on the issue, including the following:

• “Legislative Proposals to Counter Terrorism and Illicit Finance,” a joint subcommittee hearing, held on Nov. 29, 2017, by The House Financial Services Committee.
• “Combating Money Laundering and Other Forms of Illicit Finance: Opportunities to Reform and Strengthen BSA Enforcement,” held on Jan. 9, 2018, by The Senate Banking Committee.
• “Combating Money Laundering and Other Forms of Illicit Finance: Administration Perspectives on Reforming and Strengthening BSA Enforcement,” held on Jan. 17, 2018, also by The Senate Banking Committee.

Also, the following three bills have been introduced in Congress to address the issue:

• S. 1454, the “True Incorporation Transparency for Law Enforcement Act” or the “TITLE Act.”
• S. 1717, the “Corporate Transparency Act of 2017.”
• H. R. 3089, also cited as the “Corporate Transparency Act of 2017.”

In addition, Rep. Pearce, R-N.M., is considering a discussion draft of a bill entitled “Counter Terrorism and Illicit Finance Act,” but it has not been introduced into Congress.

Below is a summary of some of the key aspects of these bills. For more details, use the links above to view the full text of the bills.

What Are These Bills About?

The general purpose of the pending bills and the discussion draft is to ensure that people who form business entities disclose the beneficial owners in order to:

• Prevent wrongdoers from exploiting entities for criminal gain.
• Assist law enforcement efforts in detecting, preventing and pursuing terrorism, money laundering and other misconduct.
• Improve information sharing between financial institutions on these matters.

The bills generally define beneficial owner as a natural person who fits at least one of the following criteria, whether directly or indirectly:

• Exercises substantial control over a business entity.
• Has a substantial interest in, or receives substantial economic benefits from, the assets of a business entity.
• Owns 25% or more of the equity interests of a business entity or receives substantial economic benefits from the assets of the entity. (This criterion is specific to the discussion draft.)

In addition to requiring the disclosure of beneficial owners, S.1454, S.1721 and H.R. 3089 would require the Secretary of the Treasury to issue regulations requiring formation agents to establish anti-money laundering programs no later than 120 days after the respective bill’s enactment. Government agencies are excluded from this requirement as is any attorney or law firm that uses a paid formation agent, operating within the United States, to form the business entity.

What Type of Information Must Be Disclosed?

The bills require that, as part of the formation process, an applicant forming a business entity provide to FinCEN (the Financial Crimes Enforcement Network) or the state (as applicable) the following information on beneficial owners:

• Name
• Current residential or business street address.
• Unique identification number from a non-expired U.S. passport or a non-expired state-issued driver’s license.

If the application is exempt from the beneficial owner disclosure requirements, the applicant must file a certification identifying the specific statutory sections on which the exemption is based.

Existing entities have two years after the implementation of final regulations to file this information. In addition to these initial filings, a business entity must report any changes through an updated filing list, which must be submitted within 60 days of the change. A business entity must also submit an annual filing containing the beneficial owner information.

Where the Information Must Be Filed

Now that we know what information these bills would require to be filed, the next issue is determining where it must be filed. This is one area in which the four bills differ considerably.  

•  S. 1454 requires filing with the Secretary of State (or equivalent agency) of the formation state.
• The discussion draft requires applicants to file their information with FinCEN.
• S. 1717 and H.R. 3089 require filing with the Secretary of State, if the state already requires this filing, or with FinCEN if the state does not have that requirement. Additionally, these two bills include provisions authorizing states that license formation agents to allow filing with either the Secretary of State or a licensed formation agent residing in the state.

One similarity the bills do share in this matter is the requirement that the state, FinCEN or licensed formation agent (as applicable) must retain the records for five years from the date that a business entity terminates under the laws of the state.

In What Situations Would This Information Be Released?

The following are examples of requests which might warrant the release of beneficial owner information:

•  A civil, criminal or administrative subpoena or summons from a government agency or a congressional committee or subcommittee.
• A written request made by a federal agency, on behalf of another country, under an international treaty, agreement or convention.
• An order under sections of the United States Code issued in response to a request for assistance from a foreign country.
• A written request by FinCEN.
• A written request made by a financial institution, with customer consent, for the purpose of due diligence compliance.

 The discussion draft adds the requirement that a foreign country requesting beneficial owner information must agree to prevent public disclosure of that information and to use it strictly for the specified terrorism or criminal investigation.

Key Sticking Point is WHO Collects and Maintains the Information

These recent bills share many similarities, indicating an increased meeting of the minds on the need to collect beneficial owner information. They all share similar definitions of what constitutes a beneficial owner, they agree on the basic type of information that should be filed and on the length of time that information should be retained. They also agree on what types of scenarios should warrant releasing that information. However, they still differ significantly in their stances on who will collect and maintain the information. Only time will tell whether this year will be the closing chapter of this saga or if more chapters are to be written in years to come.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.