Former Director, Center for Capital Market Competitiveness, U.S. Chamber of Commerce
September 28, 2022
Strong enforcement of anti-money laundering laws is vital to ensuring that the U.S. economy retains the confidence of investors and consumers. Businesses, financial institutions, and law enforcement partner to prevent money laundering and other illicit activity, which makes the U.S. an attractive and safe place to invest.
In early January 2021, Congress passed the Corporate Transparency Act, which aimed to improve anti-money laundering enforcement in the United States. The legislation directs the Treasury Department’s Financial Crimes Enforcement Network to create a new federal database requiring certain businesses to report their “beneficial owners”.
Importantly, the law also sought to, “minimize the burden on reporting companies and to ensure that the information collected is accurate, complete, and highly useful.” Striking the right balance between these objectives is admittedly a difficult task. Unfortunately, the Financial Crimes Enforcement Network’s efforts have thus far missed the mark.
Disproportionately impacting small businesses
Earlier this year, the Financial Crimes Enforcement Network proposed a rule implementing the Corporate Transparency Act’s beneficial ownership reporting requirements. In doing so, the agency acknowledged the enormous scope of its rule, noting that it may apply to as many as 30 million small businesses, with at least two million new businesses required to file reports each year.
Under the proposed rule, Companies will be required to provide the Financial Crimes Enforcement Network with each beneficial owner’s full legal name, date of birth, complete current residential or business street address, and a unique identifying number from a passport, driver’s license, or other government issued identification.
And the legislation authorizing it defines a reporting company as a “corporation, limited liability company, or other similar entity.” The rule fails to identify exactly which types of entities are classified as an “other similar entity,” and required to report this information. Due to the severity of noncompliance repercussions, many businesses that are not intended to be covered could file reports unnecessarily.
Prior to the enactment of the Corporate Transparency Act, the burden of collecting beneficial ownership information fell on financial institutions under Finical Crimes Enforcement Network’s customer due diligence rule. This rule requires financial institutions to verify the identity of beneficial owners of their legal entity customers, which includes anyone who owns 25 percent or more of the equity interests of such a customer.
The Corporate Transparency Act shifted the collection burden to reporting companies and requires Financial Crimes Enforcement Network to revise its customer due diligence rule to reduce any burdens on financial institutions and its customers that were made “unnecessary or duplicative” by the enactment of the Corporate Transparency Act.
Even with revisions to the customer due diligence rule, financial institutions and businesses will likely face confusion from duplicative reporting requirements. It also remains unclear whether these increased reporting requirements will have the effect of making illicit financing easier to detect.
The last thing law abiding businesses need is the uncertainty and expense that comes with filing unnecessary reports that may not be materially useful to law enforcement. Businesses should not fear penalties for noncompliance with an ambiguous rule or for unintentionally reporting inaccurate or misleading information, especially if it is unclear if they should have to file in the first place. We hope that Financial Crimes Enforcement Network will recognize the potential consequences that could befall millions of honest businesses.
Read more of our concerns with Financial Crimes Enforcement Network’s proposed rule here.
About the authors
Will Gardner is the former director of policy at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC). He led CCMC’s portfolios on banking and insurance issues and manages its work with the Financial Stability Oversight Council (FSOC).