In 2020, the long awaited and much needed reforms of the U.S. anti-money laundering (AML) regulatory regime finally arrived with the Anti-Money Laundering Act of 2020. This new AML legislation looked to modernize the U.S. Bank Secrecy Act (BSA) and, under the Corporate Transparency Act (CTA), establish a national repository of beneficial owners of businesses located or doing business in the U.S. However, two years later, many of the specific details have yet to be finalized—leaving many unclear on what they need to do to get prepared. One such example is the Beneficial Ownership Information (BOI) reporting rule that goes into effect January 1, 2024.
The purpose of the BOI collection rule is twofold. Its primary purpose is to create a repository of individuals who own or control domestic companies or foreign companies doing business in the U.S. Gathering and maintaining this information makes it difficult for bad actors to use corporate structures as shell or front companies. Its second purpose is to improve upon the Customer Due Diligence (CDD) Rule that was implemented in 2016. That rule requires financial institutions (FIs) to gather BOI for their entity customers.
This new rule will ultimately take the onus off the FIs to gather that information. It will also create one central public database of this information to create consistency in reporting and retrieval. If older businesses haven’t opened an account at an FI since 2016, it is likely they have not had to share beneficial owner information since prior relationships were grandfathered in under the CDD Rule. This is true for newer businesses who have not opened financial accounts. The new rule is not contingent on a relationship with an FI. All businesses will need to disclose BOI to include personally identifiable information (PII) for each owner defined as individuals who own 25% or more of the business as well as individuals who serve in a position with significant responsibility to control, manage, and direct the entity.
The Countdown to BOI
Released in September 2022, the BOI collection gave businesses more than a year to prepare for the updated requirements. With less than six months to implementation, there has been no clear plan of engagement. It is likely that most of the 32 million small U.S. business owners don’t know what the Financial Crimes Enforcement Network (FinCEN) is, let alone that a rule passed by that agency could result in their civil or criminal liability if they don’t comply.
As of July 2023, FinCEN has not provided final rules around what corporate beneficial interest information must be collected, who would have access to the collected information, and how these obligations will impact the current Customer Due Diligence (CDD) Rule released in 2016. Moreover, FinCEN has not communicated the progress of the technology being created to build this database, how to access it, or how the information will be used. In fact, Congress has already pushed back with multiple letters to Treasury Secretary Janet Yellen and FinCEN Acting Director Himamauli Das.
- The first letter, dated March 15, 2023, took aim at the Notice of Proposed Rulemaking that outlined, among other things, the limited scope of FIs’ access to the BOI. FIs would only be allowed to access the information to meet their CDD Rule requirements and nothing more. They would also need to gain a customer’s permission prior to accessing the information. They would have to petition FinCEN and wait for the response. Congress countered that this would be in direct opposition to the intended purpose of gathering BOI. FIs need to be able to access the registry in order to meet all BSA/AML requirements without waiting on FinCEN. More importantly, they should not be asking the customer for permission as this may tip a customer off to an investigation.
- The second letter, dated April 3, 2023, expressed concern that the original data collection form allowed filers to choose an “unknown” or “unable to identify” option when declaring a company’s beneficial option. If allowed, Congress noted that this option would enable business filers to bypass disclosing the true beneficial owners of a business and negating the spirit of the rule.
- Congress sent a third letter, dated June 7, 2023, expressing concern about a lack of progress in notifying business owners of upcoming requirements. The letter outlines specific expectations, including a compliance guide for reporting companies, an education plan for small businesses including foreseeable hurdles, and a detailed plan for reminders to those who have not complied as the deadline approaches. In the third letter, the Treasury Department was being asked to define how it will safeguard reporting companies from “scammers and criminals” who intend to use BOI collection to obtain sensitive information from reporting companies.
These letters missed the mark on one very important point—the integrity of the BOI filing. There isn’t a verification process in place to assure that the reported beneficial owners provided are, in fact, the beneficial owners. Congress has remained silent on asking the Treasury how it will protect FIs from false ownership information provided by “scammers and criminals” who intend to create shell companies that can be used to perpetrate criminal activity. Will FIs shoulder the burden of verifying the information of their accountholders? Who will have to absorb any losses of fraud perpetrated by these companies with false reporting? Only time will tell.
At a minimum, FinCEN should be engaging with the Small Business Administration and the Secretaries of State to create a communication plan. How can business owners be expected to comply with something that hasn’t been communicated to them? Is FinCEN prepared for the deadline it created? FinCEN recently announced the appointment of a new Director, Andrea Gacki. Director Gacki certainly has a lot to address over the next several months.
As those questions are being answered, small U.S. business owners need to take immediate action and get informed of their obligations. Reading a press release and watching a few YouTube videos on the FinCEN website will not be sufficient. Small U.S. business owners should start engaging with experts who can give them appropriate guidance, answer their questions, and help them get prepared.
For further insights into the CTA and BOI, read the Datos Insights reports U.S. Anti-Money Laundering Act of 2020: Raising the Bar of Regulatory Expectations and U.S. Anti-Money Laundering Act of 2020: A Few Years Later, but Is Progress Being Made?.