[Federal Register Volume 86, Number 233 (Wednesday, December 8, 2021)]
[Proposed Rules]
[Pages 69920-69974]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-26548]
[[Page 69919]]
Vol. 86
Wednesday,
No. 233
December 8, 2021
Part VI
Department of the Treasury
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Financial Crimes Enforcement Network
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31 CFR Part 1010
Beneficial Ownership Information Reporting Requirements; Proposed Rule
Federal Register / Vol. 86 , No. 233 / Wednesday, December 8, 2021 /
Proposed Rules
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DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Part 1010
RIN 1506-AB49
Beneficial Ownership Information Reporting Requirements
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Notice of proposed rulemaking (NPRM).
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SUMMARY: FinCEN is promulgating proposed regulations to require certain
entities to file reports with FinCEN that identify two categories of
individuals: The beneficial owners of the entity; and individuals who
have filed an application with specified governmental authorities to
form the entity or register it to do business. The proposed regulations
would implement Section 6403 of the Corporate Transparency Act (CTA),
enacted into law as part of the National Defense Authorization Act for
Fiscal Year 2021 (NDAA), and describe who must file a report, what
information must be provided, and when a report is due. Requiring
entities to submit beneficial ownership and company applicant
information to FinCEN is intended to help prevent and combat money
laundering, terrorist financing, tax fraud, and other illicit activity.
Once finalized, these proposed regulations will affect a large number
of entities doing business in the United States. This document also
invites comments from the public regarding all aspects of the proposed
regulations as well as comments in response to specific questions.
DATES: Written comments on this proposed rule may be submitted on or
before February 7, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
Federal E-rulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments. Refer to Docket Number
FINCEN-2021-0005 and RIN 1506-AB49.
Mail: Policy Division, Financial Crimes Enforcement
Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-
2021-0005 and RIN 1506-AB49.
FOR FURTHER INFORMATION CONTACT: The FinCEN Regulatory Support Section
at 1-800-767-2825 or electronically at [email protected].
SUPPLEMENTARY INFORMATION:
I. Executive Summary
These proposed regulations would implement the requirement in the
CTA \1\ that a reporting company submit to FinCEN a report containing
beneficial owner and company applicant information (together,
``beneficial ownership information'' or BOI). This proposal fulfills
the statutory direction to Treasury to promulgate regulations to
implement the CTA and reflects FinCEN's careful consideration of public
comments received in response to an advanced notice of proposed
rulemaking (the ``ANPRM'').\2\ To the extent practicable, and as
required by the CTA, the proposed regulations aim to minimize the
burden on reporting companies and to ensure that the information
collected is accurate, complete, and highly useful. More broadly, the
proposed regulations are intended to protect U.S. national security,
provide critical information to law enforcement, and promote financial
transparency and compliance. The CTA and these proposed regulations
represent the culmination of years of efforts by Congress, the
Department of the Treasury (Treasury), other national security
agencies, law enforcement, and other stakeholders to bolster the United
States' corporate transparency framework and to address deficiencies in
BOI reporting noted by the Financial Action Task Force (FATF),
Congress, law enforcement, and others. The proposed regulations
address: (1) Who must file; (2) when they must file; and (3) what
information they must provide. Collecting this information and
providing access to law enforcement, the intelligence community, and
other key stakeholders will diminish the ability of malign actors to
obfuscate their activities through the use of anonymous shell and front
companies. The proposed regulations would also specify circumstances in
which a person violates the reporting requirements.
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\1\ The CTA is Title LXIV of the William M. (Mac) Thornberry
National Defense Authorization Act for Fiscal Year 2021, Public Law
116-283 (January 1, 2021) (the ``NDAA''). Division F of the NDAA is
the Anti-Money Laundering Act of 2020, which includes the CTA.
Section 6403 of the CTA, among other things, amends the Bank Secrecy
Act (BSA) by adding a new Section 5336, Beneficial Ownership
Information Reporting Requirements, to Subchapter II of Chapter 53
of Title 31, United States Code.
\2\ 86 FR 17557 (Apr. 5, 2021).
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The proposed regulations describe two distinct types of reporting
companies that must file reports with FinCEN--domestic reporting
companies and foreign reporting companies. Generally, under the
proposed regulations, a domestic reporting company is any entity that
is created by the filing of a document with a secretary of state or
similar office of a jurisdiction within the United States. A foreign
reporting company is any entity formed under the law of a foreign
jurisdiction that is registered to do business within the United
States.
The proposed regulations also describe the twenty-three specific
exemptions from the definition of reporting company under the CTA. The
CTA also includes an option for the Secretary of the Treasury
(Secretary), with the written concurrence of the Attorney General and
the Secretary of Homeland Security, to exclude by regulation additional
types of entities. FinCEN does not currently propose to exempt
additional types of entities beyond those specified by the CTA.
The proposed regulations describe who is a beneficial owner and who
is a company applicant. A beneficial owner is any individual who meets
at least one of two criteria: (1) Exercising substantial control over
the reporting company; or (2) owning or controlling at least 25 percent
of the ownership interest of the reporting company. The proposed
regulations define the terms ``substantial control'' and ``ownership
interest'' and describe rules for determining whether an individual
owns or controls 25 percent of the ownership interests of a reporting
company. The proposed regulations would also describe five types of
individuals who the CTA exempts from the definition of beneficial
owner.
The proposed regulations also describe who is a company applicant.
In the case of a domestic reporting company, a company applicant is the
individual who files the document that forms the entity. In the case of
a foreign reporting company, a company applicant is the individual who
files the document that first registers the entity to do business in
the United States. The proposed regulations specify that a company
applicant includes anyone who directs or controls the filing of the
document by another.
Under the proposed regulations, the time at which a required report
is due would depend on: (1) When the reporting company was created or
registered; and (2) whether the report is an initial report, an updated
report providing new information, or a report correcting erroneous
information in a previous report. Domestic reporting companies created,
or foreign reporting companies registered to do business in the United
States, before the effective date of the final regulations would have
one year from the effective date of the final regulations to file their
initial
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report with FinCEN. Domestic reporting companies created, or foreign
reporting companies registered to do business in the U.S. for the first
time, on or after the effective date of the final regulations would be
required to file their initial report with FinCEN within 14 calendar
days of the date on which they are created or registered, respectively.
If there is a change in the information previously reported to FinCEN
under these regulations, reporting companies would have 30 calendar
days to file an updated report. Finally, if a reporting company filed
information that was inaccurate at the time of filing, the reporting
company would have to file a corrected report within 14 calendar days
of the date it knew, or should have known, that the information was
inaccurate.
The proposed regulations also describe the type of information that
a reporting company is required to file. First, the reporting company
would have to identify itself. The proposed regulations describe the
information that a reporting company must submit to FinCEN about: (1)
The reporting company, and (2) each beneficial owner and company
applicant. This includes, for example, the name and address of each
beneficial owner and company applicant, among other things. In lieu of
providing specific information about an individual, the reporting
company may provide a unique identifier issued by FinCEN called a
FinCEN identifier. The proposed regulations describe how to obtain a
FinCEN identifier and when it may be used. The proposed regulations
also describe highly useful information that reporting companies are
encouraged, but not required, to provide. This additional information
would support efforts by government authorities and financial
institutions to prevent money laundering, terrorist financing, and
other illicit activities such as tax evasion.
The CTA provides that it is unlawful for any person to willfully
provide, or attempt to provide, false or fraudulent BOI to FinCEN, or
to willfully fail to report complete or updated BOI to FinCEN. The
proposed regulations describe persons that are subject to this
provision and what acts (or failures to act) trigger a violation.
II. Scope of the NPRM
In addition to the reporting requirements addressed by this
proposed rule, Section 6403 contains other requirements. Section 6403
requires FinCEN to maintain the information that it collects under the
CTA in a confidential, secure, and non-public database. It further
authorizes FinCEN to disclose the information to certain government
agencies, domestic and foreign, for certain purposes specified in the
CTA; and to financial institutions to assist them in meeting their
customer due diligence requirements. All disclosures of information
submitted pursuant to Section 6403 are subject to appropriate protocols
to protect the security and confidentiality of the BOI. FinCEN is
required to establish such protocols by rulemaking.
Section 6403 also requires that FinCEN revise its current
regulation concerning customer due diligence (CDD) requirements for
financial institutions at 31 CFR 1010.230 (the ``CDD Rule''). The
current CDD Rule requires certain financial institutions to identify
and verify the beneficial owners of legal entity customers when those
customers open new accounts as part of those financial institutions'
customer due diligence programs.\3\
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\3\ See 31 CFR 1010.230. See also Final Rule: Customer Due
Diligence Requirements for Financial Institutions, 81 FR 29398 (May
11, 2016) (promulgating same).
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FinCEN intends to issue three sets of rulemakings to implement the
requirements of Section 6403: A rulemaking to implement the beneficial
ownership information reporting requirements, a second to implement the
statute's protocols for access to and disclosure of beneficial
ownership information, and a third to revise the existing CDD Rule,
consistent with the requirements of section 6403(d) of the CTA. In this
proposed rule, however, FinCEN seeks comments only on the first--the
proposed regulations that would implement the reporting requirements of
Section 6403. FinCEN intends to issue proposed regulations that would
implement the other aspects of section 6403 of the CTA in the future
and will solicit public comments on those proposed rules through
publication in the Federal Register.
While developing the final BOI reporting regulations, the BOI
access regulations, and the revisions to the current CDD Rule, FinCEN
continues to evaluate options for verification of information submitted
in BOI reports.\4\
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\4\ In addition, pursuant to section 6502(b)(1)(C) and (D) of
the NDAA, the Secretary, in consultation with the Attorney General,
will conduct a study no later than two years after the effective
date of the BOI reporting final rule, to evaluate the costs
associated with imposing any new verification requirements on FinCEN
and the resources necessary to implement any such changes.
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III. Background
A. Beneficial Ownership of Entities
i. Overview and Current Status of BOI Reporting in the United States
Legal entities such as corporations, limited liability companies,
partnerships, and trusts play an essential and legitimate role in the
U.S. and global economies. They are used to engage in lawful business
activity, raise capital, limit personal liability, generate
investments, and can be engines for innovation and economic growth,
among other activities. They can also be used to engage in illicit
activity and launder its proceeds, and enable those who threaten U.S.
national security to access and transact in the U.S. economy. Because
of the ease of setting up legal entities and the minimal amount of
information required to do so in most U.S. states,\5\ combined with the
investment opportunities the United States presents, the United States
continues to be a popular jurisdiction for legal entity formation. The
number of legal entities currently operating in the United States is
difficult to estimate with certainty, but Congress found that more than
two million corporations and limited liability companies are being
formed under the laws of the states each year.\6\ According to Global
Financial Integrity, more public and anonymous corporations are formed
in the United States than in any other jurisdiction.\7\ The number of
legal entities already in existence in the United States that may need
to report information on themselves, their beneficial owners, and their
formation or registration agents pursuant to the CTA is very likely in
the tens of millions.\8\
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\5\ For simplicity, in the remainder of this NPRM preamble the
term ``state'' means the 50 states and the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, American
Samoa, Guam, the United States Virgin Islands.
\6\ CTA, Section 6402(1). FinCEN's analysis estimating such
entities is included in the regulatory analysis in Section VI of
this NPRM.
\7\ Global Financial Integrity, The Library Card Project: The
Ease of Forming Anonymous Companies in the United States, (March
2019) (``GFI Report''), p. 1, available at https://secureservercdn.net/50.62.198.97/34n.8bd.myftpupload.com/wp-content/uploads/2019/03/GFI-Library-Card-Project.pdf?time=1635277837. In
2011, the World Bank assessed that 10 times more legal entities were
formed in the United States than in all 41 tax haven jurisdictions
combined. See The World Bank, UNODC, Stolen Asset Recovery
Initiative, The Puppet Masters: How the Corrupt Use Legal Structures
to Hide Stolen Assets and What to Do About It (2011), p. 93,
available at https://star.worldbank.org/sites/star/files/puppetmastersv1.pdf.
\8\ In the regulatory analysis in Section VI of this NPRM,
FinCEN estimates that there will be at least 25 million ``reporting
companies'' (entities that are required to report BOI and are not
exempt) in existence when the proposed rule becomes effective.
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The United States does not have a centralized or other complete
aggregation of information about who owns and operates legal entities
within the United States. The information about U.S. legal entities
that is readily available to law enforcement is limited to the
information required to be reported when the entity is formed at the
state or Tribal level, unless an entity opens an account at a covered
financial institution that is required to collect certain BOI pursuant
to the CDD Rule. Though state- and Tribal-level entity formation laws
vary, most jurisdictions do not require the identification of an
entity's individual beneficial owners at the time of formation.\9\ In
addition, the vast majority of states require disclosure of little to
no contact information or information about an entity's officers.\10\
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\9\ See, e.g., GFI Report, pp. 4, 6. See also U.S. Government
Accountability Office, Company Formations: Minimal Ownership
Information Is Collected and Available (April 2006), available at
https://www.gao.gov/assets/gao-06-376.pdf. A few jurisdictions
require information about entities' beneficial owners. For example,
effective January 1, 2020, the District of Columbia requires that
entity registration filings ``state the names, residence and
business addresses of each person whose aggregate share of direct or
indirect, legal or beneficial ownership of a governance or total
distributional interest of the entity:
(A) Exceeds 10%; or
(B) Does not exceed 10%; provided, that the person:
(i) Controls the financial or operational decisions of the
entity; or
(ii) Has the ability to direct the day-to-day operations of the
entity.''
D.C. Code sec. 29-102.01(a)(6) (2021), available at https://code.dccouncil.us/us/dc/council/code/sections/29-102.01.
\10\ See U.S. Government Accountability Office, Company
Formations: Minimal Ownership Information Is Collected and Available
(April 2006), available at https://www.gao.gov/assets/gao-06-376.pdf. See also, e.g., The National Association of Secretaries of
State (NASS), NASS Summary of Information Collected by States (June
2019), available at https://www.nass.org/sites/default/files/company%20formation/nass-business-entity-info-collected-june2019.pdf, noting that in its review of key business entity
information collected by states during the entity formation process
and in annual or periodic reports, it observed that while 49 states
and the District of Columbia request information on registered agent
and incorporators during formation, collection of other information
is less widespread. For corporation formation, only 24 states
collected a principal office address; 21 states collected contact or
filer information; 17 states and the District of Columbia collected
information about the directors, officers, managers, or members,
though NASS notes that several states specify this as optional; and
one state collected ownership or control information. For limited
liability company formation, 32 states and the District of Columbia
collected a principal office address; 20 states collected contact or
filer information; 20 states collected information about the
directors, officers, managers, or members (though NASS noted this
collection requirement may be optional; and 2 states collected
ownership or control information. It appears more states collected
information during periodic reports than formation, but ownership
information remained the least reported, with 3 states and 2 states
collecting such information from corporations and limited liability
companies, respectively. In its 2019 state-by state analysis of
incorporation requirements, the GFI found that (1) 23 states
(Alaska, Arkansas, Connecticut, Indiana, Illinois, Maine, Michigan,
Minnesota, Missouri, Mississippi, Montana, North Carolina, New
Hampshire, New Mexico, Nevada, Oklahoma, Pennsylvania, Rhode Island,
South Carolina, Texas, Virginia, Washington, and Wisconsin) and the
District of Columbia do not require that a company's address be
provided; (2) every state requires the name of the person who
incorporated the company; (3) four states (Alaska, California, Ohio
and Virginia) do not require the incorporator's address; (4) 13
states require information about a company's directors; and (5) five
states require information about a company's officers either upon
incorporation or within the first 90 days after incorporation. GFI
Report, supra note 4, p. 4.
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ii. The Value of BOI and the Department of the Treasury's Efforts To
Address the Lack of Transparency in Legal Entity Ownership Structures
Access to BOI reported under the CTA would significantly enhance
the U.S. Government and law enforcement's ability to protect the U.S.
financial system from illicit use. It would also impede malign actors
from abusing legal entities to conceal proceeds from criminal acts that
undermine U.S. national security, such as corruption, human smuggling,
drug and arms trafficking, and terrorist financing. For example, BOI
can add valuable context to financial analysis in support of law
enforcement and tax investigations. It can also provide essential
information to the intelligence and security professionals who work to
prevent terrorists, proliferators, and those who seek to undermine our
democratic institutions or threaten other core U.S. interests from
raising, hiding, or moving money in the United States through anonymous
shell or front companies.\11\ Broadly, and critically, BOI can assist
in the identification of linkages between potential illicit actors and
business entities, including shell companies. Shell companies are
typically non-publicly traded corporations, limited liability
companies, or entities that have no physical presence beyond a mailing
address and generate little to no independent economic value,\12\ and
often are formed without disclosing their beneficial owners.
Furthermore, shell companies can be used to conduct financial
transactions without disclosing their true beneficial owners'
involvement.
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\11\ A front company generates legitimate business proceeds to
commingle with illicit earnings. See U.S. Department of the
Treasury, National Money Laundering Risk Assessment (2018), p. 29,
available at https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf.
\12\ FinCEN Advisory, FIN-2017-A003, ``Advisory to Financial
Institutions and Real Estate Firms and Professionals,'' p. 3 (August
22, 2017), available at https://www.fincen.gov/sites/default/files/advisory/2017-08-22/Risk%20in%20Real%20Estate%20Advisory_FINAL%20508%20Tuesday%20%28002%29.pdf. ``Most shell companies are formed by individuals and
businesses for legitimate purposes, such as to hold stock or assets
of another business entity or to facilitate domestic and
international currency trades, asset transfers, and corporate
mergers. Shell companies can often be formed without disclosing the
individuals that ultimately own or control them (i.e., their
beneficial owners) and can be used to conduct financial transactions
without disclosing their true beneficial owners' involvement.'' Id.
While shell companies are used for legitimate corporate structuring
purposes including in mergers or acquisitions, they are also used in
common financial crime schemes. See FinCEN, The Role of Domestic
Shell Companies in Financial Crime and Money Laundering: Limited
Liability Companies (November 2006), p. 4, available at https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf.
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Some of the principal authors of the CTA in the Senate and U.S.
House of Representatives recently wrote to Department of the Treasury
Secretary Janet L. Yellen that ``[e]ffective and timely implementation
of the new BOI reporting requirement will be a dramatic step forward,
strengthening U.S. national security by making it more difficult for
malign actors to exploit opaque legal structures to facilitate and
profit from their bad acts. . . . This means writing the rule broadly
to include in the reporting as many corporate entities as possible
while narrowly limiting the exemptions to the smallest possible set
permitted by the law.'' \13\ They went on to note that such an approach
``will address the current and evolving strategies that terrorists,
criminals, and kleptocrats employ to hide and launder assets. It will
also foreclose loophole options for creative criminals and their
financial enablers, maximize the quality of the information collected,
and prevent the evasion of BOI reporting.'' \14\ The integration of BOI
reported pursuant to the CTA with the current data collected under the
Bank Secrecy Act (BSA),\15\ and other
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relevant government data, is expected to improve efforts to target
illicit actors and their financial activities. The collection of BOI in
a centralized database accessible to U.S. Government departments and
agencies, law enforcement, tax authorities, and financial institutions
may also help to level the playing field for honest businesses,
particularly small businesses with fewer resources, that are at a
disadvantage when competing against criminals who use shell companies
to evade taxes, hide their illicit wealth, and defraud employees and
customers.\16\
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\13\ United States Congress, Letter from Senator Sherrod Brown,
Chairman of the Senate Committee on Banking, Housing and Urban
Affairs, Representative Maxine Waters, Chairwoman of the House
Committee on Financial Services, and Representative Carolyn B.
Maloney, Chairwoman of the House Committee on Oversight and Reform,
letter to Department of the Treasury Secretary Janet L. Yellen
(November 3, 2021), available at https://financialservices.house.gov/uploadedfiles/11.04_waters_brown_maloney_letter_on_cta.pdf.
\14\ Id.
\15\ Section 6003(1) of the Anti-Money Laundering Act of 2020
defines the BSA as comprising Section 21 of the Federal Deposit
Insurance Act (12 U.S.C. 1829b), Chapter 2 of Title I of Public Law
91-508 (12 U.S.C. 1951 et seq.), and Subchapter II of Chapter 53 of
Title 31, United States Code. Congress has authorized the Secretary
to administer the BSA. The Secretary has delegated to the Director
of FinCEN the authority to implement, administer, and enforce
compliance with the BSA and associated regulations (Treasury Order
180-01 (Jan. 14, 2020)).
\16\ FinCEN, Prepared Remarks of FinCEN Director Kenneth A.
Blanco, delivered at the Federal Identity (FedID) Forum and
Exposition, Identity: Attack Surface and a Key to Countering Illicit
Finance, noting also that ``[f]or many of the companies here today--
those that are developing or dealing with sensitive technologies--
understanding who may want to invest in your ventures, or who is
competing with you in the marketplace, would allow for better, safer
decisions to protect intellectual property.'' (September 24, 2019).
https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-federal-identity-fedid.
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Since 2000, the Department of the Treasury, including FinCEN, has
been raising awareness about the role of shell companies, their
obfuscation of beneficial owners, and their role in facilitating
criminal activity.\17\ In a 2006 report on the role of domestic shell
companies in financial crime and money laundering, FinCEN found that
shell companies enabled the movement of billions of dollars across
borders by unknown beneficial owners, thereby facilitating money
laundering or terrorist financing.\18\ Concurrently with the issuance
of the report in 2006, FinCEN published an advisory alerting financial
institutions to the money laundering risks involved in providing
financial services to shell companies.\19\ In 2010, FinCEN, along with
the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the National Credit Union
Administration, the Office of the Comptroller of the Currency, the
Office of Thrift Supervision, and the Securities and Exchange
Commission, and in consultation with the Commodity Futures Trading
Commission, issued guidance clarifying and consolidating regulatory
expectations at the time for obtaining BOI for certain accounts and
customer relationships.\20\ The guidance noted that BOI in account
relationships provides another tool for financial institutions to
better understand and address money laundering and terrorist financing
risks, protect themselves from criminal activity, and assist law
enforcement with investigations and prosecutions.\21\
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\17\ See, e.g., Suspicious Activity (SAR) Report Review Issue #1
(October 2000) (noting that SARS filed in 2000 reflected suspicious
wire transfer patterns involving shell companies that lacked
legitimate business purposes and that were being used to transfer
large amounts of funds), p. 11. https://www.fincen.gov/sites/default/files/shared/sar_tti_01.pdf.
\18\ FinCEN, The Role of Domestic Shell Companies in Financial
Crime and Money Laundering: Limited Liability Companies (November
2006), available at https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf.
\19\ FinCEN, Potential Money Laundering Risks Associated with
Shell Companies (November 2006), available at https://www.fincen.gov/resources/statutes-regulations/guidance/potential-money-laundering-risks-related-shell-companies.
\20\ FinCEN, FIN-2010-G001, Guidance on Retaining and Obtaining
Beneficial Ownership Information (March 5, 2010), available at
https://www.fincen.gov/resources/statutes-regulations/guidance/guidance-obtaining-and-retaining-beneficial-ownership. The CDD Rule
and subsequent guidance and examination guidelines have superseded
the 2010 beneficial ownership guidance.
\21\ Id., noting that ``[h]eightened risks can arise with
respect to beneficial owners of accounts because nominal account
holders can enable individuals and business entities to conceal the
identity of the true owner of assets or property derived from or
associated with criminal activity. Moreover, criminals, money
launderers, tax evaders, and terrorists may exploit the privacy and
confidentiality surrounding some business entities, including shell
companies and other vehicles designed to conceal the nature and
purpose of illicit transactions and the identities of the persons
associated with them.''
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In 2006, the FATF \22\ issued its Third Mutual Evaluation Report on
Anti-Money Laundering and Combating the Financing of Terrorism, with
respect to the United States (``2006 FATF Report''). The 2006 FATF
Report highlighted the United States' lack of timely BOI available to
relevant stakeholders.\23\ Following this report, both the U.S. Senate
and the U.S. House of Representatives introduced bipartisan legislation
to establish a nationwide beneficial ownership registry. These initial
beneficial ownership registry bills included the Incorporation
Transparency and Law Enforcement Assistance Act, first introduced in
the U.S. Senate in 2008 and in the U.S. House of Representatives in
2010.\24\
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\22\ The FATF, of which the United States is a founding member,
is an international, inter-governmental task force whose purpose is
the development and promotion of international standards and the
effective implementation of legal, regulatory, and operational
measures to combat money laundering, terrorist financing, the
financing of proliferation, and other related threats to the
integrity of the international financial system. The FATF assesses
over 200 jurisdictions against its minimum standards for beneficial
ownership transparency. Among other things, it has established
standards on transparency and beneficial ownership of legal persons,
so as to deter and prevent the misuse of corporate vehicles. See
FATF Recommendation 24, Transparency and Beneficial Ownership of
Legal Persons, The FATF Recommendations: International Standards on
Combating Money Laundering and the Financing of Terrorism and
Proliferation (updated October 2020), available at https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html; FATF Guidance, Transparency and Beneficial
Ownership, Part III (October 2014), available at https://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf.
\23\ Third Mutual Evaluation Report on Anti-Money Laundering and
Combating the Financing of Terrorism, United States (2006), p. 237-
239, 299, 302, 305, 308 available at https://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20US%20full.pdf.
\24\ Incorporation Transparency and Law Enforcement Assistance
Act, S. 2956 110th Cong. (2008), available at https://www.congress.gov/110/bills/s2956/BILLS-110s2956is.pdf; Incorporation
Transparency and Law Enforcement Assistance Act, H.R. 6098 111th
Cong. (2010).
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FinCEN took its first major regulatory step to collecting BOI when
it initiated the CDD rulemaking process in March 2012 by issuing an
advance notice of proposed rulemaking (ANPRM),\25\ followed by a NPRM
in August 2014.\26\ FinCEN published the final CDD Rule in May
2016.\27\ The CDD Rule was the culmination of years of study and
consultation with industry, law enforcement, civil society
organizations, and other stakeholders, on the need for financial
institutions to collect BOI and the value of that information. Citing a
number of examples, the preamble to the CDD Rule noted that, among
other things, BOI collected by financial institutions pursuant to the
CDD Rule would: (1) Assist financial investigations by law enforcement
and examinations by regulators; (2) increase the ability of financial
institutions, law enforcement, and the intelligence community to
address threats to national security; (3) facilitate reporting and
investigations in support of tax compliance; and (4) advance Treasury's
broad strategy to enhance financial transparency of legal entities.\28\
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\25\ 77 FR 13046 (March 5, 2012).
\26\ 79 FR 45151 (August 4, 2014).
\27\ 81 FR 29397 (May 11, 2016).
\28\ 81 FR 29399-29402.
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In December 2016, the FATF issued another Anti-Money Laundering and
Counter-Terrorist Financing Measures, United States Mutual Evaluation
Report (``2016 FATF Report''), and continued to note U.S. deficiencies
in the area of beneficial ownership transparency. The 2016 FATF Report
identified the lack of BOI reporting requirements as one of the
fundamental gaps in the U.S. anti-money laundering/countering the
financing of terrorism (AML/CFT)
[[Page 69924]]
regime.\29\ The 2016 FATF Report also observed that ``the relative ease
with which U.S. corporations can be established, their opaqueness and
their perceived global credibility makes them attractive to abuse for
[money laundering and terrorism financing], domestically as well as
internationally.'' \30\ The Assistant Attorney General of the Criminal
Division and Acting Assistant Attorney General of the National Security
Division at the Department of Justice issued a statement following the
publication of the 2016 FATF Report stating that ``[f]ull transparency
of corporate ownership would strengthen our ability to trace illicit
financial flows in a timely fashion and firmly declare that the United
States will not be a safe haven for criminals and terrorists looking to
disguise their identities for nefarious purposes.'' \31\
---------------------------------------------------------------------------
\29\ See FATF, Anti-Money Laundering and Counter-Terrorist
Financing Measures United States Mutual Evaluation Report (2016), p.
4 (key findings) and Ch. 7., available at https://www.fatf-gafi.org/media/fatf/documents/reports/mer4/MER-United-States-2016.pdf.
\30\ Id., p. 153.
\31\ U.S. Department of Justice, Assistant Attorney General
Leslie Caldwell of the Criminal Division and Acting Assistant
Attorney General Mary McCord of the National Security Division,
Financial Action Task Force Report Recognizes U.S. Anti-Money
Laundering and Counter-Terrorist Financing Leadership, but Action is
Needed on Beneficial Ownership, (December 1, 2016), available at
https://www.justice.gov/archives/opa/blog/financial-action-task-force-report-recognizes-us-anti-money-laundering-and-counter.
---------------------------------------------------------------------------
While the CDD Rule increased transparency by requiring the
collection of BOI by covered financial institutions at the time of an
account opening, the Rule did not address the collection of BOI at the
time of a legal entity's formation. Following the issuance of the 2016
FATF Report, Treasury and Department of Justice officials remained
committed to working with Congress on beneficial ownership legislation
that would require companies to report adequate, accurate, and current
beneficial ownership information at the time of a company's formation.
In addition, between the initial 2008 Incorporation Transparency and
Law Enforcement Assistance Act \32\ and the 2016 FATF Report,
bipartisan beneficial ownership registry legislation continued to be
introduced in each Congress. The introduction of the Corporate
Transparency Act of 2017 in June 2017 (in the U.S. House of
Representatives) and August 2017 (in the U.S. Senate) \33\ followed the
2016 FATF Report. In November 2017, testimony at a Senate Judiciary
Committee hearing, Deputy Assistant Secretary of the Treasury Jennifer
Fowler, head of the U.S. FATF delegation during the 2016 FATF Report,
highlighted the significant vulnerability identified by FATF, noting
that ``this has permitted criminals to shield their true identities
when forming companies and accessing our financial system.'' She also
remarked that, while Treasury's CDD Rule was an important step forward,
more remained to be done working with Congress to find a solution to
collecting BOI.\34\
---------------------------------------------------------------------------
\32\ See supra note 23.
\33\ Corporate Transparency Act of 2017, H.R. 3089 115th Cong.
(2017); Corporate Transparency Act of 2017, S. 1717 115th Cong.
(2017).
\34\ U.S. Department of the Treasury, Testimony of Jennifer
Fowler, Deputy Assistant Secretary Office of Terrorist Financing and
Financial Crimes, Senate Judiciary Committee (November 28, 2017),
available at https://www.judiciary.senate.gov/imo/media/doc/Fowler%20Testimony.pdf.
---------------------------------------------------------------------------
Over the years, Treasury and Department of Justice officials
repeatedly and publicly articulated the need for the United States to
enhance and improve authorities to collect BOI. In February 2018,
Acting Deputy Assistant Attorney General M. Kendall Day testified at a
Senate Judiciary Committee hearing on beneficial ownership reporting
that ``[t]he pervasive use of front companies, shell companies,
nominees, or other means to conceal the true beneficial owners of
assets is one of the greatest loopholes in this country's AML regime.''
\35\ In December 2019, FinCEN Director Kenneth Blanco noted that
``[t]he lack of a requirement to collect information about who really
owns and controls a business and its assets at company formation is a
dangerous and widening gap in our national security apparatus.'' \36\
He also highlighted how this gap has been addressed in part through the
CDD Rule and how much more work needed to be done, stating that ``[t]he
next critical step to closing this national security gap is collecting
beneficial ownership information at the corporate formation stage. If
beneficial ownership information were required at company formation, it
would be harder and more costly for criminals, kleptocrats, and
terrorists to hide their bad acts, and for foreign states to avoid
detection and scrutiny. This would help deter bad actors accessing our
financial system in the first place, denying them the ability to profit
and benefit from its power while threatening our national security and
putting people at risk.'' \37\
---------------------------------------------------------------------------
\35\ U.S. Department of Justice, Statement of M. Kendall Day,
Acting Deputy Assistant Attorney General, Criminal Division, U.S.
Department of Justice, Before the Committee on the Judiciary, United
States Senate, for a Hearing Entitled ``Beneficial Ownership:
Fighting Illicit International Financial Networks Through
Transparency,'' presented February 6, 2018, p. 3, available at
https://www.judiciary.senate.gov/imo/media/doc/02-06-18%20Day%20Testimony.pdf.
\36\ FinCEN, Prepared Remarks of FinCEN Director Kenneth A.
Blanco, delivered at the American Bankers Association/American Bar
Association Financial Crimes Enforcement Conference, (December 10,
2019), available at https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-american-bankers.
\37\ Id.
---------------------------------------------------------------------------
Continuing its analysis of the use of shell and front companies to
hide ill-gotten gains, in its 2018 National Money Laundering Risk
Assessment, and in its 2018 and 2020 National Strategies for Combating
Terrorist and Other Illicit Financing (``2018 Illicit Financing
Strategy'' and ``2020 Illicit Financing Strategy,'' respectively), the
Department of the Treasury discussed the money laundering risks
inherent in the United States' lack of a comprehensive beneficial
ownership reporting regime.\38\ In the 2018 National Money Laundering
Risk Assessment, Treasury highlighted a number of cases where shell and
front companies were used in the United States to disguise funds
generated in Medicare and Medicaid fraud, trade-based money laundering,
or drug trafficking, among other crimes.\39\ In the 2018 Illicit
Financing Strategy, Treasury flagged the use of shell companies by
Russian organized crime groups in the United States, as well as the
Iranian Government's use of shell companies to obfuscate the source of
funds and its role as it tried to generate revenue.\40\ The 2020
Illicit Financing Strategy cited the lack of a requirement to collect
BOI at the time of company formation and after changes in ownership as
one of the most significant vulnerabilities of the U.S. financial
system.\41\
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\38\ See e.g., id., p. 28, and U.S. Department of the Treasury,
National Strategy for Combating Terrorist and Other Illicit
Financing (2020) (``2020 Illicit Financing Strategy''), pp. 13-14,
27, 34, available at https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.
\39\ U.S. Department of the Treasury, National Money Laundering
Risk Assessment (2018), pp. 28-30, available at https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf.
\40\ U.S. Department of the Treasury, National Strategy for
Combating Terrorist and Other Illicit Financing (2018), pp. 20, 47,
available at https://home.treasury.gov/system/files/136/nationalstrategyforcombatingterroristandotherillicitfinancing.pdf.
\41\ 2020 Illicit Financing Strategy, supra note 35, p. 12,
available at https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.
---------------------------------------------------------------------------
Most recently, Congress enacted the Anti-Money Laundering Act of
2020 (the ``AML Act''), of which the CTA is a part.\42\ Congress
explained that among
[[Page 69925]]
other purposes, the AML Act was meant to ``improve transparency for
national security, intelligence, and law enforcement agencies and
financial institutions concerning corporate structures and insight into
the flow of illicit funds through those structures'' and ``discourage
the use of shell corporations as a tool to disguise and move illicit
funds.'' \43\ As part of its ongoing efforts to implement the AML Act,
FinCEN published in June 2021 the first national AML/CFT priorities,
further highlighting the use of shell companies by human traffickers,
smugglers, and weapons proliferators, among others, to generate
revenues and transfer funds in support of illicit conduct.\44\
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\42\ The Anti-Money Laundering Act of 2020 was enacted as
Division F, Sec. Sec. 6001-6511, of the William M. (Mac) Thornberry
National Defense Authorization Act for Fiscal Year 2021, Public Law
116-283 (2021).
\43\ Id., Section 6002(5)(A)-(B).
\44\ FinCEN, Anti-Money Laundering and Countering the Financing
of Terrorism Priorities (June 30, 2021), pp. 11-12, available at
https://www.fincen.gov/sites/default/files/shared/AML_CFT%20Priorities%20(June%2030%2C%202021).pdf.
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iii. National Security and Law Enforcement Implications of Legal
Entities With Anonymous Beneficial Owners
While many legal entities are used for legitimate purposes, they
can also be misused, as highlighted above and as Congress recognized in
the CTA.\45\ Corrupt actors and their financial facilitators, as a
general matter, take advantage of the administrative ease of entity
formation, the low cost, and the lack of information needed to
establish such structures in the United States. Those actors then use
the resulting anonymity and perceived legitimacy afforded to legal
entities, such as shell companies, to disguise and convert the proceeds
of crime before introducing them into the financial system. For
example, such legal entities are used to: (1) Obscure the proceeds of
bribery and large-scale corruption, money laundering, narcotics
offenses, terrorist or proliferation financing, and human trafficking;
(2) disguise efforts to undermine the integrity of U.S. elections and
institutions; and (3) conduct other threatening and illegal activities.
The ability of malign actors to hide behind opaque corporate
structures, including anonymous shell and front companies, and to
generate funding to finance their illicit activities continues to be a
significant threat to the national security of the United States. The
lack of a centralized BOI repository accessible to law enforcement and
the intelligence community not only erodes the safety and security of
our nation, but also undermines the U.S. Government's ability to
address these threats to the United States.
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\45\ ``[Ma]lign actors seek to conceal their ownership of
corporations, limited liability companies, or other similar entities
in the United States to facilitate illicit activity, including money
laundering, the financing of terrorism, proliferation financing,
serious tax fraud, human and drug trafficking, counterfeiting,
piracy, securities fraud, financial fraud, and acts of foreign
corruption[.]'' CTA, Section 6402(3).
---------------------------------------------------------------------------
In the United States, the deliberate misuse of legal entities,
including corporations and limited liability companies, continues to
significantly enable money laundering and other illicit financial
activity and national security threats. Treasury noted in its 2020
Illicit Financing Strategy that ``[m]isuse of legal entities to hide a
criminal beneficial owner or illegal source of funds continues to be a
common, if not the dominant, feature of illicit finance schemes,
especially those involving money laundering, predicate offences, tax
evasion, and proliferation financing . . . A Treasury study based on a
statistically significant sample of adjudicated IRS cases from 2016-
2019 found legal entities were used in a substantial proportion of the
reviewed cases to perpetrate tax evasion and fraud. According to
federal prosecutors and law enforcement, large-scale schemes that
generate substantial proceeds for perpetrators and smaller white-collar
cases alike routinely involve shell companies, either in the underlying
criminal activity or subsequent laundering.'' \46\ The Drug Enforcement
Administration also recently highlighted that drug trafficking
organizations (DTOs) use shell and front companies to commingle illicit
drug proceeds with legitimate revenue of front companies, thereby
enabling the DTOs to launder their drug proceeds.\47\
---------------------------------------------------------------------------
\46\ 2020 Illicit Financing Strategy, supra note 35, pp. 13-14,
available at https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.
\47\ Drug Enforcement Administration, 2020 Drug Enforcement
Administration National Drug Threat Assessment (``DEA 2020 NDTA''),
pp. 87-88 (2020), available at https://www.dea.gov/sites/default/files/2021-02/DIR-008-212020NationalDrugThreatAssessment_WEB.pdf.
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Recently, in a joint Federal Bureau of Investigation (FBI) and
Internal Revenue Service--Criminal Investigations (IRS-CI)
investigation, the Department of Justice filed civil forfeiture
complaints aggregating to $1.7 billion under the Kleptocracy Asset
Recovery Initiative related to the 1Malaysia Development Berhad (1MDB)
investigation. From 2009 through 2015, more than $4.5 billion in funds
belonging to 1MDB was allegedly misappropriated by high-level officials
of 1MDB and their associates. 1MDB was created by the Government of
Malaysia to promote economic development in Malaysia through global
partnerships and foreign direct investment, and the associated funds
were intended to be used for improving the well-being of the Malaysian
people. However, using fraudulent documents and representations, the
co-conspirators allegedly laundered the funds through a series of
complex transactions and shell companies with bank accounts located in
the United States and abroad. These transactions allegedly served to
conceal the origin, source and ownership of the funds, and ultimately
passed through U.S. financial institutions to then be used to acquire
and invest in assets located in the United States and overseas.
Included in the forfeiture were multiple luxury properties in New York
City, Los Angeles, Beverly Hills, and London, mostly titled in the name
of shell companies, as well as paintings by Van Gogh, Monet, Picasso, a
yacht, several items of extravagant jewelry, and numerous other items
of personal property. The investigation into the location and holders
of the assets associated with the alleged 1MDB scheme was made much
more difficult by the shell companies with connections in foreign
destinations.\48\
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\48\ FBI, Testimony of Steven M. D'Antuono, Section Chief,
Criminal Investigative Division, ``Combatting Illicit Financing by
Anonymous Shell Companies'' (May 21, 2019), available at https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies.
---------------------------------------------------------------------------
Shell companies also are used to evade sanctions imposed by the
U.S. Government, thereby endangering U.S. national security. In a 2020
bipartisan report, the Senate Permanent Subcommittee on Investigations
detailed, for example, how after Treasury's Office of Foreign Assets
Control (OFAC) had sanctioned certain Russian oligarchs in connection
with Russia's annexation of Crimea and for supporting Russian President
Vladimir Putin,\49\ those sanctioned oligarchs used shell companies to
engage in a total of $91 million in transactions, and to purchase $18
million dollars in high-value art in the United States.\50\ In a
[[Page 69926]]
more recent example, in a federal criminal complaint unsealed in March
2021, the Department of Justice charged 10 Iranian nationals with
running a nearly 20-year-long scheme to evade U.S. sanctions on the
Government of Iran by disguising more than $300 million worth of
transactions--including the purchase of two $25 million oil tankers--on
Iran's behalf through front companies in the San Fernando Valley,
Canada, Hong Kong and the United Arab Emirates.\51\ The U.S. State
Department has designated Iran as a state sponsor of terrorism. During
the scheme, the defendants allegedly created and used more than 70
front companies, money service businesses, and exchange houses in the
United States, Iran, Canada, the United Arab Emirates and Hong Kong.
The defendants also allegedly made false representations to financial
institutions to disguise more than $300 million worth of transactions
on Iran's behalf, using money wired in U.S. dollars and sent through
U.S.-based banks.\52\
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\49\ U.S. Department of Treasury, Treasury Sanctions Russian
Officials, Members of the Russian Leadership's Inner Circle, and an
Entity for Involvement in the Situation in Ukraine (March 20, 2014),
available at https://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx.
\50\ United States Senate Permanent Subcommittee on
Investigations, Committee on Homeland Security and Governmental
Affairs, Staff Report: The Art Industry And U.S. Policies That
Undermine Sanctions (July 2020), pp. 7 and 144, available at https://www.hsgac.senate.gov/imo/media/doc/2020-07-29%20PSI%20Staff%20Report%20-%20The%20Art%20Industry%20and%20U.S.%20Policies%20that%20Undermine%20Sanctions.pdf.
\51\ U.S. Department of Justice (U.S. Attorney's Office, Central
District of California), Iranian Nationals Charged with Conspiring
to Evade U.S. Sanctions on Iran by Disguising $300 Million in
Transactions Over Two Decades (March 19, 2021), available at https://www.justice.gov/usao-cdca/pr/iranian-nationals-charged-conspiring-evade-us-sanctions-iran-disguising-300-million.
\52\ Id.
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iv. The Law Enforcement Need for Improved BOI Collection
Although the U.S. Government has tools capable of obtaining some
beneficial ownership information, their limitations and the time and
cost required to successfully deploy them demonstrate the significant
benefits that a centralized repository of information would provide law
enforcement. The CTA explains that ``malign actors seek to conceal
their ownership of corporations, limited liability companies, or other
similar entities in the United States to facilitate illicit activity,''
yet ``most or all States do not require information about the
beneficial owners of the corporations, limited liability companies, or
other similar entities formed under the laws of the State.'' The CTA
continues, ``money launderers and others involved in commercial
activity intentionally conduct transactions through corporate
structures in order to evade detection, and may layer such structures .
. . across various secretive jurisdictions such that each time an
investigator obtains ownership records for a domestic or foreign
entity, the newly identified entity is yet another corporate entity,
necessitating a repeat of the same process.'' \53\
---------------------------------------------------------------------------
\53\ CTA, Section 6402.
---------------------------------------------------------------------------
As Kenneth A. Blanco, then-Director of FinCEN observed in testimony
to the U.S. Senate Committee on Banking, Housing and Urban Affairs, and
based on his experience as a former state and Federal prosecutor,
identifying the ultimate beneficial owner of a shell or front company
in the United States ``often requires human source information, grand
jury subpoenas, surveillance operations, witness interviews, search
warrants, and foreign legal assistance requests to get behind the
outward facing structure of these shell companies. This takes an
enormous amount of time--time that could be used to further other
important and necessary aspects of an investigation--and wastes
resources, or prevents investigators from getting to other equally
important investigations. The collection of beneficial ownership
information at the time of company formation would significantly reduce
the amount of time currently required to research who is behind
anonymous shell companies, and at the same time, prevent the flight of
assets and the destruction of evidence.'' \54\ He also noted during the
testimony that ``[i]dentifying and disrupting illicit financial
networks not only assists in the prosecution of criminal activity of
all kinds, but also allows law enforcement to halt and dismantle
criminal organizations and other bad actors before they harm our
citizens or our financial system.'' \55\
---------------------------------------------------------------------------
\54\ FinCEN, Testimony for the Record, Kenneth A. Blanco,
Director, U.S. Senate Committee on Banking, Housing and Urban
Affairs (May 21, 2019), available at https://www.banking.senate.gov/imo/media/doc/Blanco%20Testimony%205-21-19.pdf.
\55\ Id.
---------------------------------------------------------------------------
The FBI's Steven M. D'Antuono elaborated on these difficulties,
testifying before the Senate Banking Housing and Urban Affairs
Committee in 2019 that ``[t]he process for the production of records
can be lengthy, anywhere from a few weeks to many years, and . . . .
can be extended drastically when it is necessary to obtain information
from other countries . . . . [I]f an investigator obtains the ownership
records, either from a domestic or foreign entity, the investigator may
discover that the owner of the identified corporate entity is an
additional corporate entity, necessitating the same process for the
newly discovered corporate entity. Many professional launderers and
others involved in illicit finance intentionally layer ownership and
financial transactions in order to reduce transparency of transactions.
As it stands, it is a facially effective way to delay an
investigation.'' \56\ D'Antuono acknowledged that these challenges may
be even more stark for state, local, and Tribal law enforcement
agencies that may not have the same resources as their federal
counterparts to undertake long and costly investigations to identify
the beneficial owners of these entities.\57\ During the testimony, he
noted that requiring the disclosure of BOI by legal entities and the
creation of a central BOI repository available to law enforcement and
regulators could address these challenges.\58\
---------------------------------------------------------------------------
\56\ FBI, Testimony of Steven M. D'Antuono, Section Chief,
Criminal Investigative Division, ``Combatting Illicit Financing by
Anonymous Shell Companies'' (May 21, 2019), available at https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies.
\57\ Id.
\58\ Id.
---------------------------------------------------------------------------
The process of obtaining BOI through grand jury subpoenas and other
means can be time consuming and of limited utility in some cases. Grand
jury subpoenas, for example, require an underlying grand jury
investigation into a possible violation of law. In addition, the law
enforcement officer or investigator must work with a prosecutor's
office, such as a U.S. Attorney's Office, to open a grand jury
investigation, obtain the grand jury subpoena, and issue it on behalf
of the grand jury. The investigator also needs to determine the proper
recipient of the subpoena and coordinate service, which raises
additional complications in cases where there is excessive layering of
corporate structures to hide the identity of the ultimate beneficial
owners. In some cases, however, BOI still may not be attainable via
grand jury subpoena because it does not exist. For example, because
most states do not require the disclosure of BOI when forming or
registering an entity, BOI cannot be obtained from the secretary of
state or similar office. Furthermore, many states permit corporations
to acquire property without disclosing BOI, and therefore BOI cannot be
obtained from property records.
FinCEN's existing regulatory tools also have significant
limitations. The current CDD Rule, for example, requires that certain
types of U.S. financial institutions identify and verify the beneficial
owners of legal entity customers at the time those financial
institutions open a new account for a legal entity customer,\59\ but
the rule
[[Page 69927]]
provides only a partial solution.\60\ The information about beneficial
owners of certain U.S. entities is generally not comprehensive and not
reported to the Government, and therefore not immediately available to
law enforcement, intelligence, and national security agencies. Other
FinCEN authorities--geographic targeting orders \61\ and the so-called
``311 measures'' (i.e., special measures imposed on jurisdictions,
financial institutions, or international transactions of primary money
laundering concern) \62\--offer temporary and targeted tools. Neither
provides law enforcement the ability to quickly and efficiently follow
the money.
---------------------------------------------------------------------------
\59\ The CDD Rule NPRM contained a requirement that covered
financial institutions conduct ongoing monitoring to maintain and
update customer information on a risk basis, specifying that
customer information includes the beneficial owners of legal entity
customers. As noted in the supplementary material to the final rule,
FinCEN did not construe this obligation as imposing a categorical,
retroactive requirement to identify and verify BOI for existing
legal entity customers. Rather, these provisions reflect the
conclusion that a financial institution should obtain BOI from
existing legal entity customers when, in the course of its normal
monitoring, the financial institution detects information relevant
to assessing or reevaluating the risk of such customer. Final Rule,
Customer Due Diligence Requirements for Financial Institutions, 81
FR 29398, 29404 (May 11, 2016).
\60\ See U.S. Money Laundering Threat Assessment Working Group,
U.S. Money Laundering Threat Assessment (2005), pp. 48-49, available
at https://www.treasury.gov/resource-center/terrorist-illicit-finance/documents/mlta.pdf. See also Congressional Research Service,
Miller, Rena S. and Rosen, Liana W., Beneficial Ownership
Transparency in Corporate Formation, Shell Companies, Real Estate,
and Financial Transactions (July 8, 2019), available at https://crsreports.congress.gov/product/pdf/R/R45798.
\61\ 31 U.S.C. 5326(a); 31 CFR 1010.370.
\62\ 31 U.S.C. 5318A, as added by section 311 of the USA PATRIOT
Act (Pub. L. 107-56).
---------------------------------------------------------------------------
Shell companies, in particular, demonstrate how critical a
centralized database of beneficial ownership information is for
investigators. Treasury's 2020 Illicit Financing Strategy addressed in
part how current sources of information are inadequate to prosecute the
use of shell entities to hide ill-gotten gains. In particular, while
law enforcement agencies may be able to use subpoenas and access public
databases to collect information to identify the owners of corporate
structures, the 2020 Illicit Financing Strategy explained that
``[t]here are numerous challenges for federal law enforcement when the
true beneficiaries of illicit proceeds are concealed through shell or
front companies.'' \63\ In May 2019 testimony before the Senate
Banking, Housing, and Urban Affairs Committee, then-FinCEN Director
Blanco provided examples of criminals who used anonymous shell
corporations, including: ``A Russian arms dealer nicknamed `The
Merchant of Death,' who sold weapons to a terrorist organization intent
on killing Americans. Executives from a supposed investment group that
perpetrated a Ponzi scheme that defrauded more than 8,000 investors,
most of them elderly, of over $1 billion. A complex nationwide criminal
network that distributed oxycodone by flying young girls and other
couriers carrying pills all over the United States. A New York company
that was used to conceal Iranian assets, including those designated for
providing financial services to entities involved in Iran's nuclear and
ballistic missile program. A former college athlete who became the head
of a gambling enterprise and a violent drug kingpin who sold
recreational drugs and steroids to college and professional football
players. A corrupt Venezuelan treasurer who received over $1 billion in
bribes.'' He continued, ``These crimes are very different, as are the
dangers they pose and the damage caused to innocent and unsuspecting
people. The defendants and bad actors come from every walk of life and
every corner of the globe. The victims--both direct and indirect--
include Americans exposed to terrorist acts; elderly people losing life
savings; a young mother becoming addicted to opioids; a college athlete
coerced to pay extraordinary debts by violent threats; and an entire
country driven to devastation by corruption. But all these crimes have
one thing in common: shell corporations were used to hide, support,
prolong, or foster the crimes and bad acts committed against them.
These criminal conspiracies thrived at least in part because the
perpetrators could hide their identities and illicit assets behind
shell companies. Had beneficial ownership information been available,
and more quickly accessible to law enforcement and others, it would
have been harder and more costly for the criminals to hide what they
were doing. Law enforcement could have been more effective and
efficient in preventing these crimes from occurring in the first place,
or could have intercepted them sooner and prevented the scope of harm
these criminals caused from spreading.'' \64\
---------------------------------------------------------------------------
\63\ 2020 Illicit Financing Strategy, supra note 35, p. 14,
available at https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.
\64\ FinCEN, Testimony for the Record, Kenneth A. Blanco,
Director, U.S. Senate Committee on Banking, Housing and Urban
Affairs (May 21, 2019), available at https://www.banking.senate.gov/imo/media/doc/Blanco%20Testimony%205-21-19.pdf.
---------------------------------------------------------------------------
During the same hearing in front of the Senate's Committee on
Banking, Housing, and Urban Affairs in May 2019, the FBI's D'Antuono
explained that ``[t]he strategic use of [shell and front companies]
makes investigations exponentially more difficult and laborious. The
burden of uncovering true beneficial owners can often handicap or delay
investigations, frequently requiring duplicative, slow-moving legal
process in several jurisdictions to gain the necessary information.
This practice is both time consuming and costly. The ability to easily
identify the beneficial owners of these shell companies would allow the
FBI and other law enforcement agencies to quickly and efficiently
mitigate the threats posed by the illicit movement of the succeeding
funds. In addition to diminishing regulators', law enforcement
agencies', and financial institutions' ability to identify and mitigate
illicit finance, the lack of a law requiring production of beneficial
ownership information attracts unlawful actors, domestic and abroad, to
abuse our state-based registration system and the U.S. financial
industry.'' \65\
---------------------------------------------------------------------------
\65\ FBI, Testimony of Steven M. D'Antuono, Section Chief,
Criminal Investigative Division, ``Combatting Illicit Financing by
Anonymous Shell Companies'' (May 21, 2019), available at https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies.
---------------------------------------------------------------------------
In February 2020, then-Secretary of the Treasury Steven T. Mnuchin
testified at a Senate hearing on the President's Fiscal Year 2021
Budget that the lack of information on who controls shell companies is
``a glaring hole in our system.'' \66\ In his December 9, 2020, floor
statement accompanying the AML Act, Senator Sherrod Brown, the then-
Ranking Member of the Senate Committee on Banking, Housing, and Urban
Affairs and one of the primary authors of the enacted CTA, stated that
the reporting of BOI ``will help address longstanding problems for U.S.
law enforcement. It will help them investigate and prosecute cases
involving terrorism, weapons proliferation, drug trafficking, money
laundering, Medicare and Medicaid fraud, human trafficking, and other
crimes. And it will provide ready access to this information under
long-established and effective privacy rules. Without these reforms,
criminals, terrorists, and even rogue nations could continue to use
layer upon layer of shell companies to disguise and launder illicit
funds. That makes it harder to hold bad actors accountable, and puts
[[Page 69928]]
us all at risk.'' \67\ Senators Sheldon Whitehouse, Charles Grassley,
Ron Wyden, and Marco Rubio, who were co-sponsors of the CTA and its
predecessor legislation in the Senate, commented on the ANPRM that
``the CTA marked the culmination of a years-long effort in Congress to
combat money laundering, international corruption, and kleptocracy by
requiring certain companies to disclose their beneficial owners to law
enforcement, national security officials, and financial institutions
with customer due diligence obligations.'' \68\
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\66\ Steven T. Mnuchin (Secretary, Department of the Treasury),
Transcript: Hearing on the President's Fiscal Year 2021 Budget
before the Senate Committee on Finance (February 12, 2020),'' p. 25,
available at https://www.finance.senate.gov/imo/media/doc/45146.pdf.
\67\ Senator Sherrod Brown, ``National Defense Authorization
Act,'' Congressional Record 166:208 (December 9, 2020), p. S7311,
available at https://www.govinfo.gov/content/pkg/CREC-2020-12-09/pdf/CREC-2020-12-09.pdf.
\68\ Senators Sheldon Whitehouse, Chuck Grassley, Ron Wyden, and
Marco Rubio, Letter to the Financial Crimes Enforcement Network,
(May 5, 2021), available at https://www.rubio.senate.gov/public/_cache/files/ceb65708-7973-4b66-8bd4-c8254509a6f3/13D55FBEE293CAAF52B7317C5CA7E44C.senators-cta-comment-letter-05.04.2021.pdf.
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v. The United States' Corporate Transparency Measures Within the
Broader International Framework
The laundering of illicit proceeds frequently entails cross-border
transactions involving jurisdictions with weak AML/CFT compliance
frameworks, as these jurisdictions may present more ready options for
criminals to place, launder, or store the proceeds of crime. For over a
decade, through the former Group of Eight (G8), Group of Twenty
(G20),\69\ FATF, and the Egmont Group,\70\ the global community has
worked to establish a set of mutual standards to enhance beneficial
ownership transparency across all jurisdictions. U.S. efforts to
collect BOI are part of this growing international consensus by
jurisdictions to enhance beneficial ownership transparency, and will be
reinforced by similar efforts by foreign jurisdictions.
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\69\ See, e.g., United States G-8 Action Plan for Transparency
of Company Ownership and Control (June 2013), https://obamawhitehouse.archives.gov/the-press-office/2013/06/18/united-states-g-8-action-plan-transparency-company-ownership-and-control;
G8 Lough Erne Declaration (July 2013), https://www.gov.uk/government/publications/g8-lough-erne-declaration; G20 High Level
Principles on Beneficial Ownership (2014), https://www.g20.utoronto.ca/2014/g20_high-level_principles_beneficial_ownership_transparency.pdf ; United
States Action Plan to Implement the G-20 High Level Principles on
Beneficial Ownership (Oct. 2015), https://obamawhitehouse.archives.gov/blog/2015/10/16/us-action-plan-implement-g-20-high-level-principles-beneficial-ownership.
\70\ FATF has also collaborated with the Egmont Group of
Financial Intelligence Units on a study that identifies key
techniques used to conceal beneficial ownership and identifies
issues for consideration that include coordinated national action to
limit the misuse of legal entities. FATF-Egmont Group, Concealment
of Beneficial Ownership (2018), https://egmontgroup.org/sites/default/files/filedepot/Concealment_of_BO/FATF-Egmont-Concealment-beneficial-ownership.pdf. The Egmont Group is a body of 166
Financial Intelligence Units (FIUs); FinCEN is the FIU of the United
States and a founding member of the Egmont Group. The Egmont Group
provides a platform for the secure exchange of expertise and
financial intelligence amongst FIUs to combat money laundering and
terrorist financing.
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The current lack of a centralized U.S. BOI reporting requirement
and database makes the United States a jurisdiction of choice to
establish shell companies that hide the ultimate beneficiaries. This
makes it easier for bad actors to exploit these companies for the
placement, laundering, and investment of the proceeds of crime. Global
financial centers such as the United States are particularly exposed to
transnational illicit finance threats, as they tend to have
characteristics--such as extensive links to the international financial
system, sophisticated financial sectors, and robust institutions--that
make them appealing destinations for the proceeds of illicit
transnational activity. Corrupt foreign officials, sanctions evaders,
and narco-traffickers, among others, exploit the current gap in the
U.S. BOI reporting regime to park their ill-gotten gains in a stable
jurisdiction, thereby exposing the United States to serious national
security threats. For example, the Department of Justice indicted the
alleged heads of the Los Zetas Mexican drug cartel for their roles in
using the race horse industry and shell companies to launder millions
of dollars in drug proceeds.\71\ The FBI's D'Antuono noted that the
wide use of shell companies, in both the United States and Mexico, made
it challenging for banks and investigators to associate the drug cartel
with horses and bank accounts. If not for solid witness testimony and
extremely diligent forensic accounting, it would have been difficult to
prove the case, he noted.\72\
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\71\ FBI, Testimony of Steven M. D'Antuono, Section Chief,
Criminal Investigative Division, ``Combatting Illicit Financing by
Anonymous Shell Companies'' (May 21, 2019), available at https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies.
\72\ Id.
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As noted previously, the United States' lack of a centralized BOI
reporting requirement constitutes a weak link in the integrity of the
global financial system. In the CTA, Congress explained that the
statute is necessary to ``bring the United States into compliance with
international [AML/CFT] standards.'' \73\ Many countries, including the
United Kingdom and all member states of the European Union, have
incorporated elements derived from these standards into their domestic
legal or regulatory frameworks. At the same time, FATF mutual
evaluations show that jurisdictions, including the United States, still
have work to do to meet the standards for beneficial ownership
transparency. Establishing the requirements to report BOI to a
centralized database at FinCEN is another step in Treasury's decades-
long efforts to strengthen the U.S. and global financial systems and to
combat money laundering and corruption.
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\73\ CTA, Section 6402(5)(E).
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B. The CTA
The CTA added a new section, 31 U.S.C. 5336, to the BSA to address
the broader objectives of enhancing beneficial ownership transparency
while minimizing the burden on the regulated community.
In brief, 31 U.S.C. 5336 requires certain types of domestic and
foreign entities, called ``reporting companies,'' to submit specified
BOI to FinCEN. FinCEN is authorized to share this BOI with certain
Government agencies, financial institutions, and regulators, subject to
appropriate protocols.\74\ The requirement for reporting companies to
submit BOI takes effect ``on the effective date of the regulations
prescribed by the Secretary of the Treasury under [31 U.S.C. 5336].''
\75\ Reporting companies formed or registered after the effective date
will need to submit the requisite BOI to FinCEN at the time of
formation, while preexisting reporting companies will have a specified
period to comply and report.\76\
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\74\ See generally 31 U.S.C. 5336(b), (c).
\75\ 31 U.S.C. 5336(b)(5).
\76\ See 31 U.S.C. 5336(b)(1)(B), (C).
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The CTA reporting requirements target generally smaller, more
lightly regulated entities that may not be subject to any other BOI
reporting requirements. In contrast, the CTA exempts certain more
heavily regulated entities from its reporting requirements, including
to avoid imposing duplicative requirements.
The provision at 31 U.S.C. 5336 requires reporting companies to
submit to FinCEN, for each beneficial owner and company applicant, the
individual's full legal name, date of birth, current residential or
business street address, and either a unique identifying number from an
acceptable identification document (e.g., a passport) or a FinCEN
identifier--four readily accessible pieces of information that should
not be unduly burdensome for individuals to produce, or for reporting
companies to collect and submit to FinCEN.\77\ A FinCEN identifier is a
unique identifying number that FinCEN will
[[Page 69929]]
issue to individuals or entities upon request.\78\ In certain
instances, the FinCEN identifier provides a substitute to individuals
who do not wish to provide their names, birth dates, or addresses to a
reporting company.\79\
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\77\ See 31 U.S.C. 5336(b)(2).
\78\ See 31 U.S.C. 5336(b)(3)(A)(i).
\79\ See 31 U.S.C. 5336(b)(3)(B).
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Given the sensitivity of the reportable information, the CTA
imposes strict confidentiality, security, and access restrictions on
the data. FinCEN is authorized to disclose reportable BOI to a
statutorily defined group of governmental authorities and financial
institutions, in limited circumstances. Federal agencies, for example,
may only obtain access to BOI when acting in furtherance of national
security, intelligence, or law enforcement activity.\80\ State, local,
and Tribal law enforcement agencies require ``a court of competent
jurisdiction'' to authorize them to seek BOI as part of a criminal or
civil investigation.\81\ Foreign government access is limited to
foreign law enforcement agencies, prosecutors, and judges in specified
circumstances.\82\ FinCEN may also disclose reported BOI to financial
institutions that need such BOI to facilitate compliance with customer
due diligence requirements under applicable law, with the consent of
the reporting company.\83\ Moreover, a financial institution's
regulator can obtain BOI that has been provided to a regulated
financial institution for the purpose of performing regulatory
oversight that is specific to that financial institution.\84\ Taken
together, these measures, along with other restrictions, requirements,
and security protocols delineated in the CTA, will help to ensure that
BOI collected under 31 U.S.C. 5336 is only used for statutorily
described purposes. As noted above, FinCEN intends to address the
regulatory requirements related to access to information reported
pursuant to the CTA through a future rulemaking process.
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\80\ See 31 U.S.C. 5336(c)(2)(B)(i)(I).
\81\ See 31 U.S.C. 5336(c)(2)(B)(i)(II).
\82\ See 31 U.S.C. 5336(c)(2)(B)(ii).
\83\ See 31 U.S.C. 5336(c)(2)(B)(iii).
\84\ See 31 U.S.C. 5336(c)(2)(C).
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The CTA also requires that FinCEN rescind and revise portions of
the current CDD Rule within one year after the effective date of the
BOI reporting rule.\85\ The CTA does not direct FinCEN to rescind the
requirement for financial institutions to identify and verify the
beneficial owners of legal entity customers under 31 CFR 1010.230(a),
but does direct FinCEN to rescind the beneficial ownership
identification and verification requirements of 31 CFR 1010.230(b)-
(j).\86\ The CTA identifies three purposes for this revision: (1) To
bring the rule into conformity with the AML Act as a whole, including
the CTA; (2) to account for financial institutions' access to BOI
reported to FinCEN ``in order to confirm the beneficial ownership
information provided directly to the financial institutions'' for AML/
CFT and customer due diligence purposes; and (3) to reduce unnecessary
or duplicative burdens on financial institutions and legal entity
customers.\87\
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\85\ CTA, Section 6403(d)(1).
\86\ CTA, Section 6403(d)(2). The CTA orders the rescission of
paragraphs (b) through (j) directly (``the Secretary of the Treasury
shall rescind paragraphs (b) through (j)'') and orders the retention
of paragraph (a) by a negative rule of construction (``nothing in
this section may be construed to authorize the Secretary of the
Treasury to repeal . . . [31 CFR] 1010.230(a)[.]'').
\87\ CTA, Section 6403(d)(1)(A)-(C).
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FinCEN intends to satisfy the requirements related to the revision
of the CDD Rule through a future rulemaking process that will provide
the public with an opportunity to comment on the effect of the final
provisions of the beneficial ownership reporting rule on financial
institutions' customer due diligence obligations. The rulemaking
process will also allow FinCEN to reach informed conclusions about the
proper scope of the CDD Rule.\88\ FinCEN anticipates that this
rulemaking process will touch on the issue of the interplay between the
FinCEN-hosted BOI information technology (IT) system and financial
institutions' diligence efforts.
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\88\ Final Rule, Customer Due Diligence Requirements for
Financial Institutions, 81 FR 29398-29402 (May 11, 2016).
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C. The Advance Notice of Proposed Rulemaking
On April 5, 2021, FinCEN published an ANPRM on the BOI reporting
requirements.\89\ The ANPRM sought public input in five open-ended
categories of questions, including on clarifying key definitions,
developing reporting procedures, and establishing compliance standards
for reporting companies. The ANPRM also sought comment on FinCEN's
implementation of the related provisions of the CTA that govern
FinCEN's maintenance and disclosure of BOI subject to appropriate
protocols.
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\89\ ANPRM, Beneficial Ownership Information Reporting
Requirements, 86 FR 17557-17565 (April 5, 2021).
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In response to the ANPRM, FinCEN received 220 public comments from
a wide variety of commenters, including businesses, civil society
organizations, trade associations, law firms, secretaries of state and
other state officials, Indian Tribes, Members of Congress, and numerous
individuals. Commenters expressed a range of opinions, frequently
conflicting, about which entities should report, what information they
should report, about whom they should report, how to ensure that the
implementation of the CTA generates highly useful data for authorized
users, how to minimize burden on reporting companies, and more.
FinCEN has considered all of the comments that it received in
response to the ANPRM in drafting this proposed rule. The section-by-
section analysis that follows incorporates discussion of certain issues
raised by commenters.
D. Outreach
FinCEN has also engaged in outreach with a variety of potential
stakeholders, including state and Tribal entities (e.g., secretaries of
state), law enforcement, representatives of civil society
organizations, financial institution trade associations, and broader
business trade associations, to make them aware of the CTA and
encourage them to provide written comments during the rulemaking
process to ensure FinCEN's consideration of their perspectives.
IV. Section-by-Section Analysis
This proposed rule would revise the regulations implementing the
BSA by adding a new reporting requirement at Sec. 1010.380 (``Reports
of beneficial ownership information''), in subpart C (``Reports
Required to be Made'') of part 1010 (``General Provisions'') of chapter
X (``Financial Crimes Enforcement Network'') of title 31, Code of
Federal Regulations.
The analysis that follows addresses the key elements of the
proposed rule: (A) Information to be reported; (B) beneficial owners;
(C) company applicant; (D) reporting company; (E) timing, format, and
mechanics of reports; (F) reporting violations; and (G) definitions.
The analysis has a final subsection (H) that discusses the issue of the
effective date of the regulation.
A. Information To Be Reported
The CTA requires each reporting company to submit to FinCEN a
report identifying each beneficial owner of the reporting company and
each company applicant by: (1) Full legal name, (2) date of birth, (3)
current residential or business street address, and (4) unique
identifying number from an acceptable identification document; or, if
this
[[Page 69930]]
information has already been provided to FinCEN, by a FinCEN
identifier.\90\
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\90\ 31 U.S.C. 5336(b)(1)(A) (reporting requirement); 31 U.S.C.
5336(b)(2) (required information).
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To implement this requirement, proposed 31 CFR 1010.380(b)
specifies that each report or application under that section must be
filed with FinCEN in the form and manner FinCEN prescribes, and each
person filing such report shall certify that the report is accurate and
complete.\91\ It then sets forth the requirement for reporting
companies to report to FinCEN identifying information about their
beneficial owners, the company applicant, and the reporting company
itself. Finally, it outlines certain special reporting rules and sets
forth the requirements for obtaining a FinCEN identifier.
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\91\ Commenters to the ANPRM discussed the potential for FinCEN
to require an attestation of accuracy or other certification on
either a one-time or periodic basis, including financial institution
trade associations and civil society organizations, which argued
that such a requirement would encourage reporting companies to keep
their information up to date. However, others argued that FinCEN
lacks the statutory authority to include such a requirement in the
regulations. FinCEN invites further comments on its proposal that a
person filing a report or application with FinCEN pursuant to 31 CFR
1010.380(a) shall certify that the report is accurate and complete.
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i. Information To Be Reported on Beneficial Owners and Company
Applicants
Proposed 31 CFR 1010.380(b)(1)(ii) sets forth the specific items of
information that a reporting company must report about each individual
beneficial owner and each individual company applicant.\92\ The
language is drawn nearly verbatim from 31 U.S.C. 5336(b)(2)(A). In
addition, for clarity, it incorporates the statutory definition of
``acceptable identification document,'' 31 U.S.C. 5336(a)(1), rather
than leaving the reader to identify the cross-reference based on the
CTA's reference to a ``unique identifier number from an acceptable
identification document.'' \93\ Also for clarity, the proposed rule
consolidates discussion of the FinCEN identifier in proposed 31 CFR
1010.380(b)(5).
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\92\ ``Company applicant'' is the proposed rule's term for what
the statute refers to as the ``applicant.'' See 31 U.S.C.
5336(a)(2).
\93\ See 31 U.S.C. 5336(b)(2)(A)(iv)(I) (for information
submission requirement); 31 U.S.C. 5336(a)(1) (for definition of
``acceptable identification document''). The definition of
``acceptable identification document'' is not inserted entirely
verbatim because FinCEN has made certain minor changes to the
statutory language to clarify the text.
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The proposed rule also clarifies what address information should be
reported. The statute requires reporting companies to identify
beneficial owners and applicants by their ``residential or business
street address.'' 31 U.S.C. 5336(b)(2)(A)(iii). The statutory
requirement does not specify when or whether one type of address should
be used in preference to another or resolve more specific questions
regarding secondary addresses or whether addresses should be domestic,
if possible, or can be foreign. FinCEN considered leaving to the
reporting company the choice of which address to report, but assessed
that this would unduly diminish the usefulness of the reported
information to national security, intelligence, and law enforcement
activity. Beneficial owners are of interest because of their economic
status as persons who own or control a reporting company. Business
addresses or secondary residence addresses are of some investigative
value as points of contact in the event that an investigation requires
follow-up, but such addresses do not definitively establish a
beneficial owner's primary residence jurisdiction. A beneficial owner's
residential address for tax residency purposes, by contrast, is of
value both as a point of contact and for tax administration
purposes.\94\ Moreover, multiple persons may be associated with a
business address. FinCEN believes that the residential street address
will therefore be more useful for establishing the unambiguous identity
of an identified beneficial owner. The reporting of a residential
street address will also likely allow for easier follow-up by law
enforcement in the event of investigative need. Accordingly, FinCEN
believes that requiring the disclosure of beneficial owners'
residential street address for tax residency purposes is appropriate.
FinCEN therefore proposes that the reporting company report the
residential address for tax residency purposes of each beneficial
owner.
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\94\ See 31 U.S.C. 5336(c)(5)(B) (``Officers and employees of
the Department of the Treasury may obtain access to beneficial
ownership information for tax administration purposes . . . .'').
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With respect to a company applicant's address, FinCEN proposes a
bifurcated approach. For company applicants that provide a business
service as a corporate or formation agent, the reporting company would
need to report the business address of any company applicant that files
a document in the course of such individual's business. Company
applicants that provide a business service as a corporate or formation
agent are of particular interest because of their role in creating or
registering reporting companies. While any address for such a company
applicant is of some value as a point of contact in an inquiry or
investigation, company applicants who file formation documents in the
course of their business may be more easily identified by their
business address. To the extent company applicants make a business of
filing documents on behalf of many companies, reporting the associated
business address may provide more useful information to national
security, intelligence, and law enforcement agencies. The business
address will also allow law enforcement to identify patterns of
entities that are created or registered by company applicants working
at the same business address; such patterns would not be easily
identifiable if the name and address reported is specific to an
individual operating on a formation agent's behalf. This information
could provide insight into business practices and relationships between
individuals and entities, including patterns of entity formation that
suggest persons are engaged in the business of creating legal entities
for the purpose of obscuring the beneficiaries of transactions or the
owners of valuable assets. This information may therefore provide
valuable information for national security, intelligence, and law
enforcement activity.
For all other company applicants, the reporting company would need
to report the residential street address that the individual uses for
tax residency purposes. This establishes a uniform rule for the
selection of addresses to be reported and provides specificity to the
reporting company for ease of administration. It would also help to
maximize the benefit to be gained from the reporting of this data
element because stakeholders will not have to figure out which address
was reported.
In addition, the CTA authorizes FinCEN to prescribe procedures and
standards governing the reports identifying beneficial owners and
applicants ``by,'' among other things, a ``unique identifying number
from an acceptable identification document.'' \95\ The CTA does not
specify how an individual is to be identified ``by'' such number
``from'' such document. However, the CTA also makes it unlawful to
``willfully provide, or attempt to provide . . . a false or fraudulent
identifying photograph or document . . . to FinCEN,'' indicating an
assumption that identifying photographs or documents would be
reported.\96\ This provision therefore
[[Page 69931]]
indicates that FinCEN has authority to collect a scanned copy of an
identification document, along with the document's number, in
prescribing reporting procedures and standards. Therefore, the proposed
rule specifies that the reporting company provide a scanned copy of the
identification document from which the unique identifying number of the
beneficial owner or company applicant is obtained, in connection with
reporting that unique number.
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\95\ 31 U.S.C. 5336(b)(4), (b)(2)(A)(iv).
\96\ 31 U.S.C. 5336(h)(1)(A).
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FinCEN believes that the collection of an image would significantly
contribute to the creation of a highly useful database for law
enforcement and other authorized users. The image submitted by a
reporting company in connection with a specific beneficial owner or
company applicant could help to confirm the accuracy of the reported
unique identification number because the image would contain the
number. FinCEN also believes this requirement would make it more
difficult to provide false identification information because it is
likely to be significantly more difficult to falsify an image of an
identification document than to report an inaccurate number. The image
may also assist law enforcement in identifying an individual because it
would contain a picture of the individual associated with the
identifying number, providing further confirmation of the individual's
identity. While such pictures may already be available to law
enforcement from existing records associated with the reported
identification numbers, it would be highly useful for law enforcement
to obtain such information from a centralized BOI database than to
obtain the identification number from the BOI database and the picture
from a different source. FinCEN considered that, as noted by several
commenters, requiring an image may impose some additional burdens on
reporting companies (e.g., gathering and submitting images of the
identification documents for each beneficial owner and company
applicant). FinCEN anticipates, however, that the burdens should be
minimal because requesting a copy of an individual's identification
document appears routine (e.g., to verify an employee's immigration
status), and technological advances have made it relatively easy for
individuals to provide scanned images. FinCEN welcomes comments on the
proposed collection of a scanned copy of an identification document.
FinCEN recognizes that several commenters encouraged FinCEN to require
reporting companies to report significantly more information on each
beneficial owner than is required by statute. For example, various
commenters suggested FinCEN should require reporting of whether a
beneficial owner fell under the ``ownership interests'' or
``substantial control'' components of the definition of ``beneficial
owner,'' precise reporting of ownership interest percentages, whether
ownership interests are held directly or indirectly, and other types of
information. Such additional information might enhance the utility of
the database to authorized users. FinCEN welcomes further comments on
the statutory authority for and practical effect of requiring
additional information to be reported.
Proposed 31 CFR 1010.380(b)(2) would permit a reporting company to
report the Taxpayer Identification Number \97\ (TIN) of its beneficial
owners and company applicants on a voluntary basis, solely with the
prior consent of each individual whose TIN would be reported and with
such consent to be recorded on a form that FinCEN will provide. While
the statute requires reporting companies to provide certain specified
information, it does not prohibit reporting companies from providing
additional information on a voluntary basis. FinCEN has proposed this
voluntary reporting option because such information would help ensure
that the database of beneficial ownership information is highly useful
for authorized users, in furtherance of the CTA's purpose and mandate.
For example, having access to a TIN will allow authorized users such as
FinCEN, law enforcement, investigators, and financial institutions to
cross-reference other databases and more easily verify the information
of an individual. FinCEN believes that the inclusion of TIN reporting,
even if voluntary, may help to raise standards for due diligence and
transparency expectations for financial institutions and other
governments. FinCEN is particularly interested in comments on this
proposal to provide a voluntary mechanism to report beneficial owner
and company applicant TINs.
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\97\ A TIN is an identification number used by the Internal
Revenue Service (IRS) in the administration of tax laws and assists
in identifying entities and individuals and distinguishing them from
one another. See IRS, Taxpayer Identification Numbers (TINs),
available at https://www.irs.gov/individuals/international-taxpayers/taxpayer-identification-numbers-tin. A TIN is unique to an
entity or individual.
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ii. Information To Be Reported on Reporting Companies
Proposed 31 CFR 1010.380(b)(1)(i) would require reporting companies
to report certain information to identify the reporting company. While
the CTA specifies the information required to be reported to ``identify
each beneficial owner of the applicable reporting company and each
applicant with respect to that reporting company,'' the CTA does not
specify what, if any, information a reporting company must report about
itself.\98\ However, the CTA's express requirement to identify
beneficial owners and applicants for each reporting company clearly
implies a requirement to identify the associated company. That implicit
requirement is confirmed by the structure and overriding objective of
the CTA, which is to identify the individuals who own, control, and
register each particular entity, as well as by the CTA's direction to
``ensure that information is collected in a form and manner that is
highly useful.'' \99\ Without identifying information about the
reporting company itself, FinCEN would have no ability to determine the
entity that is associated with each reported beneficial owner or
company applicant. For example, an investigator could not determine
what entities a known drug trafficker uses to launder money.
Conversely, an investigator also could not determine who owns or
controls an entity it knows is being used to launder money. This would
frustrate Congress's express purposes in enacting the CTA and would
amount to an absurd result.\100\
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\98\ 31 U.S.C. 5336(b)(2)(A).
\99\ CTA, Section 6402. See also 31 U.S.C. 5336(b)(1)(F)(iv)(I),
(b)(4)(B)(ii), (d)(2)-(3).
\100\ See, e.g., Griffin v. Oceanic Contractors, Inc., 458 U.S.
564, 575 (1982) (noting that ``interpretations of a statute which
would produce absurd results are to be avoided if alternative
interpretations consistent with the legislative purpose are
available''); Arkansas Dairy Co-op Ass'n, Inc. v. Dep't of Agr., 573
F.3d 815, 829 (D.C. Cir. 2009) (rejecting a reading of a statute
that would produce a ``glaring loophole'' in Congress's instruction
to an agency); Ass'n of Admin. L. Judges v. FLRA, 397 F.3d 957, 962
(D.C. Cir. 2005) (``Unless it has been extraordinarily rigid in
expressing itself to the contrary . . . the Congress is always
presumed to intend that pointless expenditures of effort be
avoided.'' (cleaned up)); Pub. Citizen v. Young, 831 F.2d 1108, 1112
(D.C. Cir. 1987) (explaining that ``a court must look beyond the
words to the purpose of the act where its literal terms lead to
absurd or futile results'' (cleaned up)).
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Therefore, to ensure that each reporting company can be identified,
the proposed regulations would require each reporting company to report
its name, any alternative names through which the company is engaging
in business (``d/b/a names''), its business street address, its
jurisdiction of formation or registration, as well as a unique
identification number.
FinCEN believes that a company name alone may not be sufficient
[[Page 69932]]
information to uniquely identify each reporting company and distinguish
it from other companies with similar names. Companies formed in
different states may have the same names because the entity formation
practices of many states require a new entity to choose a legal name
that is unique within that state but do not require a new entity's
legal name to be unique within the United States. In addition,
companies with similar names may be mistaken for each other due to
misspellings or other errors. Moreover, FinCEN must have enough
specific information about a reporting company to enable accurate
searching of the database of beneficial ownership information. Given
that companies may have similar names, addresses, and states of
formation or registration, FinCEN believes that having a unique
identification number for each reporting company is critical to
enabling the unique identification of a reporting company and
effectively searching the database to identify the beneficial ownership
information reported for a particular company. The proposed rules would
thus require the submission of additional information beyond each
company's name.
Specifically, the reporting company would be required to submit a
TIN (including an Employer Identification Number (EIN)), or where a
reporting company has not yet been issued a TIN, a Dun & Bradstreet
Data Universal Numbering System (DUNS) number or a Legal Entity
Identifier (LEI). A reporting company must furnish a TIN on all tax
returns, statements, and other tax related documents filed with the
IRS. As a result, FinCEN believes that there will be limited burdens
for a reporting company with a tax filing obligation in the United
States to provide its TIN. However, FinCEN recognizes that an entity
may not be able to provide a TIN, such as in the case of a newly formed
entity that does not yet have a TIN when it submits a report to FinCEN
at the time of formation or registration. Accordingly, in FinCEN's
proposal, a reporting company may provide a DUNS \101\ or LEI \102\ if
it does not yet have a TIN. The DUNS and LEI numbers are commonly used
in the United States and globally to distinguish entities from one
another and to create unique identifying codes to facilitate financial
and other transactions. Over 1.8 million LEIs have been created
globally and the LEI is being adopted as a global standard in business
transactions. More than 240,000 entities in the United States use LEIs
to identify and distinguish themselves.\103\ Pursuant to 31 CFR
1010.380(b)(5)(ii)(B), if a reporting company has applied for and
received a FinCEN identifier, it may submit the FinCEN identifier in
lieu of a TIN, DUNS, or LEI number.
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\101\ See Dun & Bradstreet, What is a D-U-N-S Number?, available
at https://www.dnb.com/duns-number.html.
\102\ See LEI Worldwide, What is a Legal Entity Identifier?,
available at https://www.lei-worldwide.com/what-is-a-legal-entity-identifier.html.
\103\ See Global LEI Foundation, LEI Statistics--Global LEI
Index--LEI Data--GLEIF, available at https://www.gleif.org/en/lei-data/global-lei-index/lei-statistics.
---------------------------------------------------------------------------
FinCEN expects that there should be minimal burden on a reporting
company to obtain and report basic identifying information about itself
in light of the need to have a TIN to pay taxes in the United States
and the need for other identifying numbers and information to conform
to other business requirements. Additionally, the information that
FinCEN is proposing to collect does not extend beyond basic identifying
information that should be readily available to the reporting company.
However, FinCEN welcomes comments on the anticipated burden of this
reporting requirement, particularly for newly formed entities that may
not have a unique identifying number shortly after formation, and
potential alternatives that would allow for the unique identification
of the reporting company and effective searching of the beneficial
ownership database.
FinCEN recognizes the perspective of the many commenters who
encouraged FinCEN to require a reporting company to report a
significant amount of additional information about itself and about
intermediate legal entity owners through which ultimate natural person
beneficial owners of the reporting company own their interests. FinCEN
believes that requiring detailed reporting of intermediate legal entity
owners and other information about reporting companies could
substantially enhance the transparency of companies' ownership
structures and make the collected data more useful for law enforcement,
financial institutions, and other authorized users. However, the
commenters who urged collection of this information did not identify
the statutory authority for the collection of such information from
reporting companies. FinCEN welcomes further comments on the authority
for and practical effect of collecting such additional information
under the CTA.
FinCEN further recognizes certain commenters have raised concerns
that a reporting company may list the address of a formation agent or
other third party as its ``business street address,'' rather than its
principal place of business or the business entity's actual physical
location. FinCEN believes that requirement to submit a reporting
company's business street address precludes the reporting of the
address of the reporting company's formation agent or other third party
representatives, but welcomes comments on whether the term ``business
street address'' is sufficiently clear or whether further clarification
is needed to avoid the reporting of addresses of formation agents and
other third parties as a reporting company's ``business street
address.''
iii. Special Rules
Proposed 31 CFR 1010.380(b)(3) sets forth special reporting rules
for ownership interests held by exempt entities, minor children,
foreign pooled investment vehicles, and deceased company applicants.
Specifically, proposed 31 CFR 1010.380(b)(3)(i) sets forth a special
rule for reporting companies with ownership interests held by exempt
entities, consistent with the requirements of 31 U.S.C. 5336(b)(2)(B).
As set forth in the special rule, if an exempt entity under 31 CFR
1010.380(c)(2) has, or will have, a direct or indirect ownership
interest in a reporting company, and an individual is a beneficial
owner of the reporting company by virtue of such ownership interest,
the report shall include the name of the exempt entity rather than the
information required under paragraph (b)(1) with respect to such
beneficial owner. This rule is intended to avoid a situation in which
an entity that is exempt from the beneficial ownership reporting
requirement is nonetheless required to disclose its beneficial owners
as a result of its ownership of a reporting company.
Proposed 31 CFR 1010.380(b)(3)(ii) provides a special rule for
reporting the information of a parent or guardian in lieu of
information about a minor child. Specifically, proposed 31 CFR
1010.380(b)(3)(ii) provides that if a reporting company reports the
information required under paragraph (b)(1) with respect to a parent or
legal guardian of a minor child consistent with the exception outlined
at 31 CFR 1010.380(d)(4)(i), then the report shall indicate that such
information relates to the parent or legal guardian. Without this
information, stakeholders would not know that the parent or legal
guardian is not the actual beneficial owner.
Proposed 31 CFR 1010.380(b)(3)(iii) explains the special rule for
foreign pooled investment vehicles that the CTA established in 31
U.S.C.
[[Page 69933]]
5336(b)(2)(C). Under proposed 31 CFR 1010.380(b)(3)(iii), a foreign
legal entity that is formed under the laws of a foreign country, and
that would be a reporting company but for the pooled investment vehicle
exemption in 31 CFR 1010.380(c)(2)(xviii), must report to FinCEN the
BOI of the individual who exercises substantial control over the legal
entity.
Proposed 31 CFR 1010.380(b)(3)(iv) sets forth a special reporting
rule for situations where a reporting company is created before the
effective date of the regulations and the company applicant has died
before the reporting obligation is effective. The proposed rule
elaborates at 31 CFR 1010.380(e) that a company applicant is the
individual who files, including by directing or controlling the filing,
the document that created the reporting company. This may present
substantial challenges for a longstanding company (e.g., one that was
formed a century ago). In specifying the information to be reported
about beneficial owners and applicants, the CTA appears to presume that
such individuals are not deceased, as it requires a current address and
a number from a nonexpired identification document.\104\ Thus, for
deceased individuals, Congress does not appear to have spoken directly
to the information required to be reported to identify such
individuals, and FinCEN must ``prescribe procedures and standards
governing any report'' for such individuals.\105\
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\104\ 31 U.S.C. 5336(b)(2)(A).
\105\ 31 U.S.C. 5336(b)(4)(A).
---------------------------------------------------------------------------
To minimize burdens in this unique situation, proposed 31 CFR
1010.380(b)(3)(iv) would allow a reporting company formed or registered
before the effective date of the regulations, and whose company
applicant died before the reporting company had an obligation to obtain
identifying information from a company applicant, to report that fact
along with whatever identifying information the reporting company
actually knows about the company applicant. FinCEN believes that this
tailored approach balances stakeholders' need for information on
company applicants with the challenges older reporting companies may
face. FinCEN welcomes comments on this special rule or any other
special rules that may be required to alleviate the burden of company
applicant reporting, and would encourage commenters to include an
explanation of why they believe such further proposed special rules are
consistent with the CTA.
FinCEN does not propose to apply the same rule to deceased
beneficial owners because, as the statute makes clear and as the
proposed rule elaborates at proposed 31 CFR 1010.380(d), the
requirement to report beneficial owners pertains to those who are the
current beneficial owners of the reporting company. While a company
applicant will remain the same for all time after the entity is
created, an individual will cease to be a beneficial owner upon death.
As a result, no beneficial owners will be deceased at the time a
company must report them. A reporting company thus will not face the
same burdens in reporting information about current beneficial owners
as it may face in reporting information about deceased company
applicants.
iv. FinCEN Identifier; Other Matters
Proposed 31 CFR 1010.380(b)(4) would specify the contents of
corrected and updated reports, making clear that such reports filed in
the time and manner specified in 31 CFR 1010.380(a) must contain the
corrected or updated information, and in the case of newly exempt
entities, shall contain a notification that the exempt entity is no
longer a reporting company. These updated and corrected reports are
explained in 31 CFR 1010.380(a)(2) and (3).
Proposed 31 CFR 1010.380(b)(5) sets forth rules that relate to
obtaining and using a FinCEN identifier, reflecting requirements that
are found in several different parts of 31 U.S.C. 5336. Consistent with
31 U.S.C. 5336(b)(3)(A), an individual may obtain a FinCEN identifier
by providing FinCEN with the information that the individual would
otherwise have to provide to a reporting company if the individual were
a beneficial owner or applicant of the reporting company; an entity can
obtain a FinCEN identifier from FinCEN when it submits a filing as a
reporting company or any time thereafter.\106\ This means that an
individual or legal entity must still disclose information to FinCEN,
but once an individual or legal entity has a FinCEN identifier, the
individual or legal entity can provide the identifier to a reporting
company in lieu of the personal details required under paragraph
(b)(1). For instance, an individual can provide his or her FinCEN
identifier to the reporting company, and the reporting company can
provide the FinCEN identifier to FinCEN in lieu of any information the
reporting company would otherwise have to report about the individual
under paragraph (b)(1). Similarly, an entity can provide the FinCEN
identifier to the reporting company, and the reporting company can
provide the FinCEN identifier to FinCEN in lieu of any information the
reporting company would otherwise have to report about that entity's
beneficial owners if they qualified as beneficial owners of the
reporting company through their interests in the entity. In such
circumstances, the underlying information associated with a FinCEN
identifier would still be available to FinCEN.
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\106\ The statute provides that only entities that report their
beneficial ownership information to FinCEN are eligible to receive
FinCEN identifiers. 31 U.S.C. 5336(b)(3)(A)(i).
---------------------------------------------------------------------------
B. Beneficial Owners
The CTA defines a beneficial owner, with respect to a reporting
company, as ``any 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% of the ownership interests of the entity.'' \107\ The
statute, however, does not define ``substantial control'' or
``ownership interests.'' FinCEN proposes to clarify these terms in the
rule so that a reporting company has sufficient guidance to identify
and report its beneficial owners.
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\107\ 31 U.S.C. 5336(a)(3)(A).
---------------------------------------------------------------------------
Consistent with the CTA, the proposed rule would require a
reporting company to identify any individual who satisfies either of
these two components. Based on the breadth of the substantial control
component, FinCEN expects that a reporting company would identify at
least one beneficial owner under that component regardless of whether
(1) any individual satisfies the ownership component, or (2) exclusions
to the definition of beneficial owner apply. FinCEN is interested in
comments addressing whether that expectation is reasonable, under what
circumstances a reporting company may not have at least one reportable
beneficial owner, and how to address such circumstances, if they exist.
i. Substantial Control
Proposed 31 CFR 1010.380(d)(1) sets forth three specific indicators
of substantial control: (1) Service as a senior officer of a reporting
company; (2) authority over the appointment or removal of any senior
officer or dominant majority of the board of directors (or similar
body) of a reporting company; and (3) direction, determination, or
decision of, or substantial influence over, important
[[Page 69934]]
matters of a reporting company. The regulation also includes a catch-
all provision to make clear that substantial control can take
additional forms not specifically listed. Each of these indicators
supports the basic goal of requiring a reporting company to identify
the individuals who stand behind the reporting company and direct its
actions. The first indicator identifies the individuals with nominal or
de jure authority, the second and third indicators identify the
individuals with functional or de facto authority, and the catch-all
provision recognizes that control exercised in novel and unorthodox
ways can still be substantial. This last approach is consistent with
the common law tradition and the standards that FinCEN examined, as
well as the broader objective of preventing individuals from evading
identification as beneficial owners by hiding behind formalisms such as
job descriptions, job titles, and nominal lack of authority.
In developing the proposed definition of substantial control,
FinCEN looked to the common law of agency and corporate law and the
usage of that term in other federal statutes, which generally
incorporate similar agency-law concepts. FinCEN considered these
statutes in framing functional tests for assessing whether an
individual exercises substantial control over an entity. FinCEN also
considered the FATF Recommendations, established beneficial-owner
reporting standards such as that used with the United Kingdom's (UK's)
People with Significant Control (or PSC) Register, U.S. Federal tax
law, and the statutory law and administrative practice informing the
activity of the Committee on Foreign Investment in the United States
(CFIUS). Drawing in part on these standards, and supported by many
commenters' suggestions that FinCEN do so, proposed 31 CFR
1010.380(d)(1)(iii) provides specific examples of indicators of
substantial control. This non-exhaustive list of examples is intended
to clarify the types of matters FinCEN considers relevant to an
analysis of whether an individual is ``direct[ing], determin[ing], or
deci[ding] . . . important matters affecting [a] reporting company''
and thus exercising substantial control. Reporting companies should be
guided by the specific examples in the proposed rule, but they should
also consider how individuals could exercise substantial control in
other ways.
FinCEN acknowledges the concerns raised by commenters that too
broad a definition of substantial control could engender confusion. One
commenter pointed out that property managers make decisions that
influence the operations of the property but are hired by and report to
the owners of the property; the commenter did not think such
individuals should necessarily be considered beneficial owners on these
facts alone, and FinCEN agrees. The ordinary execution of day-to-day
managerial decisions with respect to one part of a reporting company's
assets or employees typically should not, in isolation, cause the
decision-maker to be considered in substantial control of a reporting
company, unless that person satisfies another element of the
``substantial control'' criteria.
Proposed 31 CFR 1010.380(d)(2) provides a general reminder that an
individual can exercise substantial control directly or indirectly.
This incorporates statutory language from the CTA that applies to all
beneficial ownership determinations and includes additional language
applying the concept found in the CTA to the specific instances of
substantial control found in proposed 31 CFR 1010.380(d)(1).
FinCEN carefully considered the burden that this approach to
defining substantial control might impose on reporting companies, small
businesses in particular. Based on the comments to the ANPRM, FinCEN
recognizes that the CTA may require certain entities to disclose BOI on
more and different individuals than they are accustomed to under the
control prong of the current CDD Rule. FinCEN also recognizes that
reporting companies will likely incur some additional costs in
complying with this obligation. That said, FinCEN expects the amount of
additional time and effort required to comply with the proposed rule to
be minimal. Specifically, under the proposed rule, a reporting company
would not need to spend significant time assessing which of its
beneficial owners would be the most appropriate to report as being in
substantial control. Rather, entities would simply report all persons
in substantial control as beneficial owners, with no need to
distinguish among them. Additionally, FinCEN believes that entities are
already aware of their own ownership structures, regardless of
complexity, and should be able to readily identify their beneficial
owners. Therefore, FinCEN expects that compliance should not be
particularly burdensome for most businesses. While FinCEN's approach
could be viewed to raise concerns about the disclosure of personal
information about a broader range of individuals, the privacy impact of
reporting BOI to FinCEN is relatively light, because, unlike beneficial
ownership registries in many other countries, FinCEN's database will
not be public and will be subject to stringent access protocols.
FinCEN recognizes that its proposed definition of substantial
control diverges from the approach that a number of commenters to the
ANPRM stated they would prefer, i.e., the approach laid out in the
current CDD Rule. Under the ``control prong'' of the current CDD Rule,
new legal entity customers of a financial institution must provide BOI
for the one individual who exercises a ``significant degree of
control'' over the entity. FinCEN considered whether the proposed rule
should adopt a comparable approach. As some ANPRM commenters argued,
limiting the number of persons identified under the substantial control
component to one could minimize burden to reporting companies and help
clarify when reporting companies had complied with the CTA's reporting
requirements.
However, the CTA does not require the identification of only one
person in substantial control.\108\ The CTA also mandates that FinCEN
rescind and revise portions of the CDD Rule, including the paragraph on
beneficial owners, to bring the pre-CTA CDD Rule into conformity with
the CTA.\109\ FinCEN therefore need not adopt the framework established
by the current CDD Rule, and incorporating the CDD Rule's numerical
limitation would appear inconsistent with the CTA's objective of
establishing a comprehensive BOI database for all beneficial owners of
reporting companies. FinCEN believes that limiting reporting of
individuals in substantial control to one person as in the CDD Rule--or
indeed to impose any other numerical limit--would artificially limit
the reporting of beneficial owners who may exercise substantial control
over an entity, and could become a means of evasion. Requiring
reporting companies to identify all individuals who exercise
[[Page 69935]]
substantial control would provide law enforcement and others a much
more complete picture of who makes important decisions at a reporting
company.
---------------------------------------------------------------------------
\108\ The proposed approach would also be consistent with the
text of the CTA, which--unlike the CDD Rule that preceded it--does
not expressly limit the definition of beneficial owner to ``a single
individual.'' Compare 31 U.S.C. 5336(a)(3)(A) (``The term beneficial
owner means, with respect to an entity, an individual who . . .
exercises substantial control over the entity.'') with 31 CFR
1010.230(d)(2) (defining ``beneficial owner'' as ``a single
individual with significant responsibility to control, manage or
direct a legal entity'' (emphasis added)). Under well-established
principles of agency law, moreover, more than one individual can
exercise substantial control over a single agent. See, e.g.,
Restatement (Third) of Agency Sec. 3.14, Agents with Multiple
Principals; id. Sec. 3.16, Agents for Coprincipals (``Two or more
persons may as coprincipals appoint an agent to act for them in the
same transaction or matter.'').
\109\ 31 U.S.C. 5336(d).
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FinCEN also considered but rejected a per se rule that would have
deemed all officers of a reporting company to be in ``substantial
control'' of the entity, and therefore, beneficial owners. While a per
se rule is clear and easy to administer, FinCEN ultimately concluded
that the CTA's consistent focus on individuals that are in actual
substantial control of a reporting company argued against creating a
definition of ``substantial control'' that relies on titles alone.
Thus, while FinCEN has retained a per se element in its proposed
definition of substantial control--requiring the reporting of any
``senior officer'' as a person in substantial control--this is only a
part of the definition in proposed 31 CFR 1010.380(d)(1). Despite
comments from some that FinCEN should adopt a definition of substantial
control drawn from another BOI disclosure regime, such as the UK's PSC
Register, FinCEN believes that its proposed definition of ``substantial
control,'' which, as discussed above, is based on established legal
principles and usages of this term in other contexts, provides
specificity to the regulated community while being flexible enough to
account for unique ways in which individuals can exercise substantial
control over an entity.
FinCEN seeks comments on the overall proposed approach to
substantial control as well as on the specific indicators and examples,
including whether they are clear and useful. FinCEN welcomes additional
suggestions for possible indicators and specific language in this
regard.
ii. Ownership or Control of Ownership Interests
The other component of the definition of beneficial owner concerns
individuals who own or control 25 percent of a reporting company's
ownership interests. The CTA defines a beneficial owner to include ``an
individual who . . . owns or control not less than 25 percent of the
ownership interests of the entity.'' \110\ Proposed 31 CFR
1010.380(d)(3)(i) provides that ``ownership interests,'' for the
purposes of this rule, would include both equity in the reporting
company and other types of interests, such as capital or profit
interests (including partnership interests) or convertible instruments,
warrants or rights, or other options or privileges to acquire equity,
capital, or other interests in a reporting company. Debt instruments
are included if they enable the holder to exercise the same rights as
one of the specified equity or other interests, including the ability
to convert the instrument into one of the specified equity or other
interests. This is similar to the U.S. Securities and Exchange
Commission's definition of ``equity security'' in 17 CFR 230.405.\111\
FinCEN proposes to adopt this understanding as a way of ensuring that
the underlying reality of ownership, not the form it takes, drives the
identification of beneficial owners. The approach also thwarts the use
of complex ownership structures and ownership vehicles other than
direct equity ownership to obscure a reporting company's real owners.
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\110\ 31 U.S.C. 5336(a)(3)(A)(ii).
\111\ Securities Act Rule 405.
---------------------------------------------------------------------------
Proposed 31 CFR 1010.380(d)(3)(ii) identifies ways in which an
individual may ``own or control'' interests. It restates statutory
language that an individual may own or control an ownership interest
directly or indirectly. It also gives a non-exhaustive list of examples
to further emphasize that an individual can own or control ownership
interests through a variety of means. FinCEN's proposed approach
requires reporting companies to consider all facts and circumstances
when making determinations about who owns or controls ownership
interests. FinCEN believes that the specific examples will illustrate
what FinCEN believes to be relevant to an ownership-interests analysis.
For example, with proposed 31 CFR 1010.380(d)(3)(ii)(A) (joint
ownership), FinCEN's objective is to highlight that an individual may
reach the 25 percent threshold by jointly owning or controlling with
one or more other persons an undivided ownership interest in a
reporting company.
Proposed 31 CFR 1010.380(d)(3)(ii)(C) specifies that an individual
may directly or indirectly own or control an ownership interest in a
reporting company through a trust or similar arrangement. The proposed
language aims to make clear that an individual may own or control
ownership interests by way of the individual's position as a grantor or
settlor, a beneficiary, a trustee, or another individual with authority
to dispose of trust assets. In relation to trust beneficiaries in
particular, FinCEN believes that it is appropriate to consider an
individual as owning or controlling ownership interests held in trust
if the individual is the sole permissible recipient of both income and
principal from the trust, or has the right to demand a distribution of,
or withdraw substantially all of the assets from, the trust. Other
individuals with authority to dispose of trust assets, such as
trustees, will also be considered as controlling the ownership
interests held in trust, as will grantors or settlors that have
retained the right to revoke the trust, or to otherwise withdraw the
assets of the trust. FinCEN believes that these circumstances comport
with the general understanding of ownership and control in the context
of trusts and furthers the CTA's objective of identifying true
beneficial owners regardless of formalities that may vary across
different jurisdictions. However, FinCEN acknowledges that these
concepts do not map easily onto every trust or similar arrangement.
Accordingly, FinCEN is seeking comment on its general approach to the
attribution of ownership interests held in trust to certain
individuals, as well as the particular circumstances in which
individuals may be considered to own or control ownerships interests
held in trust. More broadly, FinCEN seeks comments on whether these and
the other proposed examples of how one might own or control ownership
interests are clear and useful, and which, if any, require elaboration.
Proposed 31 CFR 1010.380(d)(3)(iii) concludes the ownership
interest section with general guidance on determining whether an
individual owns or controls 25 percent of the ownership interests of a
reporting company. An individual's ownership interests of the reporting
company shall include all ownership interests of any class or type, and
the percentage of such ownership interests that an individual owns or
controls shall be determined by aggregating all of the individual's
ownership interests in comparison to the undiluted ownership interests
of the company. FinCEN believes this approach would further the CTA's
objective of identifying true beneficial owners by accounting for
complex ownership or investment structures. FinCEN seeks comments on
this approach to the 25 percent calculation, including any issues that
FinCEN should consider in relation to reporting companies with more
complex ownership structures.
FinCEN considered alternative approaches to identifying beneficial
owners according to their ownership interests, in particular the
approach laid out in the ownership prong of the CDD Rule. In that
approach, only ``equity interests'' are relevant, joint ownership is
not explicitly addressed, and assets in trust are deemed to be owned by
their
[[Page 69936]]
trustees.\112\ The ownership prong of the CDD Rule is well known,
easily understood, and easy to comply with. Many commenters urged
FinCEN to adopt the CDD Rule approach to trusts. However, FinCEN has
declined to follow the CDD Rule approach for a combination of reasons.
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\112\ See 31 CFR 1010.230(d)(3) (CDD Rule provision stating that
``[i]f a trust owns directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, 25 percent or
more of the equity interests of a legal entity customer, the
beneficial owner for purposes of [the definition of beneficial
owner] shall mean the trustee.'').
---------------------------------------------------------------------------
First, as discussed above, the CTA does not require following the
CDD Rule by default. The same statutory interpretation arguments that
led FinCEN to believe that the CDD Rule is not an appropriate standard
in connection with substantial control apply equally to the subject of
ownership interests.
Second, the CDD Rule does not provide transparency with respect to
complex ownership structures, extensive use of trusts, voting
arrangements among owners, golden shares entitling their owners to
voting rights disproportionate to their equity stake, and other
mechanisms that can obscure the connection between an individual owner
and a reporting company. Therefore, it is not at all clear that the CDD
Rule results in the identification of all individuals who should be
identified as 25 percent owners. Instead, the CDD Rule standard could
permit obfuscatory behavior. In connection with trusts, for example,
FinCEN believes that requiring the reporting only of the trustee under
the ownership interests component would promote the misuse of trusts to
hide beneficial ownership interests and complicate the ability of
reporting companies to comply with the CTA and the proposed rule. As
with the definition of substantial control, FinCEN believes its
proposed approach would provide law enforcement with a more accurate
and complete picture of an entity's true ownership, regardless of
formalities.
Finally, FinCEN considered the burden this proposed approach would
have on reporting companies. FinCEN is mindful of the effect of new
regulations on small businesses, given their critical role in the U.S.
economy and the special consideration that Congress and successive
administrations have mandated that federal agencies should give to
small business concerns. FinCEN expects that most reporting companies
that are small businesses will have simple ownership structures with
easily identifiable beneficial owners, thereby minimizing the potential
burden on such entities. FinCEN's expectation is supported by a recent
empirical analysis on the compliance burden that resulted from the
creation of a beneficial ownership registry in the UK. In its post-
implementation review of the PSC Register, the UK Government found that
only 13% of companies had three or more beneficial owners.\113\ It also
found that the mean overall cost of compliance for small and micro
businesses (defined as businesses with less than 50 employees) to file
an initial report and provide required updates was [pound]265
(approximately $358 at current exchange rates).\114\ Notably, the UK's
beneficial owner database is public and the UK requires businesses to
provide considerably more information about each beneficial owner. This
suggests that the reporting burden of FinCEN's approach may be
materially less than the burden of compliance borne by small businesses
and other reporting companies in the UK since the establishment of the
PSC Register. FinCEN seeks comments on these considerations,
particularly regarding its assessment of the effect on small businesses
based on the assessment of the UK's implementation of its register.
FinCEN further welcomes specific data on this topic.
---------------------------------------------------------------------------
\113\ See United Kingdom Department for Business, Energy &
Industrial Strategy, Review of the Implementation of the PSC
Register, (March 2019), p. 4, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/822823/review-implementation-psc-register.pdf.
\114\ Id., Table 3.9.
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Entities for which relative burden may be higher are likely very
small entities with complex structures. As noted above, FinCEN believes
that most reporting companies will not have complex ownership
structures, and that the few that do previously chose their structures
recognizing that costs associated with legal and tax advice and other
filing and compliance obligations might be higher as a result.
Moreover, in FinCEN's experience administering the BSA and other AML
efforts, small-but-complex entities often are the highest risk for
money laundering, terrorist financing, and other illicit financial
activity. Indeed, both the CTA's statutory text and legislative history
indicate that Congress was concerned with ensuring effective BOI
reporting for these entities. Thus, in FinCEN's experience, such a
reporting burden is justified because these are the entities most at
risk for abuse of the corporate form and, therefore, an additional
compliance burden is necessary to make the BOI database ``highly useful
to law enforcement'' under the statute.
iii. Exceptions to Definition of Beneficial Owner
Proposed 31 CFR 1010.380(d)(4) describes five exceptions to the
definition of beneficial owners that are included in the CTA. These
exceptions relate to minor children, nominees or other intermediaries,
employees, inheritors, and creditors. Proposed 31 CFR 1010.380(d)(4)
mirrors the statutory text with additional clarification to ensure that
reporting companies identify real parties in interest, not only the
nominal beneficial owners.
a. Minor Children
In the case of minor children, consistent with the statute,
proposed 31 CFR 1010.380(d)(4)(i) states that the term beneficial owner
does not include a minor child, provided that the reporting company
reports the required information for a parent or legal guardian of the
minor child.\115\ Proposed 31 CFR 1010.380(b)(3)(ii) provides
additional clarification regarding the manner in which a reporting
company would need to provide information of a parent or legal
guardian.
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\115\ 31 U.S.C. 5336(a)(3)(B)(i).
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b. Nominees
With respect to the exception for an individual acting as a
nominee, intermediary, custodian, or agent on behalf of another
individual, FinCEN notes that the statute affirms that reporting
companies must report real parties in interest who exercise control
indirectly.\116\ In implementing this statutory exception, FinCEN
emphasizes the obligation of a reporting company to report identifying
information of the individual on whose behalf an apparent beneficial
owner is acting, not the apparent beneficial owner.
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\116\ 31 U.S.C. 5336(a)(3)(B)(ii).
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c. Employees
The CTA further exempts from the definition of a beneficial owner
an employee of a reporting company, ``acting solely as an employee,''
whose ``control over or economic benefits from'' a reporting company
are derived solely from the employment status of the person. Proposed
31 CFR 1010.380(d)(4)(iii) adopts the statutory language, with two
clarifications. First, the word ``substantial'' is added to modify
``control'' to clarify that the control referenced in the exception is
the same type of ``substantial control'' over the reporting company
referenced
[[Page 69937]]
in the definition of beneficial owner and defined in the regulations.
Second, the proposed rule clarifies that a person acting as a senior
officer of a reporting company could not avail himself or herself of
the exception. Under the CTA, only employees who are ``acting solely as
an employee'' may be exempt. The statute does not, however, specify
what it means to act ``solely as an employee,'' and this phrase may be
viewed as ambiguous. FinCEN proposes to address this ambiguity by
distinguishing between employees and senior officers and by clarifying
that a person acting as a senior officer of an entity is not a person
acting ``solely as an employee.'' In the common law of agency and
corporate law, senior officers have long been distinguished from
employees, with officers often regarded as principals and employees
regarded as agents.\117\ Senior officers may be considered employees in
some contexts, such as for certain tax purposes where the distinction
between officers and employees may be less relevant. But in contexts
focused more on an individual's ownership or control of an entity, such
as disclosure requirements or imputation of conduct for various
purposes, senior officers are often treated differently.\118\ In the
context of the CTA's exceptions from the definition of beneficial
owner, FinCEN believes that distinguishing employees from senior
officers would appropriately ensure that individuals whose functions
enable them to exercise substantial control over an entity in many
important ways are reported as beneficial owners.\119\ Exempting senior
officers from the definition of beneficial owner would seem to
frustrate the CTA's objective of identifying individuals who exercise
substantial control over an entity, and who may thereby be in a
position to use the entity for illicit purposes. FinCEN welcomes
comments on the exclusion of senior officers from this exemption.
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\117\ See, e.g., Goldman v. Shahmoon, 208 A.2d 492, 494 (D. Ch.
1965) (``It is clear that the terms officers and agents are by no
means interchangeable. Officers as such are the corporation. An
agent is an employee . . . .''); Rosenblum v. New York Cent. R. Co.,
57 A.2d 690, 691 (Pa. Sup. Ct. 1948) (distinguishing ``regular
employees'' and ``mere agents'' from ``executive officers'').
\118\ See, e.g., 12 U.S.C. 308.602 (debarment of accounting
firms); 15 U.S.C. 78p (requiring disclosures from directors,
officers, and principal stakeholders); 15 U.S.C. 77aa (disclosure of
directors and officers in securities issuer's registration
statement); 22 CFR 126.7 (revocation of export licenses on the basis
of senior officer conduct).
\119\ In corporate and agency-law contexts, a formal or
functional position as a senior officer can be a key indicator of an
individual's substantial control over an entity. See United States
ex rel. Vavra v. Kellong Brown & Root, Inc., 848 F.3d 366, 374 (5th
Cir. 2017); see also, e.g., U.S. Sentencing Commission Guidelines,
U.S.S.G. sec. 8A1.2 cmt. 3(B) (`` 'High-level personnel of the
organization, means individuals who have substantial control over
the organization or who have a substantial role in the making of
policy within the organization. The term includes: A director; an
executive officer; an individual in charge of a major business or
functional unit of the organization, such as sales, administration,
or finance; and an individual with a substantial ownership
interest.'').
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d. Inheritance
The inheritor exception restates statutory text with one added
clarification. The CTA's definition of beneficial owner excludes ``an
individual whose only interest . . . is through a right of
inheritance.'' \120\ Proposed 31 CFR 1010.380(d)(4)(iv) clarifies that
this exception refers to a ``future'' interest associated with a right
of inheritance, not a present interest that a person may acquire as a
result of exercising such a right. In proposing this addition, FinCEN
seeks to emphasize that once an individual has inherited an ownership
interest in an entity, that individual owns it. Individuals who may in
the future come to own ownership interests in an entity through a right
of inheritance do not have ownership until the inheritance occurs. But
once an ownership interest is inherited and comes to be owned by an
individual, that individual has the same relationship to an entity as
any other individual who acquires an ownership interest through another
means. FinCEN thus believes this clarification is necessary to avoid
exempting individuals on the basis of how ownership interests are
acquired.
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\120\ 31 U.S.C. 5336(a)(3)(B)(iv).
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e. Creditors
Finally, the CTA's definition of beneficial owner excludes a
creditor of a reporting company unless the creditor exercises
substantial control over the entity or owns or controls 25 percent of
the entity's ownership interests.\121\ Based on FinCEN's understanding
that the overarching intent of the CTA is to identify real parties in
interest, FinCEN interprets this exception to mean that the mere fact
that an individual is a creditor cannot make that individual a
beneficial owner of the reporting company: What is relevant is whether
the individual exercises substantial control of the reporting company
or owns or controls 25 percent of the reporting company's ownership
interests. However, the CTA does not define the term ``creditor.''
Drawing from U.S. tax law, proposed 31 CFR 1010.380(d)(4)(v) clarifies
that an exempt creditor is an individual who meets the definition of
beneficial owner in proposed 31 CFR 1010.380(d) solely through rights
or interests in the reporting company for the payment of a
predetermined sum of money, such as a debt and the payment of interest
on such debt. The proposed rules clarify that any capital interest in
the reporting company, or any right or interest in the value of the
reporting company or its profits, would not be considered rights or
interests for payment of a predetermined sum, regardless of whether
they take the form of a debt instrument. Accordingly, if an individual
has a right or ability to convert the right to payment of a
predetermined sum to any form of ownership interest in the company,
that would prevent that individual from claiming the creditor
exception. FinCEN believes this approach is necessary to prevent
individuals from obscuring their ownership of a company by structuring
their ownership interests in the form of debt, when in substance they
hold an interest with characteristics of equity.
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\121\ 31 U.S.C. 5336(a)(3)(B)(v).
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One commenter noted that it is not uncommon for creditors to have
so-called ``equity kickers'' allowing some form of sharing in cash flow
or capital gains in addition to fixed interest. FinCEN believes such
arrangements would not be within the proposed creditor exemption
because the payments would not be for a predetermined sum. Therefore,
it would be considered an ownership interest that could aggregate to a
reportable ownership interest. FinCEN welcomes further comments on
whether there are specific creditor or security interests that involve
equity-like attributes that should be considered as within the creditor
exemption and how such exemptions could be integrated into the proposed
rule, including an explanation of how such interests would not affect
the proposed rule's ability to generate a highly useful database.
FinCEN also welcomes comments on whether the proposed rules
implementing these statutory exceptions are sufficiently clear, and
which, if any, require further clarification.
C. Company Applicant
A reporting company would be required to report identifying
information about a company applicant under proposed 31 CFR
1010.380(a)(1). Proposed 31 CFR 1010.380(e) defines a company applicant
as any individual who files a document that creates a domestic
reporting company or who first registers a foreign reporting
[[Page 69938]]
company with a secretary of state or similar office in the United
States.
The proposed definition of a company applicant would also include
any individual who directs or controls the filing of such a document by
another person. This additional requirement is designed to ensure that
the reporting company provides information on individuals that are
responsible for the decision to form a reporting company given that, in
many cases, the company applicant may be an employee of a business
formation service or law firm, or an associate, agent, or family member
who is filing the document on behalf of another individual. In such a
case, the individual directing or controlling the formation of a legal
entity should not be able to remain anonymous simply by directing
another individual to file the requisite paperwork, and must therefore
disclose his or her identity to FinCEN along with the individual that
made the filing. FinCEN believes that this additional information about
the person directing or controlling the formation or registration of
the reporting company will be highly useful to law enforcement, which
may be able to draw connections between and among seemingly unrelated
reporting companies, beneficial owners, and company applicants based on
this additional information. In addition, FinCEN believes that it will
be better positioned to investigate the submission of inaccurate BOI if
it is able to identify both the individual who submitted the report and
the person who directed or controlled that activity. It may also give a
company applicant executing the filing an incentive to reasonably
satisfy himself or herself that the BOI being submitted to FinCEN at
the direction of another is accurate because they could also be held
accountable, thereby improving data quality. FinCEN believes that the
burden of this reporting requirement is minimal because the identity of
any individual that meets the definition of ``company applicant''--both
the person submitting the report and the person directing it--should be
readily available to reporting companies. FinCEN welcomes comments on
this proposal.
D. Reporting Company
The CTA defines a reporting company as ``a corporation, limited
liability company, or other similar entity'' that is either (1)
``created by the filing of a document with a secretary of state or a
similar office under the law of a State or Indian Tribe;'' or (2)
``formed under the law of a foreign country and registered to do
business in the United States by the filing of a document with a
secretary of state or a similar office under the laws of a State or
Indian Tribe.'' \122\
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\122\ 31 U.S.C. 5336(a)(11)(A)(i)-(ii).
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To facilitate application of the statutory definition of reporting
company, proposed 31 CFR 1010.380(c)(1) defines two new terms:
``Domestic reporting company'' and ``foreign reporting company.''
i. Domestic Reporting Company
Consistent with the CTA's statutory language, FinCEN proposes to
define a domestic reporting company to include: (1) A corporation; (2)
a limited liability company; or (3) other entity that is created by the
filing of a document with a secretary of state or a similar office
under the law of a state or Indian Tribe.\123\ Because corporate
formation is governed by state or Tribal law, and because the CTA does
not provide independent definitions of the terms ``corporation'' and
``limited liability company,'' FinCEN intends to interpret these terms
by reference to the governing law of the domestic jurisdiction in which
a reporting company that is a corporation or limited liability company
is formed. For clarity and ease of administration, the proposed rule
defines ``reporting company'' to include all domestic corporations and
limited liability companies based on FinCEN's understanding that all
corporations and limited liability companies are created by the filing
of a document with a secretary of state or a similar office under the
law of a state or Indian Tribe. FinCEN, however, invites comment on
whether this understanding is accurate.\124\
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\123\ 31 U.S.C. 5336(a)(11)(A)(i)-(ii).
\124\ A 2016 World Bank guide to beneficial ownership
information in the United States notes that the actual mechanics of
creating a corporation or limited liability company may vary
slightly from state to state, but are generally very similar.
Specifically, the guide notes that ``[f]or corporations, every state
requires the filing of a corporate governance document (called the
`articles of incorporation,' `certificate of incorporation,' or
`charter') with the state filing office, together with the payment
of a filing fee.'' It further states that ``[f]or limited liability
companies. . . [e]very state requires the filing of an organization
document (generally called a `certificate of organization,'
`certificate of formation,' or `articles of organization') which
constitutes proof of its organization, form, and existence.'' World
Bank G-20 Anti-Corruption Working Group, Guide to Beneficial
Ownership Information: Legal Entities and Legal Arrangements (United
States) (2016), p. 3, available at https://star.worldbank.org/resources/beneficial-ownership-guide-united-states-america-2016.
(accessed on November 1, 2021).
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The proposed rule does not separately define the statutory clause
``other similar entity,'' but rather reflects FinCEN's interpretation
of ``other similar entity'' as referring to any entity that is created
by the filing of a document with a secretary of state or similar
office, the only common characteristic the statute identifies. FinCEN
considered alternative approaches when determining how to interpret
``similar entity,'' but those alternatives do not appear to accord with
Congress's objective of enabling law enforcement and others to counter
illicit activity conducted through such entities, or are otherwise
unworkable.\125\ For example, FinCEN considered defining ``similar
entity'' narrowly to include entities that limit their owners' personal
liability under state or Indian Tribe law, but it is not clear how this
limitation would align with the purpose of the statute because legal
entities can be used by malign actors to further or hide illicit
activity regardless of whether they enjoy limited liability.
Alternatively, ``similar entity'' might be defined somewhat more
broadly to include entities that are legally distinct from their
natural person owners, but this definition would depend on varying
state law and could be difficult to apply. Moreover, any approach that
unduly narrows the scope of the reporting company definition could
exclude entities that malign actors can use to obscure their true
ownership or control structures, thereby limiting the usefulness of the
reported information for law enforcement, tax authorities, and other
stakeholders. In passing the CTA, Congress was concerned with entities
that can be created without needing to report who their beneficial
owners are.\126\ And Congress was aware that malign actors take
advantage of these entities to conceal their involvement in illicit
activity.\127\ As explained above, this creates a significant hurdle
for investigators who are forced to use time-consuming and resource-
intensive tools to try to obtain this information, if it can be
obtained at all. An unduly narrow interpretation of ``similar entity''
could therefore impede a key objective of the CTA. Thus, FinCEN
proposes to focus on the act of filing to create the entity as the
determinative factor in defining entities besides corporations and
limited liability companies that are also reporting companies. FinCEN
welcomes comments on this approach.
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\125\ CTA, Section 6402(5)(D).
\126\ CTA, Section 6402(2).
\127\ CTA, Section 6402(3)-(4).
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In general, FinCEN believes the proposed definition of domestic
reporting company would likely include limited liability partnerships,
limited liability limited partnerships, business trusts (a/k/a
statutory trusts or
[[Page 69939]]
Massachusetts trusts), and most limited partnerships, in addition to
corporations and limited liability companies (LLCs), because such
entities appear typically to be created by a filing with a secretary of
state or similar office. FinCEN estimates that there are now
approximately 30 million such entities in the United States, and that
approximately three million such entities are created in the United
States each year.\128\ FinCEN understands that state and Tribal laws
may differ on whether certain other types of legal or business forms--
such as general partnerships, other types of trusts, and sole
proprietorships--are created by a filing, and therefore does not
propose to categorically include any particular legal forms other than
corporations and limited liability companies within the scope of the
definition. FinCEN invites commenters to provide information on state
and Indian Tribe legal entity formation practices and requirements for
consideration.
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\128\ See Section VI of this NPRM for more information on these
estimates.
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ii. Foreign Reporting Company
Proposed 31 CFR 1010.380(c)(1)(ii) defines a foreign reporting
company as any entity that is a corporation, limited liability company,
or other entity that is formed under the law of a foreign country and
that is registered to do business in the United States by the filing of
a document with a secretary of state or equivalent office under the law
of a state or Indian Tribe. Similar to the treatment of the phrase
``corporation, limited liability company, or other similar entity'' for
domestic reporting companies, FinCEN intends to interpret these terms
by reference to the requirement to register to do business in the
United States by the filing of a document in a state or Tribal
jurisdiction. The proposed regulation otherwise tracks the statutory
text except to clarify that registration to do business in any state or
Tribal jurisdiction suffices as registration to do business in the
United States.
As with domestic reporting companies that are ``created by a
filing,'' there may be questions about how the ``registered to do
business'' standard applies to different entity types across state and
Tribal jurisdictions. The phrase ``registered to do business'' may
capture more entities than ``created by the filing of a document''
because typically a jurisdiction within the United States will require
any legal entity formed under the law of any other jurisdiction--
including another jurisdiction within the United States--to register to
do business as a ``foreign'' entity if it engages in certain types of
activities.\129\ FinCEN welcomes comments on what activities will
trigger foreign entity registration requirements in particular state or
Tribal jurisdictions, whether compliance with those requirements
constitutes ``registering to do business,'' and whether FinCEN should
further clarify the ``registered to do business'' requirement.
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\129\ See, e.g., Cal. Corp. Code sec. 2107, Del. Code tit. 8,
sec. 371, New York Consolidated Laws (N.Y.C.L.), Business and
Corporations Code secs. 1301-1305, Mass. Gen. L. Ann. Ch. 156D,
secs. 15.01-15.03, Va. Code tit. 13.1, secs. 757-759.
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iii. Exemptions
The CTA specifically excludes from the definition of ``reporting
company'' twenty-three types of entities.\130\ The statute also
authorizes the Secretary to exempt, by regulation, additional entities
for which collecting BOI would neither serve the public interest nor be
highly useful in national security, intelligence, law enforcement, or
other similar efforts.\131\ Except for the proposed clarifications
discussed below, as well as minor alterations to paragraph structure
and the addition of short titles, FinCEN proposes to adopt verbatim the
statutory language granting the twenty-three specified exemptions. Each
proposed short title summarizes the applicable exemptions, which cover
securities issuers, domestic governmental authorities, banks, domestic
credit unions, depository institution holding companies, money
transmitting businesses, brokers or dealers in securities, securities
exchange or clearing agencies, other Securities Exchange Act of 1934
entities,\132\ registered investment companies and advisers, venture
capital fund advisers, insurance companies, state licensed insurance
producers, Commodity Exchange Act registered entities,\133\ accounting
firms, public utilities, financial market utilities, pooled investment
vehicles, tax exempt entities, entities assisting tax exempt entities,
large operating companies, subsidiaries of certain exempt entities, and
inactive businesses. These categories of exempt entities either are
already generally subject to substantial Federal or state regulation
under which their beneficial ownership may be known.
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\130\ See 31 U.S.C. 5336(a)(11)(B)(i)-(xxiii).
\131\ See 31 U.S.C. 5336(a)(11)(B)(xxiv).
\132\ See 15 U.S.C. 78l.
\133\ See 15 U.S.C. 78o(d).
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While most of the reporting company exemptions are straightforward,
several contain ambiguous language that FinCEN proposes to clarify in
its regulations. FinCEN first proposes to define ``public utility''
\134\ via reference to the Internal Revenue Code definition of
``regulated public utility'' at 26 U.S.C. 7701(a)(33)(A). Under this
definition, a ``public utility'' would generally be a corporation that
furnishes or sells electric energy, gas, water, or sewage disposal
services, or transportation, at rates established or approved by a
government body. Using this preexisting definition should promote
predictability and continuity across Treasury and other federal
regulations, which may reduce compliance burdens that would otherwise
arise from definitional differences among regulatory regimes.
---------------------------------------------------------------------------
\134\ 31 U.S.C. 5336(a)(11)(B)(xvi).
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Proposed 31 CFR 1010.380(c)(2)(xxi) clarifies an exemption relating
to what the proposed regulations refer to as ``large operating
companies.'' An entity falls into this category, and therefore is not a
reporting company, if it: (1) ``Employs more than 20 employees on a
full-time basis in the United States''; (2) ``filed in the previous
year Federal income tax returns in the United States demonstrating more
than $5,000,000 in gross receipts or sales in the aggregate,''
including the receipts or sales of other entities owned by the entity
and through which the entity operates; and (3) ``has an operating
presence at a physical office within the United States.'' \135\ Under
the proposed regulations, an entity with an ``operating presence at a
physical office within the United States'' would be one for which the
physical office is owned or leased by the entity, is not a residence,
and is not shared space (beyond being shared with affiliated
entities)--in short, a genuine working office of the entity. In the
exemption, FinCEN also proposes to clarify what it means to employ
someone on a full-time basis through reference to the Internal Revenue
Service definition of ``full-time employee'' and related determination
methods at 26 CFR 54.4980H-1(a)(21) and 54.4980H-3. These regulations
generally count as a full-time employee anyone employed an average of
at least 30 service hours per week or 130 service hours per month, with
adaptations for non-hourly employees. As with the ``public utility''
definition, FinCEN is borrowing the IRS concept to promote regulatory
consistency and because most large operating companies should already
be familiar with it from compliance with the Affordable Care Act.\136\
Therefore, FinCEN believes its
[[Page 69940]]
proposed approach will help minimize compliance burdens.
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\135\ 31 U.S.C. 5336(a)(11)(B)(xxi).
\136\ See 26 U.S.C. 4980H.
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Regarding the $5,000,000 filing threshold, FinCEN proposes to make
clear that the relevant filing may be a federal income tax or
information return, and that the $5,000,000 must be reported as gross
receipts or sales (net of returns and allowances) on the entity's IRS
Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065,
or other applicable IRS form, excluding gross receipts or sales from
sources outside the United States, as determined under federal income
tax principles. For entities that are part of an affiliated group of
corporations within the meaning of 26 U.S.C. 1504 that filed a
consolidated return, FinCEN proposes that the applicable amount should
be the amount reported on the group's consolidated return. FinCEN's
proposal to exclude gross receipts or sales from sources outside the
United States reflects the CTA's domestic focus in requiring that a
qualifying entity have filed ``Federal tax returns in the United
States.'' \137\ This focus on the United States is reinforced in other
prongs requiring that an entity's 20 or more employees be employed in
the United States, and that the entity have an operating presence at an
office within the United States.\138\ FinCEN believes that focusing on
gross receipts or sales from U.S. sources would maintain consistency
with the exemption's overall United States-centric approach, but
welcomes comments on the feasibility of applying this test to only
U.S.-sourced gross receipts.
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\137\ 31 U.S.C. 5336(a)(11)(B)(xxi)(II) (emphasis added).
\138\ 31 U.S.C. 5336(a)(11)(B)(xxi)(I).
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Proposed 31 CFR 1010.380(c)(2)(xxii) would clarify the exemption
for entities in which ``the ownership interests are owned or
controlled, directly or indirectly, by 1 or more [specified entity
types that do not qualify as reporting companies].'' \139\ FinCEN is
calling this the ``subsidiary exemption,'' and interprets the definite
article ``the'' in the quoted statutory text as requiring an entity to
be owned entirely by one or more specified exempt entities in order to
qualify for it. In addition to expressing greater fidelity to the
statutory language, this interpretation also prevents entities that are
only partially owned by exempt entities from shielding all of their
ultimate beneficial owners--including those that beneficially own the
entity through a non-exempt parent--from disclosure.
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\139\ 31 U.S.C. 5336(a)(11)(B)(xxii) (emphasis added).
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The last category of exempt entities for which FinCEN proposes to
clarify ambiguous statutory language is the exemption for ``dormant
entities'' that meet the criteria provided at 31 U.S.C.
5336(a)(11)(B)(xxiii). Under the CTA, the exemption applies to any
entity: (1) ``In existence for over 1 year;'' (2) that is not engaged
in active business; (3) that is not owned, directly or indirectly, by a
foreign person; (4) that has not, in the preceding 12-month period,
experienced a change in ownership or sent or received more than $1,000;
and (5) that does not otherwise hold assets of any type.
The phrase ``in existence for over 1 year'' is ambiguous because
the CTA did not specify whether it refers to entities in existence for
over one year at the time of the CTA's enactment or to entities in
existence for over one year at any time the statute is applied. While
other prongs of the exemption use the present tense (``is'' not engaged
in active business; ``does'' not hold assets) and such present-tense
language generally does not include the past, the first prong notably
lacks any verb, much less one in the present tense.\140\ Moreover, both
the CTA's text and its legislative history suggest that the exemption
was understood to be a ``grandfathering'' provision for entities in
existence before the CTA's enactment. Another CTA provision expressly
refers to entities subject to this exemption as ``exempt grandfathered
entities.'' \141\ And in a floor statement made just before the passage
of the CTA, Senator Brown explained that ``[t]he exemption for dormant
companies is intended to function solely as a grandfathering provision
that exempts from disclosure only those dormant companies in existence
prior to the bill's enactment.'' \142\ He added, ``No entity created
after the date of enactment of the bill is intended to qualify for
exemption as a dormant company.'' \143\ It therefore appears reasonable
to interpret the dormant entity exemption as a grandfathering provision
applicable only to entities in existence for over one year at the time
the CTA was enacted. This interpretation also limits opportunities for
bad actors to exploit the exemption by forming exempt shelf companies
for later use.
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\140\ See Carr v. United States, 130 S. Ct. 2229, 2236 (2010).
\141\ 31 U.S.C. 5336(b)(2)(E).
\142\ Senator Sherrod Brown, National Defense Authorization Act,
Congressional Record 166:208 (December 9, 2020), p. S7311, available
at https://www.govinfo.gov/content/pkg/CREC-2020-12-09/pdf/CREC-2020-12-09.pdf.
\143\ Id.
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FinCEN notes that this exemption's first prong may appear to bear
some similarity to its fourth, with the latter requiring an entity to
have not experienced a change in ownership or sent or received more
than $1,000 ``in the preceding 12-month period.'' However, FinCEN does
not propose to interpret this language as applying to the 12-month
period before the enactment of the CTA. This fourth prong not only uses
different language from the first, but also focuses on repeatable
actions by the entity rather than its creation date. Requiring an
entity to be in existence one year before the CTA's enactment is
consistent with an understanding of the exemption as a grandfathering
provision for entities created before that date because creation is a
one-time event. Changes in ownership and funds transfers, by contrast,
are not necessarily events that occur once and then never again. They
may occur at any time after an entity comes into existence. For these
actions, we do not believe that the 12-month period prior to the
enactment of the CTA is more significant than any other subsequent 12-
month period. If a company experiences an ownership change or transfers
more than $1,000 at some later date after the CTA's enactment, we do
not see a reason why the company should be subject to the exemption
simply because it did not take those actions for the 12 months prior to
the CTA's enactment. FinCEN therefore proposes to interpret the first
prong of the dormant entity exemption as applying to the one-year
period before enactment, but FinCEN understands the fourth prong as
applying to any 12-month period.
In addition to the exemptions Congress specified in the CTA,
Congress also provided an exemption for ``any entity or class of
entities that the Secretary of the Treasury, with the written
concurrence of the Attorney General and the Secretary of Homeland
Security, has, by regulation, determined should be exempt.'' \144\ To
make such a determination, there must be a finding that requiring
beneficial ownership information ``would not serve the public
interest'' and ``would not be highly useful in national security,
intelligence, and law enforcement agency efforts to detect, prevent, or
prosecute money laundering, the financing of terrorism, proliferation
finance, serious tax fraud, or other crimes.'' \145\ Commenters to the
ANPRM suggested creating exemptions for state-licensed accounting
companies; federally regulated health care
[[Page 69941]]
institutions; limited liability companies owned by spouses solely to
hold real property; certain Tribal entities; certain commodity pools,
additional pooled investment vehicles, additional investment advisors,
and family offices; companies with less than a defined capitalization
or revenue threshold; well-established businesses; and entities owned
by U.S. persons with significant asset holdings held in custody at
regulated financial institutions. Many of these commenters, however,
did not explain why they believe their proposed additions would meet
the statutory standard. Other commenters from civil society
organizations recommended construing existing exemptions narrowly and
not introducing new exemptions at this time. While the proposed rule
would not create additional exemptions, FinCEN will continue to
consider whether any additional exemptions would be appropriate. FinCEN
welcomes comments on this approach and whether to adopt exemptions
beyond those specifically required by statute. FinCEN also welcomes
comments on how, when considering a new exemption, the agency should
make the statutorily required determinations that collecting beneficial
ownership information for a potentially exempt entity or class of
entities ``would not serve the public interest'' and also ``would not
be highly useful in national security, intelligence, and law
enforcement agency efforts to detect, prevent, or prosecute money
laundering, the financing of terrorism, proliferation finance, serious
tax fraud, or other crimes.''
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\144\ 31 U.S.C. 5336(a)(11)(B)(xxiv).
\145\ Id.
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Many commenters also encouraged FinCEN to require exempt entities
to file a report in order to claim an exemption. Such a requirement may
make FinCEN's BOI database significantly more useful by making it clear
which entities did not file BOI because they intentionally claimed
exemptions and which simply failed to satisfy the reporting obligation.
Many other commenters opposed such a requirement, arguing it was
inconsistent with both the statutory language of the CTA and the CTA's
legislative history, and likely to be highly burdensome. One commenter
suggested that a reasonable alternative to any affirmative exemption
filing requirement would be a requirement to provide an exemption
certification to FinCEN only upon request from the bureau or another
applicable governmental authority. However, the commenter did not
identify the statutory authority that would permit FinCEN to impose
such a requirement. FinCEN invites comment on any applicable statutory
authority. At least one commenter noted that FinCEN should permit
exempt entities to voluntarily file exemption certifications. FinCEN
invites comment on the appropriateness of inviting such voluntary
filings.
E. Timing of Reports; Update or Correction of Reports
i. Timing of Initial Reports
The CTA describes the filing deadlines for both reporting companies
in existence prior to the effective date of the regulations and for
reporting companies formed or registered after the effective date. The
provision at 31 U.S.C. 5336(b)(1)(B) provides that any reporting
company that has been formed or registered before the effective date of
the reporting regulations shall, in a timely manner, and not later than
two years after the effective date of the reporting regulations, submit
to FinCEN a report that contains the information described in 31 U.S.C.
5336(b)(2). Separately, 31 U.S.C. 5336(b)(1)(C) provides that in
accordance with regulations prescribed by the Secretary, any reporting
company that has been formed or registered after the effective date of
the regulations shall, at the time of formation or registration, submit
to FinCEN a report that contains the information described in 31 U.S.C.
5336(b)(2).
Thus, the CTA requires FinCEN to prescribe regulations for exactly
when reporting companies must file. The proposed regulations elaborate
and clarify these filing deadlines in a manner that seeks to both
minimize burdens on filers and to advance the objective of providing a
timely and accurate database of highly useful information for
authorized users. For newly formed or registered companies, proposed 31
CFR 1010.380(a)(1)(i) specifies that a domestic reporting company
formed on or after the effective date of the regulation shall file a
report within 14 calendar days of the date it was formed as specified
by a secretary of state or similar office. Proposed 31 CFR
1010.380(a)(1)(ii) specifies that any entity that becomes a foreign
reporting company on or after the effective date of the regulation
shall file a report within 14 calendar days of the date it first became
a foreign reporting company. Both proposed rules are intended to
minimize the compliance burden by providing a bright-line rule as well
as a reasonable period of time for newly formed or registered reporting
companies to collect and report information from their beneficial
owners and company applicants. At the same time, FinCEN seeks to
compile a timely and highly useful database of beneficial ownership
information available to law enforcement and other authorized users.
FinCEN believes that allowing 14 days for such initial reporting to
FinCEN will provide newly formed or registered reporting companies
reasonable time to collect the information specified in proposed 31 CFR
1010.380(b)(1) from their beneficial owners and company applicants and
to enter the required information about the company, its beneficial
owners, and its company applicants into a form provided by FinCEN.
Because the entity will be newly formed or registered, FinCEN
anticipates that much of the required information will be readily
available to the reporting company, and that the burden on the
reporting company to collect and provide this information within 14
calendar days will be minimal. FinCEN also believes that requiring
initial reports to be filed relatively quickly will help make the BOI
reporting process a natural part of the formation or registration
process, furthering the CTA's objective to ``set a clear, Federal
standard for incorporation practices.'' \146\ However, based on
comments received in response to the ANPRM, FinCEN is aware there may
be special circumstances in which a 14-calendar-day deadline to file an
initial report is insufficient or impractical.\147\ FinCEN welcomes
additional comments on whether the 14-day deadline for newly formed or
registered reporting companies to file an initial report is reasonable,
and on whether there are situations in which this time is likely to be
insufficient and proposals to address such situations.
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\146\ CTA, Section 6406(5)(A).
\147\ For example, one commenter noted that it may take longer
than 14 days for an entity to complete necessary registrations or
approvals that would exclude the entity from the definition of a
``reporting company.''
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For entities formed or registered before the effective date of the
regulations, the CTA requires filing of beneficial owner and company
applicant information ``in a timely manner,'' but no later than two
years after the effective date of the final regulations. Proposed 31
CFR 1010.380(a)(1)(iii) would require any domestic reporting company
created before the effective date of the regulation and any entity that
became a foreign reporting company before the effective date of the
regulation to file a report not later than one year after the effective
date of the regulation. This approach balances the need for effective
outreach and notice to preexisting companies with the need to collect
[[Page 69942]]
beneficial information in a timely manner and ensure a level playing
field between all legal entities that constitute reporting companies.
A one-year reporting deadline is designed to provide reporting
companies sufficient time to receive notice of the reporting
requirement, conduct appropriate due diligence to determine the company
applicant and beneficial owners, collect the required information from
the beneficial owners and company applicants, and provide the required
information about the company, its beneficial owners, and its company
applicants to FinCEN. FinCEN intends to work with secretaries of state
or similar offices and to leverage other communication channels to
ensure that reporting companies in existence prior to the effective
date of the regulations receive timely notice of and guidance on their
BOI reporting obligations. In proposing a one-year deadline, FinCEN has
sought to ensure that the database is highly useful to law enforcement
by obtaining BOI for existing entities as soon as possible while also
minimizing burdens on reporting companies and secretaries of state and
similar offices that will need adequate time to comply with the new
rules. FinCEN invites comments on whether the one-year period for
preexisting reporting companies to file their initial report is
reasonable.
Proposed 31 CFR 1010.380(a)(1)(iv) would require entities that are
not reporting companies by virtue of one or more exemptions to file a
report within 30 calendar days after the date on which the entity no
longer meets any exemption criteria.\148\ Whenever an entity does not
meet the criteria for an exemption and otherwise qualifies as a
reporting company, it becomes subject to the CTA's requirement that
``each reporting company shall submit to FinCEN a report'' of its
BOI.\149\ Although the CTA specifies when newly formed and existing
reporting companies must file their reports,\150\ it does not in most
cases specify when a report must be filed by a previously exempt
entity.\151\ FinCEN believes that 30 days from the date an exemption
ceases to apply is a reasonable time for once-exempt entities to file
an initial report with FinCEN. Specifically, FinCEN believes that
keeping the database updated and accurate is essential to ensuring it
is highly useful and that 30 days provides sufficient time for entities
that previously evaluated their eligibility for an exemption from the
reporting requirements and claimed such an exemption to collect and
file the required BOI with FinCEN. Again, FinCEN invites comments on
whether this proposed timeframe is reasonable.
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\148\ The trigger date is delayed by statute 180 days for legal
entities described in section 501(c) of the Internal Revenue Code
that lose their tax exemption. 31 U.S.C. 5336(a)(11)(xix)(I),
proposed 31 CFR 1010.380(d)(2)(xix)(A).
\149\ 31 U.S.C. 5336(b)(1)(A).
\150\ 31 U.S.C. 5336(b)(1)(B); 5336(b)(1)(C).
\151\ The CTA specifies that a report must be filed at the time
an entity no longer meets the criteria for the subsidiary exemption
and the grandfathered inactive business exemption. See 31 U.S.C.
5336(b)(2)(D), (E). However, in light of the express obligation in
section 5336(b)(1)(A) for all reporting companies to file reports,
FinCEN does not interpret the provisions focused on those two
exemptions as relieving reporting companies of a filing obligation
when they no longer meet the criteria for other exemptions. While
the provisions focused on those two exemptions are arguably
unnecessary in light of the general filing obligation, Congress may
have included those provisions to make itself clear, as it may have
had particular concern about those two exemptions. See, e.g., Loving
v. IRS, 742 F.3d 1013, 1019 (D.C. Cir. 2014) (recognizing that,
despite the general desire to avoid surplusage, ``lawmakers, like
Shakespeare characters, sometimes employ overlap or redundancy so as
to remove any doubt and make doubly sure'').
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ii. Update or Correction of Reports
The provision at 31 U.S.C. 5336(b)(1)(D) requires reporting
companies to update information submitted in prior reports to FinCEN in
a timely manner, and not later than one year after the date on which
there is a change with respect to any of the information described in
31 U.S.C. 5336(b)(2). The CTA also provides a safe harbor for persons
who inadvertently submit inaccurate information in a report to FinCEN
if they, among other things, voluntarily and promptly file a corrected
report no later than 90 days after the submission of the inaccurate
report.
FinCEN proposes to provide reporting companies with 14 calendar
days to correct any inaccurate information filed with FinCEN from the
date on which the inaccuracy is discovered and 30 calendar days to
update with FinCEN information that has changed after filing.
Specifically, proposed 31 CFR 1010.380(a)(3) would require reporting
companies to file a report to correct inaccurately filed information
within 14 calendar days after the date on which the reporting company
becomes aware or has reason to know that any required information
contained in any report that the reporting company filed with FinCEN
was inaccurate when filed and remains inaccurate. This would include
information about any beneficial owner and the reporting company.
FinCEN believes 14 calendar days provides adequate time for a reporting
company, after it knows or has reason to know that it has made an
inaccurate filing, to conduct appropriate due diligence and correct the
information. This time frame is intended to be consistent with the 14-
calendar-day timeframe for a newly formed or registered reporting
company to file an initial report with FinCEN. FinCEN believes quickly
correcting errors is essential for fulfilling Congress's instruction
that BOI reported to the agency be ``accurate, complete, and highly
useful.'' \152\ FinCEN anticipates this deadline will present a low
burden on a reporting company that has discovered that inaccurate
information has inadvertently been filed. It also provides incentives
to reporting companies to ensure that accurate information is filed at
the time an initial or updated submission is made to FinCEN, which is
consistent with the broader goal of maintaining an accurate database
for law enforcement and other authorized users.
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\152\ 31 U.S.C. 5336(b)(4)(b)(ii).
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Proposed 31 CFR 1010.380(a)(3) also notes that a corrected report
filed under this paragraph within this 14-day period shall be deemed to
satisfy 31 U.S.C. 5336(h)(3)(C)(i)(I)(bb) \153\ if filed within 90
calendar days after the date on which an inaccurate report is filed.
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\153\ The provision at 31 U.S.C. 5336(h)(3)(C) provides that a
person shall not be subject to civil or criminal penalties under 31
U.S.C. 5336(h)(3)(A) if the person has reason to believe that any
report submitted by that person to FinCEN contains inaccurate
information and, in accordance with regulations issued by the
Secretary, voluntarily and promptly, and in no case later than 90
days after the date on which the person submitted the report,
submits a report containing corrected information. However, this
safe harbor does not apply if, at the time the person submits the
report, the person acts for the purpose of evading the reporting
requirements and has actual knowledge that any information contained
in the report is inaccurate.
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The CTA provides that the deadline for updating information
established by regulations must be ``in a timely manner'' but not later
than one year after there was a change in the information. FinCEN is
proposing a 30-calendar-day deadline for updating information that was
accurate when filed but has subsequently changed. Specifically,
proposed 31 CFR 1010.380(a)(2) would require reporting companies to
file an updated report within 30 calendar days after the date on which
there is any change with respect to any information previously
submitted to FinCEN, including any change with respect to who is a
beneficial owner of a reporting company, as well as any change with
respect to information reported for any particular beneficial owner or
applicant. This proposed rule would also apply to a reporting company
that subsequently becomes eligible for an exemption from
[[Page 69943]]
the reporting requirement after the filing of its initial report. One
commenter noted it is important to avoid ambiguity as to whether a
change in information superseded by subsequent changes within the 30-
calendar-day window must be reported. That is to say, if a reporting
company has a change in substantial control that triggers the 30-
calendar-day window (e.g., Individual A becomes a beneficial owner
because they exercise substantial control over the reporting company),
and then another change in substantial control within the 30-calendar-
day window (i.e., Individual A ceases to exercise substantial control
over the reporting company), is the reporting company obliged to report
anything about Individual A? In this situation, the proposed rule would
require two separate reports from the reporting company, noting the
addition and then the removal of Individual A as a beneficial owner.
The first report would be due within 30 calendar days of Individual A
gaining substantial control over the reporting company; the second
report would be due within 30 days of Individual A ceasing to exercise
substantial control over the reporting company.
FinCEN considers that keeping the database current and accurate is
essential to keeping it highly useful, and that allowing reporting
companies to delay mandatory updates by more than 30 days--or allowing
them to report updates on an annual basis--could cause a significant
degradation in accuracy and usefulness of the BOI. FinCEN also believes
that a 30-calendar-day deadline is necessary to limit the possible
abuse of shelf companies--i.e., entities formed as generic corporations
without assets and then effectively assigned to new owners. The longer
updates are delayed, the longer a shelf company can be ``off the
shelf'' without notice to law enforcement of the company's new
beneficial owners, and without any notice to financial institutions
that they should scrutinize transactions involving the company from the
perspective of its new beneficial owners. FinCEN has considered the
costs of the compliance burden that the 30-calendar-day timeframe may
place on reporting companies in the regulatory analysis in Section VI
below. To minimize those costs while ensuring that the database be
highly useful, and also recognizing that this requirement is not based
on when a reporting company knows or has reason to know that
information in a prior report has changed, FinCEN proposes allowing 30
days for such filings, as opposed to the 14 calendar days provided for
the correction of inaccurate reports. FinCEN believes the 30 day
timeframe is sufficient time for a reporting company to identify and
report updates to the information previously submitted to FinCEN.
FinCEN recognizes that several commenters recommended a 180-day or 1-
year period to allow updates of reports, and some suggested that FinCEN
only use a shorter period for changes in beneficial owners while
retaining a longer period for changes in the information reported about
a particular beneficial owner. FinCEN selected a 30-calendar-day
deadline rather than a longer deadline to update reports in an effort
to consider both the burden on reporting companies and the desire of
both law enforcement and financial institutions to have a database that
is as up-to-date as possible.
The CTA further requires Treasury to conduct a review, in
consultation with the Attorney General and the Secretary of Homeland
Security, to evaluate the timing of updates to reports against the
backdrop of benefits to law enforcement and burdens to filers.\154\
FinCEN thus solicits comments on the burdens that the requirement to
correct inaccurate information within 14 days and to update changed
information within 30 days would impose on reporting companies, on the
degree to which the accuracy and usefulness of the database depend upon
prompt updates, and on any other relevant topics regarding the proposed
rule's approach to changes or updates to a reporting company's
reportable information.
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\154\ See 31 U.S.C. 5336(b)(1)(E).
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Proposed 31 CFR 1010.380(a)(2)(i) provides that if a reporting
company becomes exempt after filing an initial report, this change will
be deemed a change requiring an updated report. The CTA does not
expressly require a reporting company to file a report indicating that
it has become exempt. Nevertheless, FinCEN believes the authority to
require such a report is implicit in the CTA. As explained above, the
express requirement in 31 U.S.C. 5336(b)(2)(A) to identify beneficial
owners and applicants for each reporting company implies a requirement
to identify the associated company. It likewise implies a requirement
that the company identify itself as a reporting company. This implied
representation that a company reporting its beneficial owners is in
fact a reporting company is therefore among the information that 31
U.S.C. 5336(b)(2)(A) requires to be reported, albeit implicitly. And
when there is a change with respect to any such information, 31 U.S.C.
5336(b)(1)(D) requires a report that updates the information relating
to the change. FinCEN thus believes that it is consistent with the CTA
to require a reporting company to file a report indicating that it has
become exempt. Having notice that an entity that was a reporting
company subsequently became eligible for an exemption to the definition
of a ``reporting company'' will help FinCEN preserve enforcement
resources by allowing it to focus on reporting companies that failed to
report, rather than on entities that had previously filed reports but
that became exempt from the requirement.
Proposed 31 CFR 1010.380(a)(2)(ii) provides that if an individual
is a beneficial owner of a reporting company because the individual
owns at least 25 percent of the ownership interests of the reporting
company, and such beneficial owner dies, a change with respect to the
required information will be deemed to occur when the estate of a
deceased beneficial owner is settled. This proposed rule is intended to
clarify that a reporting company is not required to file an updated
report to notify FinCEN of the death of a beneficial owner. However,
when the estate of a deceased beneficial owner is settled either
through the operation of the intestacy laws of a jurisdiction within
the United States or a testamentary deposition, the reporting company
is required to file an updated report removing the deceased former
beneficial owner and, to the extent appropriate, identifying any new
beneficial owners. Moreover, the other provisions of proposed 31 CFR
1010.380(b)(1) and (d) would still apply--namely, that the reporting
company would be required to report any beneficial owner who meets the
substantial control or ownership components of the proposed rule as a
result of another beneficial owner's death. This proposed rule is
intended promote efficiency and limit the burden on reporting companies
by reducing the number of updates that a reporting company must file in
the event of the death of a beneficial owner.
As noted above, FinCEN is still developing reporting protocols and
relevant forms, and is not proposing a final format or mechanism of
reporting at this time. FinCEN will prescribe the forms and
instructions for filing the required reports, consistent with the final
rules. Reporting companies will not have to submit their own letters to
report information to FinCEN.
[[Page 69944]]
F. Reporting Violations
The provision at 31 U.S.C. 5336(h)(1) makes it unlawful for any
person to ``willfully provide, or attempt to provide, false or
fraudulent beneficial ownership information . . . to FinCEN'' or to
``willfully fail to report complete or updated beneficial ownership
information to FinCEN.'' The CTA further provides for civil and
criminal penalties for any person violating that obligation.\155\ Such
person shall be liable for a civil penalty of up to $500 for each day a
violation continues or has not been remedied, and may be fined up to
$10,000 and imprisoned for up to two years, or both, for a criminal
violation.\156\
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\155\ 31 U.S.C. 5336(h)(3)(A).
\156\ Id.
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Proposed 31 CFR 1010.380(g) adopts the language of 31 U.S.C.
5336(h)(1) and clarifies four potential ambiguities. First, the
proposed regulations clarify that the term ``person'' includes any
individual, reporting company, or other entity. Second, the proposed
regulations clarify that the term ``beneficial ownership information''
includes any information provided to FinCEN under this section. Third,
the proposed regulations clarify that a person ``provides or attempts
to provide beneficial ownership information to FinCEN,'' within the
meaning of section 5336(h)(1), if such person does so directly or
indirectly, including by providing such information to another person
for purposes of a report or application under section. While only
reporting companies are directly required to file reports or
applications with FinCEN, individual beneficial owners and company
applicants may provide information about themselves to reporting
companies in order for the reporting companies to comply with their
obligations under the CTA. The accuracy of the database may therefore
depend on the accuracy of the information supplied by individuals as
well as reporting companies, making it essential that such individuals
be liable if they willfully provide false or fraudulent information to
be filed with FinCEN by a reporting company.
Finally, the proposed regulations clarify that a person ``fails to
report'' complete or updated beneficial ownership information to
FinCEN, within the meaning of section 5336(h)(1), if such person
directs or controls another person with respect to any such failure to
report, or is in substantial control of a reporting company when it
fails to report. While the CTA requires reporting companies to file
reports and prohibits failures to report, it does not appear to specify
who may be liable if required information is not reported. Because
section 5336(h)(1) makes it unlawful for ``any person'' to fail to
report, and not just a reporting company, this obligation may be
interpreted as applying to responsible individuals in addition to the
companies themselves. To the extent an individual willfully directs a
company not to report or willfully fails to report while in substantial
control of a reporting company, potential penalties against such
individuals may be necessary to ensure that companies comply with their
obligations. This is essential to achieving the CTA's primary objective
of preventing malign actors from using legal entities to conceal their
ownership and activities. Malign actors who form entities and fail to
report required beneficial ownership information may not be deterred by
penalties applicable only to such entities. Absent individual
liability, malign actors might seek to create new entities to replace
old ones whenever an entity is subject to liability, or might otherwise
attempt to use the corporate form to insulate themselves from the
consequences of their willful conduct.
One commenter suggested exploring the idea of the termination of
entities that willfully refuse to file. However, the commenter did not
identify what authority under the CTA would permit FinCEN to take such
action. FinCEN also notes that several commenters expressed a desire
for FinCEN to take a conservative approach to enforcement of the
statute, at least initially, for instance by being clear that FinCEN
will not impose fines except in the case of other illegal activity or
that FinCEN will take a very flexible compliance approach during the
early stages of implementation. FinCEN will consider these comments in
the exercise of its enforcement discretion and welcomes additional
comments on this subject.
G. Definitions
As previously noted, many of the terms for this proposed rule are
defined in 31 U.S.C. 5336. With the exceptions of the definitions
discussed separately above and below, FinCEN has followed those
meanings as set out by Congress, with some minor clarifications.
Under proposed 31 CFR 1010.380(f)(1), the term ``employee'' would
have the meaning given it in 26 CFR 54.4980H-1(a)(15). The CTA does not
expressly define the term ``employee,'' but the proposed definition is
established and familiar given its use in the Affordable Care Act.\157\
Using the definition here promotes regulatory consistency.
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\157\ See 26 U.S.C. 4980H.
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Proposed 31 CFR 1010.380(f)(2) would retain the statutory
definition and define ``FinCEN identifier'' as the unique identifying
number assigned by FinCEN to a legal entity or individual under this
section.
Proposed 31 CFR 1010.380(f)(3) would define ``foreign person'' as a
person who is not a United States person.
Proposed 31 CFR 1010.380(f)(4) would define ``Indian Tribe'' as any
Indian or Alaska Native Tribe, band, nation, pueblo, village, or
community that the Secretary of the Interior acknowledges to exist as
an Indian Tribe as set forth in section 102 of the Federally Recognized
Indian Tribe List Act of 1994 (25 U.S.C. 5130).
Under proposed 31 CFR 1010.380(f)(5), an individual is lawfully
admitted for permanent residence if such individual has been lawfully
accorded the privilege of residing permanently in the United States as
an immigrant in accordance with the immigration laws and such status
not having changed as set forth in section 101(a) of the Immigration
and Nationality Act (8 U.S.C. 1101(a)).
Proposed 31 CFR 1010.380(f)(6) would define ``operating presence at
a physical office within the United States'' to mean that an entity
regularly conducts its business at a physical location in the United
States that the entity owns or leases, that is not the place of
residence of any individual, and that is physically distinct from the
place of business of any other unaffiliated entity.
Proposed 31 CFR 1010.380(f)(7) would define a ``pooled investment
vehicle'' as: (i) Any investment company, as defined in section 3(a) of
the Investment Company Act of 1940 (15 U.S.C. 80a-3(a)); or (ii) any
company that would be an investment company under that section but for
the exclusion provided from that definition by paragraph (1) or (7) of
section 3(c) of that Act (15 U.S.C. 80a-3(c)); and is identified by its
legal name by the applicable investment adviser in the Form ADV (or
successor form) filed with the U.S. Securities and Exchange Commission.
Proposed 31 CFR 1010.380(f)(8) would define ``senior officer'' to
mean any individual holding the position or exercising the authority of
a president, secretary, treasurer, chief financial officer, general
counsel, chief executive officer, chief operating officer, or any
[[Page 69945]]
other officer, regardless of official title, who performs a similar
function.
As noted previously, proposed 31 CFR 1010.380(f)(9) would define
``state'' as any state of the United States, the District of Columbia,
the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, American Samoa, Guam, the United States Virgin
Islands, and any other commonwealth, territory, or possession of the
United States.
Proposed 31 CFR 1010.380(f)(10) would define the term ``United
States person'' as having the meaning given the term in section 7701(a)
of the Internal Revenue Code of 1986.
H. Effective Date
The CTA authorizes FinCEN to determine the effective date of the
BOI reporting rule. FinCEN does not propose an effective date in this
proposed regulation, but seeks views on the timing of the effective
date and any potential factors to be considered. FinCEN is committed to
identifying the soonest possible effective date after publication of
the final rule. FinCEN recognizes that the collection of beneficial
ownership information is critical to protecting U.S. national security
and other interests and will advance efforts to counter money
laundering, terrorist financing, and other illicit activity. It will
also bring the United States into compliance with international AML/CFT
standards and support U.S. leadership in combatting corruption and
other illicit finance. A timely effective date will help to achieve
national security and law enforcement objectives and support Congress'
goals in enacting the CTA.
FinCEN also notes that certain practical steps must be completed
prior to the effective date and the initiation of the collection of
information, and it is undertaking significant work towards achieving a
timely effective date. These steps include the design and build of a
new IT system--the Beneficial Ownership Secure System, or BOSS--to
collect and provide access to BOI. Upon the CTA's enactment, FinCEN
began a process for BOSS program initiation and acquisition planning
that will lead to the development of a detailed planning and
implementation document. Once greater progress is made towards the
final reporting rule and a parallel rulemaking effort relating to
access to and disclosure of BOI, which will provide concrete guidance
on the design and build of the BOSS, FinCEN will move expeditiously to
the execution phase of the project, which will include several
technology projects that will be executed in parallel.
The effective date for the final reporting rule will also turn on
several additional factors, such as: (1) How long reporting companies,
and small businesses in particular, need to comply with the new rules;
(2) the time needed for secretaries of state and Tribal authorities to
understand the new requirements and to update their websites and other
documentation to notify reporting companies of their obligations under
the CTA; and (3) the anticipated timeline for revising the CDD Rule,
which is triggered by the effective date of the final reporting rule.
Secretaries of state anticipate that they will need to field a high
volume of questions and devote significant resources to addressing
reporting companies' concerns, even with a delayed effective date that
provides sufficient time to educate reporting companies about their
responsibilities, distribute guidance, and ensure that reporting
mechanisms are fully functional and user-friendly. Absent a coordinated
effort with state- and Tribe-level authorities, a reporting requirement
could create confusion and unintended liability for businesses. FinCEN
intends to conduct ongoing outreach with stakeholders, including
secretaries of state and Indian Tribes, trade groups, and others, to
ensure coordinated efforts to provide notice and sufficient guidance to
all potential reporting companies. However, FinCEN welcomes comments on
how long other stakeholders such as secretaries of state and local
authorities will need to provide notice of and guidance on the BOI
reporting requirements to reporting companies.
V. Request for Comment
FinCEN continues in this NPRM to seek comment on how best to
implement the reporting requirements of the CTA, and responsive
comments can now focus on the proposed reporting rule that FinCEN has
developed. FinCEN seeks comment from all parts of the public and
Federal Government, with respect to the proposed rule as a whole and
specific provisions discussed above.
FinCEN invites comment on any and all aspects of the proposed rule,
and specifically seeks comments on the following questions:
Understanding the Rule
1. How can the organization of the rule text be improved to make it
easier to understand and implement?
2. How can the language of the rule text be simplified or
streamlined to make it easier to understand and implement?
Reporting Requirement
3. In general, is the description of the information FinCEN is
proposing to require reporting companies to report about a beneficial
owner and company applicant sufficiently clear? If not, what additional
clarification should FinCEN provide? Are there other categories of
information FinCEN should collect about beneficial owners and company
applicants, taking into consideration the statutory language of the
CTA? Is there additional information that would be useful for FinCEN to
collect, but which would require further authorization by Congress?
4. Is it clear what the requirement to report a beneficial owner's
residential address ``for tax residency purposes'' means? If not, how
could the regulatory language be clarified? Are there cases where a
respondent could have difficulty providing tax residency information,
or where other residence information would be more generally valuable
than tax residency information?
5. In general, is the description of the information FinCEN is
proposing to require reporting companies to report about themselves
sufficiently clear? If not, what additional clarification should FinCEN
provide? Is there additional information about a reporting company that
FinCEN should collect to ensure that it can identify and distinguish
between different reporting companies, and to allow for effective
searching of the beneficial ownership database?
6. What value can FinCEN reasonably expect from its proposed
voluntary mechanism for collecting TINs of beneficial owners and
company applicants? How can such information enhance the overall value
of the information collected under this reporting requirement? Are
there potentially negative consequences to a voluntary collection of
this data? For instance, do businesses have particular concerns about
providing or not providing such information?
7. Does FinCEN have the authority under the CTA to require that a
person filing a report or application with FinCEN pursuant to proposed
31 CFR 1010.380(b) certify that the report is accurate and complete?
8. In general, is the term ``business street address'' sufficiently
clear on its face, or does it require further clarification to avoid
the reporting of P.O. boxes or the addresses of formation agents,
agents for the service of process, and other third parties as a
reporting company's ``business street address''? Would it improve the
clarity of the reporting requirement to substitute the
[[Page 69946]]
term ``street address of the reporting company's principal place of
business''?
9. Should the reporting requirement for foreign reporting companies
be more specific with respect to the reporting of a business address?
If so, should it specify provision of a U.S. business street address if
possible, a principal place of business (even if outside the United
States), or some other alternative?
10. Is the process by which FinCEN is providing notice to the
public about the specific reporting requirements of this regulation
sufficiently clear and deliberate to give interested parties adequate
notice, opportunity to comment, and opportunity to prepare to comply
with the requirements?
FinCEN Identifier
11. Are the proposed requirements for obtaining a FinCEN identifier
from FinCEN and using a FinCEN identifier sufficiently clear?
12. If an individual beneficial owner has obtained a FinCEN
identifier and provided its FinCEN identifier to a reporting company,
should a reporting company be required, rather than merely permitted,
to use the FinCEN identifier in lieu of the four pieces of
identification information (i.e., name, date of birth, street address,
and unique identification number) the reporting company must report to
FinCEN for the individual beneficial owner, as is proposed in the rule?
Special Reporting Rules
13. Proposed 31 CFR 1010.380(b)(3) sets out special reporting
rules. Two of these are mandated by the CTA--the use of the FinCEN
identifier, and the special rule for foreign pooled investment
vehicles. FinCEN created the third and fourth--the special rule for
minor children and deceased company applicants--to clarify the core
reporting requirements and ensure that they are workable considering
the unanticipated consequences of certain statutory language. Are any
other special reporting rules necessary to make the core reporting
requirements, or the rule as a whole, work better? Please explain the
necessity and propose regulatory language. In doing so, FinCEN
encourages commenters to explain how their proposals are consistent
with the text of the CTA.
14. As noted in the previous question, proposed 31 CFR
1010.380(b)(3)(iv) contains a special reporting rule applicable to
situations in which the company applicant for a reporting company is
deceased. Is it sufficient for FinCEN to permit a reporting company to
report that fact, together with any information that the reporting
company actually knows about its company applicant, or should FinCEN
require other information?
Beneficial Owners
15. Proposed 31 CFR 1010.380(d) interprets the CTA as providing for
a relatively broad approach to the definition of beneficial ownership.
How burdensome will this approach be for reporting companies? How
useful will it be for national security, intelligence, and law
enforcement activities? In addition to responding generally to this
question, please provide specific considerations and data related to
costs and burdens.
16. One component of the proposed definition of beneficial owner is
an individual who ``exercises substantial control over the reporting
company.'' Is the definition of ``substantial control'' sufficiently
clear for reporting companies to be able to understand and use it? In
addition to responding generally to this question, please consider the
following specific questions:
i. Are there any indicators that are not sufficiently clear? What
additional clarification could make it easier to consider these
indicators when determining whether an individual exercises substantial
control? Please propose regulatory language.
ii. Does the catch-all provision (``any other form of substantial
control over the reporting company'') enable a reporting company to
identify the individual(s) in substantial control of the reporting
company? What would the impact on be on the usefulness, accuracy, or
completeness of information in the database if the definition of
``substantial control'' lacked such a catch-all provision?
iii. Are there any additional indicators of substantial control
that FinCEN should consider expressly including in the regulatory
definition?
17. The statutory definition of beneficial owner also includes an
individual ``owns or controls at least 25 percent of the ownership
interests.'' Is the approach to first define ``ownership interests''
useful? In addition to responding generally to this question, please
consider the following specific questions:
i. Is the proposed definition of ``ownership interests''
sufficiently clear for reporting companies to be able to understand and
use it? What additional clarification could make it more useful? Please
propose explanatory regulatory language.
ii. Are there any aspects of the proposed rule on the determination
of whether an individual owns or controls 25 percent of the ownership
interests of a reporting company that are not sufficiently clear? What
additional clarification could make it easier to calculate whether one
owns or controls 25 percent of the ownership interests? Please propose
explanatory regulatory language.
18. Are there any aspects of the exceptions that are not
sufficiently clear? What additional clarification could make it easier
to determine whether an individual is excluded from the definition of
beneficial owner?
19. FinCEN expects that the definition of beneficial owner is broad
enough that every reporting company will have at least one beneficial
owner to report. Is that expectation reasonable, and if not, what
mechanism should FinCEN establish or what changes should FinCEN make to
the proposed rule to make certain that every reporting company reports
at least one beneficial owner?
Company Applicant
20. Is the proposed definition of company applicant sufficiently
clear in light of current law and current company filing and
registration practices, or should FinCEN expand on this definition? If
so how?
Reporting Company
21. Is the proposed definition of ``reporting company''
sufficiently clearly to avoid confusion about whether an entity does or
does not meet this requirement? If not, what additional clarifications
could make it easier to determine whether this requirement applies to a
particular entity?
22. FinCEN's proposed definitions of domestic and foreign reporting
company reference ``the secretary of state or a similar office'' that
is involved in filings that create entities or register entities,
respectively. Does this distinction result in different ``similar
offices'' being applicable for domestic and foreign reporting
companies?
23. The proposed rule defines ``reporting company'' to include all
domestic corporations and limited liability companies based on FinCEN's
understanding that all corporations and limited liability companies are
created by the filing of a document with a secretary of state or a
similar office under the law of a state or Indian Tribe. Are there any
states or Indian Tribes where corporations or limited liability
companies are not created by a filing of a document with a secretary of
state or a similar office?
24. In general, FinCEN believes the phrase ``other similar entity
created by
[[Page 69947]]
the filing of a document with a secretary of state or similar office''
in the context of the definition of ``domestic reporting company''
would likely include limited liability partnerships, limited liability
limited partnerships, business trusts (a/k/a statutory trusts or
Massachusetts trusts), and most limited partnerships, because such
entities appear typically to be created by a filing with a secretary of
state or similar office. However, FinCEN understands that state and
Tribal laws may differ on whether certain other types of legal or
business forms--such as general partnerships, other types of trusts,
and sole proprietorships--are created by a filing. Are there any states
or Indian Tribes where general partnerships, other types of trusts, or
sole proprietorships are created by the filing of a document with a
secretary of state or similar office?
25. FinCEN's proposed definition of foreign reporting company
requires that the foreign entity is ``registered to do business'' in
any state or Tribal jurisdiction. FinCEN understands that this
threshold may be interpreted differently across U.S. jurisdictions.
What activities would require foreign (non-U.S.) companies to register
in a U.S. jurisdiction before they may conduct business in that
jurisdiction, and what discrepancies exist in these standards across
the jurisdictions?
26. In general, are the proposed exemptions from the definition of
``reporting company'' sufficiently clear, or are there aspects of any
of the defined exemptions that FinCEN should clarify, similar to the
exposition of the inactive business exemption? If so, how?
27. Is the term ``full-time employee'' explained sufficiently
clearly in the large operating company exemption?
28. Is the term ``operating presence at a physical office within
the United States,'' which is used in the large company exemption and
other exemptions, defined sufficiently clearly? Is it appropriate that
the term is defined to exclude a physical location that is also an
individual's residence? If not, why not? Should the term include any
other limitations or exclusions?
29. Are there any exemptions from the definition of ``reporting
company'' that should be defined more broadly or more narrowly? If so,
which ones, why, and how?
30. In addition to the proposed exemptions from the definition of
``reporting company,'' are there any other categories of entities that
are not currently subject to an exemption from the definition of
``reporting company'' that FinCEN should consider for exemption and, if
so, why?
Other Definitions
31. While Congress defined many of the CTA's key terms within the
statute, some--like ``public utility''--were left to FinCEN to
interpret. If any of FinCEN's proposed definitions for these currently
undefined terms warrant revision, which ones, why, and how?
32. Are there any undefined terms in the proposed rule for which
FinCEN did not provide definitions, but should? If so, which terms, why
should FinCEN define them, and how?
Timing of Reports and Updates
33. FinCEN believes the proposed timeframes for reporting,
correcting, and updating information to be reported to FinCEN are
within FinCEN's legal authority to propose, and are appropriate to
ensure that the BOI collected is current, useful, and accurate without
making the reporting requirement unduly burdensome. Is there any
respect in which these timeframes should be altered because alteration
is necessary to conform with the CTA or other law? Should any
timeframes be altered because gains in ensuring information is current
and accurate outweighs the burden imposed? Should any timeframes be
altered because the burden imposed outweighs the gains in ensuring
information is current and accurate?
i. In particular, does the proposed timeline of one year for
existing reporting companies to file an initial report impose undue
burdens on reporting companies, secretaries of state, or other
stakeholders? Is a longer timeline necessary? If so, why?
ii. By contrast, is a shorter timeline necessary? If so, why?
34. FinCEN has proposed that a reporting company that ceases to be
entitled to an exemption from the definition of reporting company
(under one or more of proposed exemptions in 31 CFR 1010.380(c)(2)(i)
through (xxiii)), report to FinCEN within 30 days after it no longer
meets those criteria. Is it appropriate that all reporting company
exemptions be handled in the same way? If not, explain how and why
different exemptions should be handled differently.
35. The proposed rule would require that a reporting company submit
a corrected report to FinCEN not later than 14 days after the date that
the reporting company knows or has reason to know that any information
in a report submitted to FinCEN under this section was not correct when
filed and remains incorrect. The rule also explains how the statutory
safe harbor of the CTA for incorrect information will be applied. Are
these proposed provisions an appropriate implementation of the
requirements of the CTA? If not, why not?
36. Should FinCEN require reporting companies that have terminated
their legal existence report this to FinCEN? If terminated entities are
not required to report their termination, how should FinCEN be made
aware of their termination, to properly administer its record retention
obligations?
37. The proposed rule would require a reporting company that
subsequently meets the criteria for any exemption under 31 CFR
1010.380(c)(2)(i) through (xxiii) after the filing of an initial report
to file an updated report within 30 days. Is 30 days sufficient to
enable such legal entities to file such reports? Is it too long?
38. Is the burden that a 30-day update requirement would impose on
reporting companies justified by the degree to which the accuracy and
usefulness of the database depend upon prompt updates? Are there other
factors that FinCEN should consider in reviewing update timelines in
consultation with the Departments of Justice and Homeland Security, as
mandated by the CTA?
Reporting Violations
39. Is FinCEN's articulation of what constitutes a reporting
violation under the CTA sufficiently clear?
Effective Date of the Rule
40. How much time is needed before the rule is effective to enable
jurisdictions within the United States, reporting companies, and other
stakeholders to incorporate any necessary changes into their systems
and other procedures in tandem with other routine updates, and thereby
enable reporting companies to reduce implementing costs? Should FinCEN
consider a long effective date, and if so, why? Should FinCEN consider
a shorter effective date, and if so, why?
Please note that questions for comment specific to the Regulatory
Analysis section that follows may be found at the end of that section.
VI. Regulatory Analysis
FinCEN has analyzed the proposed rule as required under Executive
Orders 12866 and 13563, the Regulatory Flexibility Act, the Unfunded
Mandates Reform Act, and the Paperwork Reduction Act. FinCEN's analysis
assumed the baseline scenario is the current regulatory framework,
which has no beneficial ownership disclosure requirements to FinCEN.
Thus, any estimated costs and benefits as a result
[[Page 69948]]
of the proposal are new relative to maintaining the current framework.
Pursuant to the Regulatory Flexibility Act, FinCEN's analysis concluded
that the proposed rule would have a significant economic impact on a
substantial number of small entities. Furthermore, pursuant to the
Unfunded Mandates Reform Act, FinCEN concluded that the proposed rule,
if implemented, would result in an expenditure of $158 million or more
annually by state, local, and Tribal governments or by the private
sector.\158\
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\158\ The Unfunded Mandates Reform Act requires an assessment of
mandates with an annual expenditures of $100 million or more,
adjusted for inflation. The gross domestic product (GDP) deflator in
1995, the date of the Unfunded Mandates Reform Act, is $71.868,
while in 2020 it was $113.625. Thus, the inflation adjusted estimate
for $100 million is $113.625/71.868 x 100 = $158 million.
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A. Executive Orders 12866 and 13563
Executive Orders 12866 and 13563 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, and public health and
safety effects; distributive impacts; and equity). Executive Order
13563 emphasizes the importance of quantifying both costs and benefits,
reducing costs, harmonizing rules, and promoting flexibility. This
proposed rule has been designated a ``significant regulatory action''
and economically significant under section 3(f) of Executive Order
12866. Accordingly, the proposed rule has been reviewed by the Office
of Management and Budget (OMB).
This proposed rule is necessary to comply with and implement the
CTA. As described in the preamble, this proposed rule is consistent
with the CTA's statutory mandate that the Secretary of the Treasury by
regulation prescribe procedures and standards governing reports and the
FinCEN identifier described in the CTA. The CTA states that the
regulations shall be promulgated to the extent practicable: (1) To
minimize burdens on reporting companies associated with the collection
of BOI, including by eliminating duplicative requirements; and (2) to
ensure that the BOI reported to FinCEN is accurate, complete, and
highly useful. As also described throughout the preamble, FinCEN has
carefully weighed these considerations while developing the proposed
rule. The implementation of the CTA would promote the President's
objective to combat illicit activity in the United States, including
money laundering related to the financing of terrorism, corruption,
proliferation, and other crimes.\159\ The proposed rule avoids undue
interference with state, local, and Tribal governments. While such
governments are important partners and consultative parties in the
implementation of the CTA, as noted in the law itself, the proposed
rule minimizes the interference with these governments (see alternative
considered below).
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\159\ Fighting corruption was identified as a Presidential
priority in a Presidential Memorandum published on June 3, 2021. The
memorandum specifically mentions bringing transparency to the United
States and global financial systems. The White House, Memorandum on
Establishing the Fight Against Corruption as a Core United States
National Security Interest, (June 3, 2021), available at https://www.whitehouse.gov/briefing-room/presidential-actions/2021/06/03/memorandum-on-establishing-the-fight-against-corruption-as-a-core-united-states-national-security-interest/.
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i. Costs
The primary cost to the public associated with the proposed rule
results from multiple information collection requirements. Pursuant to
the proposed rule, reporting companies would be required to submit to
FinCEN an initial report that contains certain identifying information
for the reporting company, each identified beneficial owner, and each
company applicant, as well as copies of acceptable identification
documents for each identified beneficial owner and each company
applicant. Reporting companies would also be required to update these
reports. Individuals requesting a FinCEN identifier would be required
to submit initial requests to FinCEN and update the identifying
information associated with their FinCEN identifier.\160\ Finally,
foreign pooled investment vehicles would be required to submit reports
to FinCEN identifying a beneficial owner and update such information. A
detailed analysis of the potential costs associated with these proposed
information collection requirements is included in the Paperwork
Reduction Act section below (see Tables 6 and 7 below). The net present
value of the total cost over a 10-year time horizon at a seven percent
discount rate for these information collections is approximately $3.4
billion. At a three percent discount rate, the net present value is
approximately $3.98 billion as the aggregate cost estimate of the
proposed rule. FinCEN estimates that it would cost each of the 25
million domestic and foreign reporting companies that are estimated to
currently exist approximately $45 apiece to prepare and submit an
initial report in the first year that the BOI reporting requirements
are in effect. In comparison, the state formation fee for creating a
limited liability company could cost between $40 and $500, depending on
the state.\161\
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\160\ FinCEN is not separately calculating a cost estimate for
entities requesting a FinCEN identifier, but rather FinCEN has
included those costs as a part of the costs of submitting the BOI
reports.
\161\ The fee for Articles of Organization of a domestic limited
liability company in Kentucky is $40. Kentucky Secretary of State,
Business Filings Fees, available at https://sos.ky.gov/bus/business-filings/Pages/Fees.aspx The fee for a Certificate of Registration
for a limited liability company in Massachusetts is $500.
Massachusetts Secretary of State, Corporations Division Filing Fees,
available at https://www.sec.state.ma.us/cor/corfees.htm. FinCEN
also identified a website that provides the fees for all states, as
a point of reference. See IncFile, Review State Filing Fees & LLC
Costs, available at https://www.incfile.com/state-filing-fees.
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Administering the regulation would also entail potential costs to
FinCEN. Such costs include information technology (IT) development and
ongoing annual maintenance, as well as processing electronic
submissions of BOI data.\162\ FinCEN estimates that initial IT
development costs would be $33 million \163\ with an additional $31
million per year required to maintain the new BOI systems and the
underlying FinCEN technology being leveraged to support the new
capabilities.
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\162\ FinCEN would also incur costs in administering access to
BOI, but those costs will be considered in detail in a separate
notice for the BOI access regulations.
\163\ FinCEN's cost estimates will continue to evolve as more
information about systems requirements and development costs become
known. For example, the requirement to include scanned images of
acceptable identification documents will increase the cost of system
development and implementation.
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FinCEN may incur additional costs, besides those estimated above,
while promoting compliance with the BOI reporting requirements,
potentially including providing training on the requirements,
publishing documents such as guidance and frequently asked questions
(FAQs), and conducting outreach to and answering inquiries from the
public. FinCEN does not currently have specific estimates for these
costs, but estimates that there would be relatively modest personnel
costs of less than $10 million associated with the reporting rule in
both Fiscal Year 2022 and Fiscal Year 2023, with continuing recurring
costs of roughly the same magnitude for ongoing outreach and
enforcement thereafter.
FinCEN and other government agencies may also incur costs in
enforcing compliance with the regulation. FinCEN does not currently
[[Page 69949]]
have estimates for these costs, and they are not included in the
estimates above. FinCEN plans to identify non-compliance with BOI
reporting requirements \164\ by leveraging a variety of data sources,
both internal and external. Because the external data sources may
include third parties, FinCEN requests comment on what external data
sources would be appropriate for FinCEN to leverage in identifying non-
compliance with the BOI reporting requirements and what potential costs
may be incurred by such third parties, particularly state, local, and
Tribal authorities and financial institutions. If the external data
sources include third party commercial data, FinCEN assesses that the
cost associated with accessing these databases would be modest and
incremental, given that FinCEN regularly maintains access to such
databases but may need to request additional licenses for employees.
After identifying non-compliance, FinCEN may initiate outreach to the
entity, work with law enforcement to investigate non-compliance, or
initiate an enforcement action. FinCEN's enforcement of the BOI
reporting requirements would also involve coordination with law
enforcement agencies. These law enforcement agencies may also incur
costs (time and resources) while conducting investigations into non-
compliance. FinCEN anticipates that costs to law enforcement agencies
that have access to the BOI data would be assessed in the BOI access
regulations, and therefore is not estimating them here.
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\164\ This would include identifying potential non-compliance
with the proposed rule through reporting of false information or
through failing to file an initial or updated report when required.
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The proposed rule does not impose direct costs on state, local, and
Tribal governments. However, state, local, and Tribal governments would
incur indirect costs in connection with the implementation of the
proposed rule. For example, such governments would likely be the
initial point of outreach for some companies with questions on how to
comply with the reporting requirement. FinCEN anticipates taking
measures to minimize the costs associated with such questions. These
measures would include providing clear FinCEN guidance directly to the
public on BOI reporting requirements, which may help to diminish the
number of questions from the public. FinCEN would also provide guidance
materials to state, local, and Tribal governments that they could use
and distribute in response to questions, which would minimize those
governments' need to develop their own guidance materials at their own
cost. FinCEN received comments to the ANPRM which discussed such
possible costs; they are summarized in the Unfunded Mandates Reform Act
section below. FinCEN encourages additional comments that discuss, and
if possible estimate, the costs to state, local and Tribal governments
under the proposed rule.
ii. Benefits
There are several potential benefits associated with this proposed
rule. These benefits are interrelated and likely include improved and
more efficient investigations by law enforcement, U.S. financial
institutions, and other authorized users, which in turn may strengthen
national security, enhance financial system transparency and integrity,
and align with international financial standards.
The U.S. 2018 National Money Laundering Risk Assessment (NMLRA)
estimates that domestic financial crime, excluding tax evasion,
generates approximately $300 billion of proceeds for potential
laundering.\165\ Criminal actors may use entities to send or receive
funds, or otherwise assist in the money laundering process to
legitimize the illegal funds. For example, an entity may act as a shell
company--which usually has no employees or operations--and hold assets
to obscure the identity of the true owner, or act as a front company
which generates legitimate business proceeds to commingle with illicit
earnings. Trade-based money laundering, for example, often leverages
such front companies.\166\ FinCEN is not able to provide estimates of
the amount of proceeds that flow through money laundering schemes that
use entities given lack of data,\167\ but entities are frequently used
in money laundering schemes and provide a layer of anonymity to the
natural persons involved in such transactions.\168\
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\165\ U.S. Department of the Treasury, National Money Laundering
Risk Assessment (2018), p. 2, available at https://
home.treasury.gov/system/files/136/2018NMLRA_12-
18.pdf#:~:text=The%202018%20National%20Money%20Laundering%20Risk%20As
sessment%282018%20NMLRA%29,participated%20in%20the%20development%20of
%20the%20risk%20assessment.
\166\ Id., p. 29. Trade-based money laundering involves a cycle
of money brokers and exporters of goods to disguise and move illicit
funds. The sale of the goods effectively launders the money and
provides payment to illicit actors in local currency. Merchants who
receive payment for their goods may be unaware they are
participating in a money laundering scheme, but some willingly
accept such funds and are complicit. Id., p. 3.
\167\ For example, the Government Accountability Office's 2020
report on trade-based money laundering noted that specific estimates
of the amount of such activity globally are unavailable, but it is
likely one of the largest forms of money laundering. Government
Accountability Office, Trade-based Money Laundering (April 2020), p.
19, available at https://www.gao.gov/assets/gao-20-333.pdf.
\168\ Please see the discussion of this topic in the Background
section of the preamble, which describes in greater detail the money
laundering concerns with legal entities and disguised beneficial
owners, as well as the Department of the Treasury's efforts to
address the lack of transparency in legal entity ownership
structures.
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Identifying the owners of these entities is a crucial step to all
parties that investigate money laundering. The NMLRA notes that,
according to federal law enforcement agencies, misuse of entities poses
a significant money laundering risk, and that law enforcement efforts
to uncover the true owners of companies can be resource-intensive,
especially when those ownership trails lead overseas or involve
numerous layers of ownership.\169\ However, there is currently no
systematic way to obtain information on the beneficial owners of
entities in the United States.
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\169\ U.S. Department of the Treasury, National Money Laundering
Risk Assessment (2018), p. 4, available at https://
home.treasury.gov/system/files/136/2018NMLRA_12-
18.pdf#:~:text=The%202018%20National%20Money%20Laundering%20Risk%20As
sessment%282018%20NMLRA%29,participated%20in%20the%20development%20of
%20the%20risk%20assessment.
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The proposed rule is expected to help address the lack of BOI
critical for money laundering investigations. Improved visibility into
the identities of the individuals who own or control entities may
enhance law enforcement's ability to investigate, prosecute, and
disrupt the financing of international terrorism, other transnational
security threats, and other types of domestic and transnational
financial crime, when entities are used to engage in such activities.
Other authorized users in the national security and intelligence fields
would likewise be expected to benefit from the use of this data. The
BOI database may also increase investigative efficiency and thus
decrease the cost to law enforcement of investigations that require or
benefit from identifying the owners of entities. These anticipated
benefits are supported by ANPRM comments from those that represent the
law enforcement community, some of whom expressed the opinion that the
availability of BOI would provide law enforcement at every level with
an important tool to investigate the misuse of shell companies and
other entities used for criminal activity. To the extent these
investigations may become more effective, money laundering in the
United States may become more
[[Page 69950]]
difficult. Making any method of money laundering more difficult in the
U.S. would improve the national security of the United States by
increasing barriers for illicit actors to covertly enter and act within
the U.S. financial system.\170\ This may serve to deter the use of U.S.
entities for money laundering purposes.
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\170\ The CTA states that FinCEN may disclose BOI upon receipt
of a request from a federal agency on behalf of a law enforcement
agency, prosecutor, or judge of another country, including a foreign
central authority or competent authority (or like designation),
under prescribed conditions. 31 U.S.C. 5336(c)(2)(B)(ii). Therefore,
the sharing of BOI with international partners may also result in
more efficient investigations of money laundering on a global scale,
and also help U.S. law enforcement understand global money
laundering networks that affect the United States.
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Second, since the collection of BOI would shed light upon the
beneficial owners of U.S. entities, which may also provide insight into
overall ownership structures, the proposed rule may promote a more
transparent, and consequently more secure, economy. Financial
institutions with authorized access to such data would have key data
points--including potentially additional beneficial owners, given the
differences between the definition in the proposed rule and the CDD
Rule--available for their customer due diligence processes, which may
decrease customer due diligence and other compliance burdens.\171\
FinCEN also expects increased transparency in ownership structures of
entities to increase financial system integrity by reducing the ability
of certain actors to hide monies through shell companies and other
entities with obscured ownership information. This may discourage
inefficient capital allocation designed primarily for non-business
reasons, such as paying for professional services to set up and
potentially capitalizing intermediate legal entities designed solely to
obscure the relationship between a legal entity and its owners. In
addition, the IRS could obtain access to BOI for tax administration
purposes, which may provide benefits for tax compliance.
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\171\ It is worth noting that the CDD Rule also promotes
transparency in ownership structures of legal entities, and thereby
strengthens the U.S. economy and national security. However, the
CTA's BOI reporting requirement may improve upon these benefits by
requiring that BOI be collected earlier in the life cycle of a
company, at the time of company formation, rather than when the
company opens a bank account. The CTA would also apply to a broader
range of entities, since the CDD Rule covers only those institutions
subject to financial institution customer due diligence requirements
(e.g., those with accounts at such institutions).
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Third, the BOI reporting requirements would have the benefit of
aligning the United States with international AML/CFT standards, which
would bolster support for such standards and strengthen cooperation
with our partners, including the sharing of BOI, subject to appropriate
protocols consistent with the CTA, in transnational investigations, tax
enforcement, and the identification of national and international
security threats.
The benefits of the proposed rule are difficult to quantify, but
the prior description of these benefits point to their significance.
FinCEN's CDD Rule also did not quantify the benefits of collecting BOI,
but rather included a breakeven analysis that concluded the CDD Rule
would only have to reduce annual real illicit activity by between 0.16
percent (roughly $0.38 billion in 2016, rising to 0.47 billion in 2025)
and 0.6 percent (roughly $1.46 billion in 2016, rising to $1.81 billion
in 2025) to yield a positive net benefit.\172\ While the CDD Rule and
proposed BOI rule require submission of BOI under different
circumstances and to different parties, the breakeven analysis of the
CDD Rule suggests that even a small percentage reduction in money
laundering activities as a result of the proposed BOI rule could result
in economically significant net benefits. FinCEN does not currently
propose a breakeven analysis for the proposed BOI rule herein, as it
continues to collect information on potential costs and benefits of the
proposed rule through the rulemaking process. FinCEN requests comment
on data or methods that may inform estimates of potential benefits in
this case.
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\172\ 81 FR 29432.
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iii. Alternatives
The proposed rule is statutorily mandated, and therefore FinCEN has
very limited ability to implement alternatives. However, FinCEN
considered certain significant alternatives that would be available
under the statute.
One alternative would be to require reporting companies to submit
BOI to FinCEN indirectly, by submitting the information to their
jurisdictional authority who would then transmit it to FinCEN. In this
case, jurisdictions would need to develop IT that would ultimately
transmit data to FinCEN.\173\ As a lower bound estimate, if FinCEN
assumes that jurisdictions would only incur 10 percent of FinCEN's
stated initial IT development costs of approximately $33 million, then
each jurisdiction would incur approximately $3.3 million in development
costs. As an upper bound estimate, if FinCEN assumes that jurisdictions
would incur close to 100 percent of the stated costs, then each of the
jurisdictions could incur as much as approximately $33 million for IT
development, plus additional ongoing data maintenance costs. At either
end of the range, this scenario would impose significant costs on state
or local governments.
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\173\ FinCEN further assumes under this alternative analysis
that FinCEN would be responsible for aggregating this BOI,
consistent with the CTA.
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FinCEN requested comment in the ANPRM on questions regarding the
collection of BOI through partnership with state, local, and Tribal
governments. In response to the ANPRM, several state authorities
commented that they should not be involved in the process of collecting
and transmitting BOI to FinCEN. Some states noted that they did not
gather or index ownership information, and that states might need to
change their statutes, and possibly engage in additional rulemaking to
establish a system for collecting BOI and sharing such information with
FinCEN. One state noted that the CTA requires FinCEN, not individual
states, to collect, store, and protect the information collected, and
that there is no obligation in the CTA that a state adopt new
legislation in order to aid in the delivery of BOI. Another state that
currently collects some ownership information (office, director, and
member information for most business entities) stated that reporting
this information to FinCEN would ``end up causing more problems than it
solves'' because the owner information reported to the state, such as a
``member'' of an LLC, may not be the same individual that would be
reported to FinCEN as a beneficial owner under the CTA's requirements.
Other states noted technical challenges with providing BOI to FinCEN,
such as limitations in sharing images due to file sizes, which would
require changes to states' filing systems. One state noted that these
types of changes could easily cost a million dollars or more. For all
of these reasons, FinCEN decided not to propose an alternative in which
reporting companies would submit BOI to their jurisdictional authority.
However, FinCEN continues to consider whether there are feasible
opportunities to partner with state authorities on the BOI reporting
requirement, particularly where states already collect BOI, and FinCEN
welcomes comments on this subject.\174\
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\174\ One jurisdiction recommended that FinCEN receive copies of
registry databases on a fixed schedule in order to compare the
number of FinCEN filers with the numbers from corporate registrars
across the country. Another state raised numerous questions about
relying on existing state policies and procedures, and noted that
doing so would be challenging, but did not directly oppose this type
of arrangement.
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[[Page 69951]]
Finally, as explained in more detail below, FinCEN considered
alternatives while shaping the specific reporting requirements of the
rule, including: (1) The length of the initial reporting period; and
(2) the length of time to file an updated report. These alternatives
and their cost differences, as well as FinCEN's rationale for not
selecting the alternative, is discussed in the Paperwork Reduction Act
section below (see Table 8).
B. Regulatory Flexibility Act
The Regulatory Flexibility Act \175\ (RFA) requires an agency
either to provide an initial regulatory flexibility analysis (IRFA)
with a proposed rule or certify that the proposed rule would not have a
significant economic impact on a substantial number of small entities.
This proposed rule would apply to a substantial number of small
entities. FinCEN has attempted to minimize the burden on reporting
companies to the greatest extent practicable, but the proposed rule may
nevertheless have a significant economic impact on small entities
required to disclose beneficial owners. Accordingly, FinCEN has
prepared an IRFA. FinCEN welcomes comments on all aspects of the IRFA.
A final regulatory flexibility analysis will be conducted after
consideration of comments received during the comment period.
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\175\ 5 U.S.C. 601 et seq.
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i. Statement of the Need for, and Objectives of, the Proposed Rule
The CTA establishes a new federal framework for the reporting,
storage, and disclosure of BOI. In enacting the CTA, Congress has
stated that this new framework is needed to set a clear federal
standard for incorporation practices; protect vital U.S. national
security interests; protect interstate and foreign commerce; better
enable critical national security, intelligence, and law enforcement
efforts to counter money laundering, the financing of terrorism, and
other illicit activity; and bring the United States into compliance
with international AML/CFT standards.\176\ Section 6403 of the CTA
amends the BSA by adding a new section at 31 U.S.C. 5336 that requires
the reporting of BOI at the time of formation or registration of a
reporting company, along with protections to ensure that the reported
BOI is maintained securely and accessed only by authorized persons for
limited uses. The CTA requires the Secretary to promulgate implementing
regulations that prescribe procedures and standards governing the
reporting and use of such information, to include procedures governing
the issuance of FinCEN identifiers for BOI reporting. The CTA requires
FinCEN to maintain BOI in a secure, non-public database that is highly
useful to national security, intelligence, and law enforcement
agencies, as well as federal functional regulators. The proposed rule
would require certain entities to report to FinCEN information about
the reporting company, its beneficial owners (the individuals who
ultimately own or control the reporting companies) and the company
applicant of the reporting company, as required by the CTA.
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\176\ CTA, Section 6402(5).
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ii. Small Entities Affected by the Proposed Rule
To assess the number of small entities affected by the proposed
rule, FinCEN separately considered whether any small businesses, small
organizations, or small governmental jurisdictions, as defined by the
RFA, would be impacted. FinCEN concludes that small businesses would be
substantially impacted by the proposed rule. Each of these three
categories is discussed below.
In defining ``small business'', the RFA points to the definition of
``small business concern'' from the Small Business Act.\177\ This small
business definition is based on size standards (either average annual
receipts or number of employees) matched to industries.\178\ Under the
proposed rule, small businesses would be ``reporting companies''
required to submit BOI reports to FinCEN.\179\ There are 23 types of
entities that are exempt from submitting BOI reports to FinCEN,\180\
but none of these exemptions apply directly to small businesses. In
fact, many of the statutory exemptions, such as exemptions for large
operating companies and highly regulated businesses, would apply to
larger businesses. For example, the large operating companies exemption
applies to entities that have more than 20 full-time employees in the
United States; more than $5 million in gross receipts or sales from
sources inside the United States; and have an operating presence at a
physical office in the United States.\181\ Using the SBA's 2019
definition of small business across all 1,037 industries (by 6-digit
NAICS code), there are only 46 categories of industries whose SBA
definition of small would be lower than this statutory exemption of
more than 20 million employees and $5 million in gross receipts/sales.
And these were predominantly related to agricultural categories. All
other SBA definitions of small entity well exceeded the thresholds
stated in the statutory exemption for large operating companies.
Therefore, FinCEN assumes that all entities estimated to be reporting
companies are small, for purposes of this analysis. FinCEN estimates
that there are approximately 25 million existing reporting companies
and 3 million new reporting companies formed each year.\182\ As
mentioned
[[Page 69952]]
before, FinCEN assumes for purposes of estimating costs to small
businesses that all reporting companies are small businesses. Such a
general descriptive statement on the number of small businesses to
which the rule would apply is specifically permitted under the RFA,
when, as here, greater quantification is not practicable or
reliable.\183\ FinCEN has made this assumption in part to ensure that
its IRFA does not underestimate the economic impact on small
businesses. FinCEN solicits comment on whether there is a more precise
way to estimate the number of small businesses that will meet the
definition of reporting company with exemptions considered.
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\177\ See 5 U.S.C. 601(3).
\178\ See U.S. Small Business Administration, Table of Small
Business Size Standards Matched to North American Industry
Classification System Codes (NAICS) (August 19, 2019), available at
https://www.sba.gov/sites/default/files/2019-08/SBA%20Table%20of%20Size%20Standards_Effective%20Aug%2019%2C%202019_Rev.pdf.
\179\ Domestic reporting companies are defined in the proposed
rule as corporations, limited liability companies, or other entities
that are created by the filing of a document with a secretary of
state or similar office under the law of a state or Indian Tribe.
Foreign reporting companies are defined in the proposed rule as
corporations, limited liability companies, or other entities that
are formed under the law of a foreign country and registered to do
business in any state or Tribal jurisdiction by the filing of a
document with a secretary of state or any similar office under the
law of a state or Indian Tribe. Both definitions are consistent with
statutory definitions of these terms in the CTA. See 31 U.S.C.
5336(a)(11)(A) and proposed 31 CFR 1010.380(c)(1).
\180\ FinCEN has proposed including the 23 exemptions that are
statutorily mandated. See 31 U.S.C. 5336(a)(11)(B) and proposed 31
CFR 1010.380(c)(2).
\181\ 31 U.S.C. 5336(a)(11)(xxi), and proposed 31 CFR
1010.380(c)(2)(xxi).
\182\ FinCEN estimated these numbers by relying upon the most
recent available data, 2018, of the annual report of jurisdictions
survey administered by the International Association of Commercial
Administrators in which Colorado, Delaware, Hawaii, Illinois,
Indiana, Louisiana, Massachusetts, Michigan, North Carolina, Ohio,
Oregon, Texas, Wisconsin, and Wyoming were asked the same series of
questions on the number of total existing entities and total new
entities in their jurisdictions by entity type. See International
Association of Commercial Administrators, Annual Report of
Jurisdictions Survey--2018 Results, (2018), available at https://www.iaca.org/annual-reports/. Please note this underlying source
does not provide information on the number of small businesses in
the aggregate entity counts, or on the revenue or number of
employees of the entities in the data. FinCEN used the reported
state populations, total existing entities per state, and new
entities in a given year per state to calculate per capita ratios of
total existing and new entities in a year for each state. FinCEN
then calculated a weighted average of the per capita ratio of the 14
states to estimate a weighted per capita average for the entire
United States (see Table 1 below). FinCEN then multiplied this
estimated weighted average by the current U.S. population to
estimate the total number of existing entities and the number of new
entities in a year. FinCEN then estimated the number of exempt
entities by estimating each of the relevant 23 exempt entity types.
Last, FinCEN subtracted the estimated number of exempt entities from
its prior estimations. This results in an approximate estimate of 25
million reporting companies currently in existence and 3 million new
reporting companies per year. To review this analysis, including all
sources and numbers, please see the Paperwork Reduction Act section
below.
\183\ The RFA provides that an agency may provide a more general
descriptive statement of the effects of a proposed rule if
quantification is not practicable or reliable. 5 U.S.C. 607.
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In defining ``small organization,'' the RFA generally defines it as
any not-for-profit enterprise that is independently owned and operated
and is not dominant in its field.\184\ FinCEN anticipates that the
proposed rule would not affect ``small organizations,'' as defined by
the RFA because the CTA exempts any organization that is described in
section 501(c) of the Internal Revenue Code of 1986 (determined without
regard to section 508(a) of such Code) and exempt from tax under
section 501(a) of such Code, and because the proposed rule incorporates
this exemption.\185\ Therefore, any small organization, as defined by
the RFA, would not be a reporting company.
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\184\ 5 U.S.C. 601(4).
\185\ 31 U.S.C. 5336(a)(11)(xix)(I), and proposed 31 CFR
1010.380(c)(2)(xix).
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In defining ``small governmental jurisdiction[s],'' the RFA
generally defines it as governments of cities, counties, towns,
townships, villages, school districts, or special districts, with a
population of less than fifty thousand.\186\ FinCEN does not anticipate
at this time that the proposed rule would directly affect any ``small
governmental jurisdictions,'' as defined by the RFA. The CTA exempts
entities that exercise governmental authority on behalf of the United
States or any such Indian Tribe, state, or political subdivision from
the definition of reporting company, and the proposed rule would
incorporate verbatim the CTA's exemption language.\187\ Therefore,
small governmental jurisdictions would be uniformly exempt from
reporting pursuant to the proposed rule. FinCEN is aware that certain
small governmental jurisdictions may be among the state and local
authorities that incur costs as they address questions on the BOI
reporting rule. FinCEN does not have adequate information to estimate
these possible burdens. As noted above, FinCEN would take all possible
measures to minimize the costs associated with questions from the
public directed at state and local government agencies and offices. In
addition, FinCEN specifically solicits comments that discuss, and if
possible estimate, what those costs may be, what types of small
governmental jurisdictions could expect to face such costs, whether
small governmental jurisdictions may face costs that are different in
kind from those which larger jurisdictions may face, and how FinCEN
could mitigate the burden on small governmental jurisdictions.
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\186\ 5 U.S.C. 601(5).
\187\ 31 U.S.C. 5536(a)(11)(ii)(II) and proposed 31 CFR
1010.380(c)(2)(ii).
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iii. Compliance Requirements
FinCEN recognizes that the proposed rule would impose costs on
small entities to comply with the BOI reporting requirements. These
costs could include: (1) Gathering relevant BOI for both initial and
updated BOI reports; (2) hiring or utilizing compliance, legal, or
other resources for expert advice on filing requirements; and (3)
training of personnel to file the report. Possible costs of the
reporting requirement are also discussed in the ANPRM comments from
representatives of the small business community. One comment noted that
optimizing the implementation process of the proposed rule is the most
important step that FinCEN can take to reduce compliance costs for
small business owners. This commenter stated that the costs to
businesses of reporting the name, date of birth, address, and
government ID number of a company's owner are ``incredibly low,''
citing a UK Government study on beneficial ownership reporting \188\
and assuming that the United States will have a similar experience.
However, the commenter stated that making the filing process modern,
efficient, and integrated with state and Tribal incorporation practices
would ensure a negligible compliance cost for businesses. The comment
emphasized that the best opportunity to minimize small business
compliance cost would be to integrate the BOI filing as seamlessly as
possible into existing state-level incorporation processes. The comment
also noted that technology, such as pre-verifying submitted information
and requiring electronic filing, would minimize business costs during
filing. A separate comment supported similar recommendations, stating
that to reduce the cost of compliance for small businesses, FinCEN
could collaborate with authorities in all 50 states to integrate the
FinCEN filing process into existing corporate formation and
registration processes; verify data as it is entered in the system;
provide plenty of opportunities to learn about the BOI reporting
requirement; and create a searchable hub of information on the
requirements. An additional comment noted that using familiar processes
with minimal burdens would protect small businesses; the same comment
also stated that FinCEN should conduct a small business impact analyses
of the proposed regulation.
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\188\ FinCEN cites to the UK study within this NPRM. See United
Kingdom Department for Business, Energy & Industrial Strategy,
Review of the Implementation of the PSC Register, (March 2019), p.
16, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/822823/review-implementation-psc-register.pdf.
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FinCEN did consider an alternative scenario in which reporting
companies would submit BOI to their state authority in the Executive
Orders 12866 and 13563 section above. Ultimately, FinCEN decided not to
propose this alternative. FinCEN would strive to minimize costs by
ensuring that small businesses are aware of the reporting requirement.
Table 9 below illustrates how a reduction in the time burden for
reporting the required information would decrease costs for reporting
companies.
Another comment stated that the reporting requirements would create
significant unintended consequences with new burdens and complexity for
nearly 4.9 million American small businesses, resulting in an
additional $5.7 billion in regulatory paperwork.\189\ The comment
further stated that the reporting requirement is not necessary because
the information is already collected and proposed that a simple
alternative would be to allow FinCEN to review information provided to
the IRS in tax filings. To the extent that similar information may be
reported to the IRS, the disclosure of taxpayer information is limited
by statute, and the IRS generally does not have the authority to
disclose such information for the purposes specified in the CTA.
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\189\ The comment does not provide the sources for these
estimates.
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As noted previously, FinCEN estimates that small businesses across
multiple industries would be subject to these requirements. Assuming
that all reporting companies are small businesses, the burden hours for
filing
[[Page 69953]]
BOI reports would be 32,800,422 \190\ in the first year of the
reporting requirement (as existing small businesses come into
compliance with the proposed rule) and 9,468,510 \191\ in the years
after. FinCEN estimates that the total cost of filing BOI reports is
approximately $1.26 billion \192\ in the first year and $364 million
\193\ in the years after. FinCEN estimates it would cost the 25 million
domestic and foreign reporting companies that are estimated to
currently exist approximately $45 each to prepare and submit an initial
report for the first year that the BOI reporting requirements are in
effect.\194\ FinCEN intends that the reporting requirement would be
accessible to the personnel of reporting companies who would need to
comply with these regulations and would not require specific
professional skills or expertise to prepare the report. However, FinCEN
is aware that some reporting companies may seek legal or other
professional advice in complying with the BOI requirements. FinCEN
seeks comment on whether small businesses anticipate requiring
professional expertise to comply with the BOI requirements described
herein and what FinCEN could do to minimize the need for such
expertise.
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\190\ 30,186,029 hours to file initial BOI reports + 2,614,392
hours to file updated BOI reports. Please see the Paperwork
Reduction Act section below for the underlying analysis related to
these burden hour estimates.
\191\ 3,764,381 hours to file initial BOI reports + 5,704,129
hours to file updated BOI reports. Please see the Paperwork
Reduction Act section below for the underlying analysis related to
these burden hour estimates.
\192\ $1,160,332.854.17 to file initial BOI reports +
$100,495,669.61 to file updated BOI reports. FinCEN estimated cost
using a loaded wage rate of $38.44 per hour. Please see the
Paperwork Reduction Act section below for the underlying analysis
related to these cost estimates.
\193\ $144,700,558.43 to file initial BOI reports +
$219,263,279.14 to file updated BOI reports. FinCEN estimated cost
using a loaded wage rate of $38.44 per hour. Please see the
Paperwork Reduction Act section below for the underlying analysis
related to these cost estimates.
\194\ $1,160,332,854.17/25,873,739 reporting companies = $44.85,
approximately $45.
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iv. Duplicative, Overlapping, or Conflicting Federal Rules
There are no Federal rules that directly and fully duplicate,
overlap, or conflict with the proposed rule. FinCEN recognizes that the
CTA requires the Administrator for Federal Procurement Policy to revise
the Federal Acquisition Regulation maintained under 41 U.S.C.
1303(a)(1) to require any contractor or subcontractor that is subject
to the reporting requirements of the CTA and proposed rule to disclose
the same information to the Federal Government as part of any bid or
proposal for a contract that meets the threshold set in 41 U.S.C.
134.\195\ FinCEN would collaborate with the Administrator for Federal
Procurement Policy and other Government agencies as necessary to
reduce, to the extent possible, any duplication of the CTA
requirements. Additionally, Section 885 of the NDAA includes a separate
beneficial ownership disclosure requirement in the database for federal
agency contract and grant officers.
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\195\ 31 U.S.C. 5336(c)(1).
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FinCEN is aware that the IRS collects taxpayer information that may
include information related to beneficial ownership, such as
information on entity ownership structure and identifying information
about such owners and entities. However, disclosure of taxpayer
information is limited by statute, and the IRS generally does not have
authority to disclose such information for the purposes specified in
the CTA.
FinCEN is also aware that financial institutions subject to the CDD
Rule are required to collect some BOI from legal entities that
establish new accounts. However, the CDD Rule does not require these
financial institutions to file a report of that BOI with FinCEN, and
FinCEN has long viewed the CDD Rule and BOI reporting at entity
formation as distinct.\196\ Furthermore, the CTA requires that the CDD
Rule be revised, retaining the general requirement for financial
institutions to identify and verify the beneficial owners of legal
entity customers but rescinding the specific requirements of 31 CFR
1010.230(b)-(j). The CTA explicitly identifies three purposes for this
revision: to bring the rule into conformity with the AML Act as a
whole, including the CTA; to account for the fact that financial
institutions would have access to BOI reported to FinCEN ``in order to
confirm the [BOI] provided directly to the financial institutions'' for
AML/CFT and customer due diligence purposes; and to reduce unnecessary
or duplicative burdens on financial institutions and customers. This
revision must be accomplished within one year after the effective date
of the BOI reporting rule.
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\196\ See, e.g., 81 FR 29398, 29401 (discussion of multipronged
strategy in the implementing notice for the CDD Rule).
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v. Significant Alternatives That Reduce Burden on Small Entities
Given that FinCEN assumes that all reporting companies would be
small entities, the alternatives discussion in the Paperwork Reduction
Act section below (see Table 8), which analyzes alternatives to the
specific reporting requirements of the rule, describes in greater
detail several alternatives that would reduce the burden on small
entities.\197\ A brief overview of the alternative analysis is
summarized in this section. The alternative scenarios considered
include: (1) The length of the initial reporting period; and (2) the
length of time to file an updated report.
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\197\ The alternative scenario discussed in the Executive Orders
12866 and 13563 section above that relies on states to collect BOI
is not expected to reduce burden on small entities.
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In the first alternative, FinCEN lengthened the timeframe in which
initial reports may be submitted by companies that are in existence
when the eventual final rule comes into effect. Specifically, FinCEN
lengthened the current proposal's BOI compliance requirement from one
year to two years, which is permissible under the CTA.\198\ After
applying several more assumptions, including but not limited to
assuming half of the existing reporting companies would file their
initial BOI report in Year 1 and the other half would file in Year 2,
FinCEN estimated that the cost of the proposed rule would be
approximately $637 million less in Year 1 and approximately $358
million more in Year 2 under this alternative scenario of extending the
compliance timeframe from one to two years. This would translate into a
decreased net present value cost over a ten-year horizon by
approximately $281 at a three percent discount rate or $283 million at
a seven percent discount rate.
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\198\ See 31 U.S.C. 5336(b)(1)(B).
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In the second alternative, FinCEN lengthened the timeframe for
updated reports from the proposed 30 days to one year, which is again
permissible under the CTA.\199\ After applying several assumptions,
including but not limited to assuming updates would be ``bundled,''
meaning that a reporting company would submit one updated report to
account for multiple updates, which would in turn result in an
increased burden of filing due to increased information per report,
FinCEN estimated that the total cost of the proposed rule would be
approximately $238 million at a seven percent discount rate or $293
million at a three percent discount rate less in net present value over
a ten-year horizon under this alternative scenario of increasing the
timeframe for updated reports.
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\199\ See 31 U.S.C. 5336(b)(1)(D).
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Additionally, FinCEN considered an alternative scenario in the
Executive Orders 12866 and 13563 section above
[[Page 69954]]
in which reporting companies would submit BOI to FinCEN indirectly, by
submitting the information to their jurisdictional authority who would
then transmit it to FinCEN. Some commenters to the ANPRM noted that
this alternative would decrease the compliance burden on small
entities. However, FinCEN ultimately decided not to propose this
alternative for the reasons stated above. FinCEN welcomes comment on
any significant alternatives that would minimize the impact of the
proposed rule on small entities and still accomplish the objectives of
the CTA.
C. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
\200\ requires that an agency prepare a statement before promulgating a
rule that may result in expenditure by the state, local, and Tribal
governments, in the aggregate, or by the private sector, of $158
million or more in any one year.\201\ Section 202 of the UMRA also
requires an agency to identify and consider a reasonable number of
regulatory alternatives before promulgating a rule, which FinCEN has
completed in the Executive Orders 12866 and 13563 section above and the
Paperwork Reduction Act section below. This rule in its proposed form
may result in the expenditure by state, local, and Tribal governments,
in the aggregate, or by the private sector, of $158 million or more.
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\200\ See 2 U.S.C. 1532(a).
\201\ The UMRA threshold is $100 million per year adjusted for
inflation, which is currently $158 million per year.
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The proposed rule is being promulgated to implement the CTA. The
primary cost of the private sector complying with the proposed rule is
captured in the Paperwork Reduction Act section below, which amount to
a net present value for a 10-year time horizon at a seven percent
discount rate of approximately $3.4 billion. The net present value at a
three percent discount rate is approximately $3.98 billion. Both of
these amounts exceed the threshold under UMRA. Additional discussion on
the proposed rule's costs and benefits may be found in the Executive
Orders 12866 and 13563 section above. While state, local and Tribal
governments do not have direct costs mandated to them by the proposed
rule, state, local, and Tribal governments may incur indirect costs
under the proposed rule, including if they wish to expend funds to
provide notice and assistance to filers.\202\
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\202\ The CTA states that as a condition of funds made available
under the CTA, each state and Indian Tribe shall, not later than 2
years after the effective date of the regulations, take the
following actions: (1) Periodically notifying filers--including at
the time of any initial formation or registration of an entity,
assessment of an annual fee, or renewal of any license to do
business in the United States and in connection with state or Indian
Tribe corporate tax assessments or renewals, notification to filers
of their requirements as reporting companies and provider--with a
copy of the reporting company form or an internet link to that form;
and (2) updating the websites, forms relating to incorporation, and
physical premises of the office to notify filers of the BOI
reporting requirements, including by providing an internet link. 31
U.S.C. 5336(e)(2)(A). The provision of these funds depends on
availability of appropriations. However, states and Indian Tribes
may wish to provide information about the BOI reporting requirement
regardless of the availability of such funds.
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FinCEN received multiple ANPRM comments that described possible
costs that state, local, and Tribal governments could incur,\203\ such
as:
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\203\ FinCEN also received comments from state, local, and
Tribal governments that related to other topics; however, these
comments are not summarized herein.
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Collecting or reporting additional BOI data to FinCEN;
Generating a unique identifier that would link BOI reports
with state documents;
Sending customers notice about the BOI reporting
requirement by mail or email;
Adding an internet link to office website and/or on
publications sent to new business filers; and
Sharing language/information provided by FinCEN to
customers.
As noted above, various comments stated that collecting and
reporting additional BOI data to FinCEN would require a change to state
law and development of a new processing system, both of which would
generate significant costs and burden. One comment from a state
government stated these type of changes could easily cost a million
dollars or more for a single state government. Some other comments from
state authorities also noted technological limitations with sharing
existing records with FinCEN. State-level collection and reporting of
additional BOI data was strongly opposed by multiple commenters,
including state governments. However, it is worth noting that some
private sector comments argued for incorporating BOI reporting with
existing state registration processes. For example, one private sector
comment noted that FinCEN's best opportunity to minimize small business
compliance cost is to integrate the FinCEN filing as seamlessly as
possible into existing state-level incorporation processes. This
alternative is considered more fully in the Executive Orders 12866 and
13563 section above.
Commenters from state offices stated that mailing a paper notice to
representatives of entities registered in their jurisdiction is a
significant cost, and that most filing offices only have a mailing
address for the registered agent of a business entity. One secretary of
state comment estimated the cost of annual mailings at more than
$300,000, which would increase along with the total amount of active
entities. Some secretary of state comments also specified that
secretaries of state should provide notice only to domestic entities in
their jurisdiction, not foreign business entities, and that such
reminders should coincide with the states' report filing period.
However, one private sector commenter proposed that state offices send
reminders of the requirement via mail.
Multiple secretary of state commenters supported a requirement that
states add an internet link to their office website and/or on
publications sent to new business filers, with language provided by
FinCEN to ensure all states share the same information and that directs
customers to FinCEN for questions.
Some secretary of state comments noted that state agencies would
not have the legal expertise, authority, or resources to respond to
questions about the BOI reporting requirements. Therefore, they argued,
FinCEN should circulate the required periodic notices to reporting (and
potentially exempt) entities, and every such periodic notice must have
clear and prominently displayed contact information for FinCEN. One
secretary of state comment noted that providing states with FinCEN-
branded materials to help differentiate from secretary of state-branded
communication is important and may help deflect some questions from
states directly to FinCEN. A comment from a secretary of state stated
that it anticipates that staff time would be devoted to responding to
calls and emails from business entities regarding compliance with the
rule, but additional staffing is not expected. The comment stated that
FinCEN can minimize burdens on agencies receiving business filings in
part by providing sufficient resources for such agencies to direct
business entities to in response to inquiries. Another secretary of
state noted that template language from FinCEN is helpful, but they
wanted to retain flexibility to tailor the information. One commenter
representing Tribal interests noted that Indian Tribes first should be
given the opportunity to identify whether or not the Tribe is capable
of sharing reporting obligations and/or internet links and what may be
necessary for the Tribe to carry out the obligations of the CTA and
[[Page 69955]]
the final promulgated rules and regulations, among other items. FinCEN
welcomes additional comments describing these items in more detail and
ways in which FinCEN may address them in its rule.
FinCEN appreciates the issues the commenters raised regarding the
possibility of state, local, and Tribal governments incurring indirect
costs due to the BOI reporting requirement, particularly in the form of
compliance questions being directed to such authorities. State, local,
and Tribal governments play an important role in spreading awareness to
entities, many of which may have no knowledge of FinCEN or about the
new BOI reporting requirements. FinCEN endeavors to make publicly
available clear and concise guidance documents. FinCEN will work
closely with state, local, and Tribal governments to ensure effective
outreach strategies for implementation of the eventual final rule.\204\
Additionally, FinCEN has a call center (the Regulatory Support Section)
which will receive incoming inquiries relating to the CTA and its
implementation. Finally, FinCEN considered and ultimately decided not
to propose an alternative that would have relied upon state, local, and
Tribal governments in the collection and reporting of BOI.
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\204\ Multiple ANPRM comments from state authorities spoke to
the feasibility of adding an internet link to their websites.
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FinCEN is not aware at this time of disproportionate budgetary
effects of this proposed rule upon any particular regions of the nation
or particular state, local, or Tribal governments; urban, rural or
other types of communities; or particular segments of the private
sector.\205\ The wide-reaching scope of the reporting company
definition means that the proposed rule would apply to entities across
multiple private sector segments, types of communities, and nationwide
regions. FinCEN acknowledges that there is potential variance in the
concentration of reporting companies by region due to variation in
corporate formation rates and laws. FinCEN also acknowledges that the
statutory exemptions to the reporting company definition may in
practice result in segments of the private sector not being affected by
the proposed rule; thereby causing those that are affected to be
disproportionately so compared to exempt entities. FinCEN welcomes any
estimates on how such regions, and the regions' related governments,
could be disproportionately affected by this proposed rule. FinCEN also
welcomes any input on estimated disproportionate budgetary effects for
particular segments of the private sector.
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\205\ Though entities that have chosen complex ownership
structures are likely to face higher burden, FinCEN is not aware of
a particular segment of the private sector that this would
disproportionately affect.
---------------------------------------------------------------------------
FinCEN does not at this time have accurate estimates that are
reasonably feasible regarding the effect of the proposed rule on
productivity, economic growth, full employment, creation of productive
jobs, and international competitiveness of United States goods and
services.
D. Paperwork Reduction Act
The new reporting requirements in this proposed rule are being
submitted to OMB for review in accordance with the Paperwork Reduction
Act of 1995 \206\ (PRA). Under the PRA, an agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a valid control number assigned by OMB.
Written comments and recommendations for the proposed information
collection can be submitted by visiting www.reginfo.gov/public/do/PRAMain. Find this particular document by selecting ``Currently Under
Review--Open for Public Comments'' or by using the search function.
Comments are welcome and must be received by February 7, 2022. In
accordance with the requirements of the PRA and its implementing
regulations, 5 CFR part 1320, the following details concerning the
collections of information are presented to assist those persons
wishing to comment.
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\206\ See 44 U.S.C. 3506(c)(2)(A).
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As noted above, the primary cost for entities associated with the
proposed rule would result from the requirement that reporting
companies must file a BOI report with FinCEN, and update those reports
as appropriate. FinCEN has also estimated costs that may be incurred
related to individuals who may choose to apply for a FinCEN identifier,
and related to foreign pooled investment vehicles that would need to
submit a report to FinCEN, as well as the costs that would be incurred
to update the information contained in those applications and reports.
i. Filing BOI Reports
There are three factors that FinCEN has considered in estimating
the number of reporting companies that would file BOI reports under the
rule, all of which contain uncertainty: (1) The total number of
entities that could be reporting companies (i.e., estimating the total
number of corporations, limited liability companies, and other
entities); (2) how many of those entities would be exempt from the
definition of a reporting company (i.e., removing from the estimates of
total number of entities those that are estimated to satisfy relevant
exemptions); and (3) how often those entities that meet the definition
of reporting company would need to update their initial reports.\207\
FinCEN welcomes comments on all aspects of this analysis.
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\207\ FinCEN recognizes that reporting companies may also
dissolve annually, but FinCEN assumes that the number of entities
created and dissolved each year is roughly the same, and therefore
the number of overall reporting companies is not likely to vary
greatly year-to-year. This assumption is supported by Figure 3 of
the SBA's Office of Advocacy 2020 Small Business Profile Report (See
U.S. Small Business Administration Office of Advocacy, 2020 Small
Business Profile, (2020) available at https://cdn.advocacy.sba.gov/wp-content/uploads/2020/06/04144224/2020-Small-Business-Economic-Profile-US.pdf), which shows very little change, on average, to the
net entity count. And in the instances in time that observe a large
change in growth, there is an opposite and roughly equal in
magnitude growth change in the immediately subsequent time period.
FinCEN does account for an annual number of initial reports from
newly created reporting companies in its estimates but assumes that
each new entity is balanced by a reporting company which dissolves
in the overall count of reporting companies.
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a. Total Number of Entities That Could be Reporting Companies
The first step in this analysis is for FinCEN to estimate the
number of domestic entities, regardless of the entity type,\208\ that
are in existence at the effective date of the regulation and that are
newly created each year. As noted above, FinCEN assumes that the number
of new entities each year equals the number of dissolved entities.
FinCEN also must estimate the number of foreign entities already
registered to do business in one or more jurisdictions within the
United States at the effective date of the regulation and the number
that are newly registered each year. FinCEN also assumes that the
number of new foreign registered businesses is balanced by the number
of existing foreign registered businesses that terminate. FinCEN does
not have definitive counts of these entities but has identified
information from the following sources as relevant to its initial
estimates; none of this
[[Page 69956]]
information can be used without caveats:
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\208\ While the proposed definition of ``domestic reporting
company'' is any entity that is a corporation, limited liability
corporation, or other entity that is created by the filing of a
document with a secretary of state or any similar office under the
law of a state or Indian Tribe, FinCEN is not limiting its estimate
of domestic entities to specific entity types or to entities that
are created by such a filing. This simplifies the analysis but may
produce overall estimates of costs that exceed the actual costs.
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FATF: In its 2016 mutual evaluation of the United States,
FATF noted that there are ``no precise statistics on the exact number
of legal entities,'' but cited estimates that there are around 30
million legal entities in the United States, with about two million new
formations every year.\209\
---------------------------------------------------------------------------
\209\ FATF, Anti-Money Laundering and Counter-Terrorist
Financing Measures United States Mutual Evaluation Report (2016), p.
34 (Ch. 1), available at https://www.fatf-gafi.org/media/fatf/documents/reports/mer4/MER-United-States-2016.pdf . These
estimations were also relied upon by the Congressional Research
Service. See Congressional Research Service, Beneficial Ownership
Transparency in Corporate Formation, Shell Companies, Real Estate,
and Financial Transactions (July 8, 2019), available at https://fas.org/sgp/crs/misc/R45798.pdf. FATF's 2006 Mutual Evaluation of
the United States estimated, based on information from the
International Association of Commercial Administrators provided by
Delaware state officials, that in 2004 there were 13,484,336 active
legal entities registered in the 50 states in the U.S. FATF, Mutual
Evaluation of the United States (2006), p. 13 (Ch. 1), available at
https://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20US%20full.pdf.
---------------------------------------------------------------------------
CDD Rule: In the CDD Rule, FinCEN estimated 8 million new
legal entity bank accounts are opened per year.\210\ However, this
number could include multiple accounts for any given entity, and not
all entities open a bank account annually.
---------------------------------------------------------------------------
\210\ 81 FR 29398, 29436.
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Census data: FinCEN reviewed statistics published by the
U.S. Census Bureau, particularly from the Statistics of U.S. Businesses
(SUSB). However, FinCEN is not aware of a methodology that may be
applied to ``carve out'' entities that meet the definition of reporting
companies from the SUSB data. FinCEN has relied upon Census data in
some instances below related to estimates of exempt entities.
State statistics: FinCEN reviewed online publications from
state governments that provided statistics on business entities,
including statistics on total active companies and new company
formations. However, the information appeared to only be available from
a limited number of states. Furthermore, the categories of reported
statistics are not consistent and each state may have unique company
definitions that make it difficult to assess which entities would fall
under the proposed rule. FinCEN also reviewed comments to the ANPRM
that included some relevant estimates reported by state
authorities.\211\
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\211\ FinCEN received such comments from Colorado, Connecticut,
Indiana, Iowa, Kentucky, Massachusetts, North Carolina, and
Pennsylvania. Some of the states provided estimates of total active
companies and the average number of new companies formed annually.
FinCEN welcomes further comments on these statistics, and also
requests that any reported statistics explain what entity types are
included, whether the counts include entities foreign and domestic
to the jurisdiction, and if possible, whether the statistics
include: (1) Only entities that would be defined as a ``reporting
company'' in the proposed rule; and (2) any entities that would be
included in the 23 exemption categories.
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International Association of Commercial Administrators
(IACA) 2018 annual reports survey: FinCEN reviewed the most recent
iteration, 2018, of the annual report of jurisdictions survey
administered by the IACA \212\ in which Colorado, Delaware, Hawaii,
Illinois, Indiana, Louisiana, Massachusetts, Michigan, North Carolina,
Ohio, Oregon, Texas, Wisconsin, and Wyoming, were asked the same series
of questions on the number of total entities and total new entities in
their jurisdictions by entity type and responded with statistical data.
---------------------------------------------------------------------------
\212\ See International Association of Commercial
Administrators, Annual Report of Jurisdictions Survey--2018 Results,
(2018), available at https://www.iaca.org/annual-reports/.
---------------------------------------------------------------------------
While these sources do not provide a complete picture of entities
in the United States, they are useful in providing an approximate range
for estimation and for highlighting the likely variation among states
in numbers of reporting companies. Overall, the sources FinCEN reviewed
suggest that tens of millions of entities may be subject to the
proposed rule. FinCEN believes that the IACA 2018 annual reports survey
data is the most relevant information for estimating the total number
of existing domestic reporting companies. The survey provides
consistency in format and response among multiple states.\213\ The
survey specifically includes data on the number of corporations,
professional corporations, nonprofit corporations, limited liability
companies, and partnerships. FinCEN acknowledges that this data may not
exactly match the definition of ``domestic reporting company'' in the
proposed rule, and may have other limitations.\214\ In addition, FinCEN
is not able to confirm whether trusts that may qualify as reporting
companies are counted within the IACA data because they are not
specified in a category. FinCEN welcomes comments that provide
estimations on the number of trusts and other particular types of
entities that may fall under the proposed rule.\215\
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\213\ FinCEN notes that four of the states that provided
estimates of entities in their jurisdiction in their ANPRM comment
letters also responded to the 2018 IACA survey: Colorado, Indiana,
Massachusetts, and North Carolina. FinCEN used the estimates
reported in the IACA survey for its analysis, rather than the
estimates in the comment letters, for purposes of consistency.
Additionally, FinCEN understands that the IACA data is narrowed to
companies that are in good standing or active and specific entity
types, both of which make the overall estimates more applicable to
the ``reporting company'' category.
\214\ For example, FinCEN cannot identify the precise number of
general partnerships from the IACA count to the extent a state
reported on the number of general partnerships--since the numbers
were not reported separately by the reporting states. FinCEN assumes
that some states did not include general partnerships in these
statistics because they may not be required to register with the
secretaries of state, and therefore may not be in the underlying
data source. In a comment to the ANPRM, the Ohio Secretary of State
noted that general partnerships follow a different process.
Michigan's Department of Licensing and Regulatory Affairs also noted
in a comment that co-partnerships do not file with the state-level
office, but with the relevant County Clerk. FinCEN did compare the
estimates of partnerships in IACA's data with 2018 IRS data that
shows 527,595 domestic general partnerships and 446,713 limited
partnerships, totaling 974,308 partnerships. The IRS data also
includes numbers of partners, which could provide insight into the
number of beneficial owners reported for these entities. See IRS,
Statistical Tables--By Entity Type, available at https://www.irs.gov/statistics/soi-tax-stats-partnership-statistics. FinCEN
compared these numbers with an estimate of total partnerships based
on IACA's data, using the per capita analysis described below, which
resulted in approximately 1.7 million partnerships. FinCEN notes
that the IRS numbers, which are over 50 percent general
partnerships, are lower than FinCEN's estimate using IACA data.
However, FinCEN understands that IRS data only includes partnerships
that filed tax returns. Therefore, even with the potential inclusion
of general partnerships, IACA's data is more inclusive and a better
data source for purposes of the reporting company estimation.
\215\ IRS data from 2014 shows that the total number of returns
for complex trusts, simple trusts, grantor trusts, decedent's
estates, qualified disability trusts, Chapter 7 bankruptcy estates,
split-interest trusts, qualified funeral trusts, Chapter 11
bankruptcy estates, and pooled income funds is 3,170,667. See IRS,
SOI Tax Stats--Fiduciary Returns--Sources of Income, Deductions, and
Tax Liability--Type of Entity, available at https://www.irs.gov/statistics/soi-tax-stats-fiduciary-returns-sources-of-income-deductions-and-tax-liability-by-type-of-entity.
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To leverage the IACA 2018 annual reports survey data in order to
estimate total domestic reporting companies, FinCEN conducted the
following analysis:
1. FinCEN first transcribed data reported by each of the states
listed above in response to questions 1-18 of the survey.\216\ FinCEN
did not transcribe
[[Page 69957]]
the responses to the other questions because they did not relate to the
number of entities.
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\216\ The questions (Q) are the following: Q1 Jurisdiction; Q2
Total population of your Jurisdiction; Q3 Total number of
Corporations and Professional Corporations; Q4 Total number of
Nonprofit Corporations; Q5 Total number of Limited Liability
Companies; Q6 Total Number of Partnerships (GPs, LPs, LLPs, etc. . .
.); Q7 Total number of registered Corporations and Professional
Corporations; Q8 Total number of registered Nonprofit Corporations;
Q9 Total number of registered Limited Liability Companies; Q10 Total
number of registered Partnerships (GPs, LPs, LLPs, etc. . . .); Q11
Total number of new Corporations and Professional Corporations; Q12
Total number of new Nonprofit Corporations; Q13 Total number of new
Limited Liability Companies; Q14 Total number of new Partnerships
(GPs, LPs, LLPs, etc. . . .); Q15 Total number of new Foreign
Corporations and Professional Corporations; Q16 Total number of new
Foreign Nonprofit Corporations; Q17 Total number of new Foreign
Limited Liability Companies; Q18 Total number of new Foreign
Partnerships (GPs, LPs, LLPs, etc. . . .).
---------------------------------------------------------------------------
2. FinCEN then considered which data to total in order to estimate
the: (1) Total number of existing entities; and (2) total number of new
entities within a year.
a. FinCEN totaled the numbers reported for Q3 (Corporations and
Professional Corporations), Q4 (Nonprofit Corporations), Q5 (limited
liability companies), and Q6 (Partnerships) for each state in order to
estimate the existing entities as of 2018. FinCEN did not total the
responses to Q7-Q10, which are ``registered'' companies, because FinCEN
assumes that those registered entities are foreign to the state in
question.\217\ As noted above, the counts for Q6 may include general
partnerships for some jurisdictions which may not be considered
reporting companies; however, because they are grouped with limited
partnerships and limited liability partnerships in this survey, FinCEN
is retaining this number as part of its estimate.
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\217\ The prior year of the IACA survey (2017) worded questions
differently than the 2018 survey. For example, the 2017 survey
included ``the total number of domestic and foreign for-profit
corporations and professional corporations on file (in good standing
or active)'' as Q6. FinCEN assumes that this question covers the
same entities as Q3 (``total number of Corporations and Professional
Corporations'') and Q7 (``total number of registered Corporations
and Professional Corporations'') in the 2018 survey. Given this,
FinCEN assumes that the number of ``registered'' entities in the
2018 survey aligns with foreign entities. FinCEN understands foreign
in this context to mean outside of the jurisdiction, but potentially
still within the United States. In order to avoid double-counting
the same entity across multiple states, FinCEN is not including
``registered'' entities in its analysis. At least one state in the
2018 survey, Illinois, specified that their numbers in response to
Q3 included domestic and foreign companies. However, FinCEN is
retaining Illinois in its analysis for consistency. Illinois' per
capita average is lower than the weighted per capita average, which
alleviates any concern that it would create a significant upward
bias in the nationwide weighted average (see Table 1).
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b. FinCEN totaled the numbers reported for Q11-Q14--data that
mirrors the categories from Q3-Q6--for each state in order to estimate
the new entities created in one year (2018). One of the survey
respondents, Wyoming, did not provide responses to these questions.
FinCEN did not total the responses to Q15-Q18, which relate to ``new
[f]oreign'' entity types, because FinCEN understands that ``foreign''
entities counted here could be entities formed in another state.
Therefore, there could be double-counting across states if an entity is
formed in one state and registered in others.
3. FinCEN next created a table listing each state, the population
reported by each state in response to Q2,\218\ the totals for Q3-Q6
(total entities), and totals for Q11-Q14 (new entities). FinCEN then
calculated a per capita rate of total entities and a per capita rate of
new entities by dividing the population by these totals; see Table 1.
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\218\ Wisconsin specified that its population estimate was from
2017.
Table 1--Domestic Entities per Capita Analysis
----------------------------------------------------------------------------------------------------------------
Per capita Per capita new
State Population Total entities New entities total entities entities
----------------------------------------------------------------------------------------------------------------
Colorado........................ 5,761,252 641,174 112,165 0.11129074 0.019468859
Delaware........................ 967,171 1,372,130 213,697 1.418704655 0.220950587
Hawaii.......................... 1,420,000 120,779 14,626 0.085055634 0.0103
Illinois........................ 12,770,000 802,880 98,303 0.062872357 0.007697964
Indiana......................... 6,700,000 406,408 51,135 0.06065791 0.00763209
Louisiana....................... 4,680,000 423,755 52,389 0.09054594 0.011194231
Massachusetts................... 6,902,000 351,363 41,029 0.050907418 0.005944509
Michigan........................ 9,995,915 831,973 100,550 0.0832313 0.010059109
North Carolina.................. 10,350,000 647,632 88,052 0.06257314 0.00850744
Ohio............................ 11,730,719 838,850 89,495 0.071508831 0.007629096
Oregon.......................... 4,191,000 1,319,082 110,694 0.314741589 0.026412312
Texas........................... 29,100,000 1,761,695 236,505 0.060539347 0.00812732
Wisconsin....................... 5,795,000 419,644 43,495 0.07241484 0.007505608
Wyoming......................... 568,125 155,010 .............. 0.272844884 ..............
----------------------------------------------------------------------------------------------------------------
4. FinCEN then calculated a weighted average (weighted by
population) for both per capita estimates to find a weighted average
per capita rate for the United States.
a. The weighted average per capita rate for total companies is:
0.090978702.
b. The weighted average per capita rate for new companies is:
0.011345597.\219\
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\219\ Wyoming is excluded from this calculation since it did not
provide statistics on new companies.
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5. Finally, FinCEN estimated the total companies and new companies
per year by multiplying the per capita rates by the U.S. population as
of 2021: \220\
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\220\ FinCEN assumes that there is proportional growth between
the population and formation of new entities over time for purposes
of estimating the total number of existing and registered entities
as of today. Although this assumption is arguably in tension with
the assumption of zero net company formation in subsequent years,
neither assumptions plays a significant role in estimation of total
costs over the time period analyzed.
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a. Total entities estimate: 30,247,071.10.
b. Total new entities per year estimate: 3,771,993.58.
While the IACA data provides a window into the total number of
domestic entities, FinCEN turned to other sources to identify possible
estimates for the number of foreign (non-U.S.) entities that are
registered to do business in the United States, and therefore would be
a reporting company for purposes of the proposed rule.\221\ FinCEN is
proposing the following estimate based on tax filing data, although
FinCEN acknowledges that this data may not exactly match the definition
of ``foreign reporting company'' in the proposed rule. In 2018 there
were approximately 22,000 partnership tax returns filed by foreign
partnerships.\222\ Using the same scaling process as noted above, the
estimate for
[[Page 69958]]
2021 is 22,263.39.\223\ In addition, in 2018 an estimated 21,000
foreign corporations filed the Form 1120-F (``U.S. Income Tax Return of
a Foreign Corporation'')--scaled for 2021 to 21,251.42.\224\ Adding
these two estimates (22,263.39 + 21,251.42) results in an overall
estimate of approximately 43,514.81 foreign entities operating in the
United States that may be subject to BOI reporting requirements. To
estimate new foreign companies annually, FinCEN multiplied the estimate
of total foreign companies as of 2021 (43,514.81) by the ratio of
estimated new entities to total entities based on the IACA data
analysis above (3,771,993.58/30,247,071.10). The estimation is
approximately 5,426.56.
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\221\ Although some of the IACA questions referenced ``foreign''
entities, as noted above FinCEN understands that those numbers may
include entities formed in another state and entities formed in
another country. FinCEN is only interested in the latter number for
these purposes, which cannot be derived from IACA data in the same
way that FinCEN derived the number of entities formed in each state.
\222\ FinCEN understands that, in the vast majority of cases,
foreign partnerships file a U.S. partnership tax return because they
engage in a trade or business in the United States; however, this
may not always be the case.
\223\ 22,000 x 1.011972411.
\224\ 21,000 x 1.011972411.
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Therefore, it is reasonable, given the data reviewed and these
considerations, to estimate that there are 30,290,586 existing
companies that could be reporting companies. It is also reasonable to
estimate that there are 3,777,420 new companies per year that could be
reporting companies.
b. Entities That Are Not Exempt From the Definition of a Reporting
Company
As to FinCEN's second estimate, the number of entities that would
be reporting companies would be less than 100 percent of the entities
that could be reporting entities because some of the entities that
comprise the total number of entities would be exempt from the
definition of ``reporting company'' pursuant to one or more of the
exemptions found at proposed 31 CFR 1010.380(c)(2)(i)-(xxiii).
In order to estimate the number of exempt entities to subtract from
the first estimate of entities that are estimated to be corporations,
limited liability companies, or other entities, FinCEN considered the
following:
1. A reasonable estimate for the number of existing entities under
each of the exemptions.
2. Whether each of the entities described in the exemptions: (1)
Meet the proposed definition of ``reporting company'' (i.e., is the
exempt entity formed or registered by filing with the secretary of
state or similar office); and (2) is included in the IACA annual
reports survey estimates (i.e., does the exempt entity fall into a
category reported by the states in the IACA annual reports survey used
to estimate the number of corporations, limited liability companies, or
other entities as described above).
3. Whether there is overlap between exemption categories, and
whether the number of entities that overlap can be estimated.
To address the first item, the number of existing entities under
each of the exemptions, FinCEN conducted research and outreach to
multiple stakeholders to identify a reasonable estimate for each
exemption. When the data was historical, FinCEN ``scaled'' the estimate
to 2021, scaling the estimate based on overall U.S. population growth
from the date of the estimate to June 2021. FinCEN considered whether
the data underlying FinCEN's estimate of exempt entities in each
exemption category aligns with the proposed definition of the exemption
in this NPRM. The sources used for these estimates should not be viewed
as encompassing all entities that may be captured under the definition.
Additionally, the sources should not be understood to convey any
interpretation of the exemptions' definitions. FinCEN identified
sources for estimates using what it believes to be the best data
available related to the exemption in question, and welcomes other
sources or clarifications on these estimates that may be provided
through the rulemaking process. Furthermore, these estimates are based
on multiple data sources that may not always align; meaning that the
data source for an exemption may not only or totally include the
entities subject to the exemption that are included in the total
companies' estimate. Each exemption estimate is considered in detail
below.
1. Securities and Exchange Commission (SEC) reporting issuers:
FinCEN proposes relying upon the World Bank's data of listed domestic
companies in the United States as of 2019. Listed domestic companies,
including foreign companies that are exclusively listed,\225\ are those
that have shares listed on an exchange at the end of the year.
Investment funds, unit trusts, and companies whose only business goal
is to hold shares of other listed companies, such as holding companies
and investment companies, regardless of their legal status, are
excluded. A company with several classes of shares is counted once.
Only companies admitted to listing on the exchange are included. This
estimate is 4,266.\226\ FinCEN scaled this number to 4,294.89.\227\
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\225\ This estimate may therefore include entities that are not
part of the ``total entities'' previously calculated. However,
FinCEN assesses that the number of foreign companies included is
sufficiently small to be trivial.
\226\ See The World Bank Data, Listed domestic companies,
total--United States, available at https://data.worldbank.org/indicator/CM.MKT.LDOM.NO?locations=US.
\227\ This was calculated by multiplying the estimate by a
``2019 scaling factor'' of 1.006772611. The scaling factor was
calculated by dividing the U.S. population as of July 1, 2019
(330,226,709) by the U.S. population as of June 27, 2021
(332,463,206). These population estimates were found at the Census
Bureau's population clock. See U.S. Census Bureau, U.S. and World
Population Clock, available at https://www.census.gov/popclock/.
---------------------------------------------------------------------------
2. Governmental authorities: FinCEN proposes relying upon the U.S.
Census Bureau's 2017 Census of Governments for this estimate. FinCEN
accessed the publicly available zip file ``Table 1. Government Units by
State: Census Years 1942 to 2017'' and the ``Data'' Excel file included
therein. The Excel file lists the total number of Federal, state, and
local government units in the United States as of 2017 as 90,126. \228\
FinCEN scaled this number to 91,741.49; \229\ FinCEN welcomes comments
regarding whether this is a category that is less likely to scale by
population.
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\228\ See U.S. Census Bureau, Table 1. Government Units by
State: Census Years 1942 to 2017, available at https://www.census.gov/data/tables/2017/econ/gus/2017-governments.html.
\229\ This was calculated by multiplying the estimate by a
``2017 scaling factor'' of 1.017924839. The scaling factor was
calculated by diving the U.S. population as of July 1, 2017
(326,608,796) by the U.S. population as of June 27, 2021
(332,463,206). These population estimates were found at the Census
Bureau's population clock. See U.S. Census Bureau, U.S. and World
Population Clock, available at https://www.census.gov/popclock/.
---------------------------------------------------------------------------
3. Banks: FinCEN accessed the number of Federal Deposit Insurance
Corporation (FDIC)-insured entities as of October 20, 2021, through the
``Institution Directory'' on FDIC's Data Tools website. FinCEN searched
for active institutions anywhere in the United States, which resulted
in 4,916 institutions.\230\ FinCEN also considered whether to include
uninsured entities that are required to implement written AML program
as a result of a final rule issued on September 15, 2020,\231\ in this
estimate; however, given that the exemption may or may not apply to
these entities, FinCEN is not including them at this time.
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\230\ See FDIC, Details and Financials--Institution Directory,
available at https://www7.fdic.gov/idasp/advSearchLanding.asp.
\231\ See 85 FR 57129.
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4. Credit unions: There are 4,999 federally insured credit unions
as of October 20, 2021.\232\
---------------------------------------------------------------------------
\232\ Data available at FINDRs.
---------------------------------------------------------------------------
5. Depository institution holding companies: According to a report
from
[[Page 69959]]
the Federal Reserve, as of the fourth quarter of 2020 there are 3,638
bank holding companies and 11 savings and loan holding companies (7
insurance and 4 commercial).\233\ This totals 3,649.
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\233\ Federal Reserve Board of Governors, Supervision and
Regulation Report (April 2021), p. 33, available at https://www.federalreserve.gov/publications/files/202104-supervision-and-regulation-report.pdf.
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6. Money transmitting businesses: According to the FinCEN Money
Services Business (MSB) Registrant Search Page, there are 24,124
registered MSBs as of October 15, 2021.\234\ Please note this count
includes MSBs that are registered for activity including, but not
limited to, money transmission. This count does not include MSB agents
that would not be within the scope of the exemption since they are not
registered with FinCEN.
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\234\ See FinCEN MSB Registrant search page, accessed from
https://www.fincen.gov/msb-registrant-search.
---------------------------------------------------------------------------
7. Brokers or dealers in securities: According to the SEC, the
number of broker-dealers as of the end of the first quarter of 2021 is
3,532.
8. Securities exchanges and clearing agencies: The SEC provided the
following estimates of exchanges and clearing agencies in August 2021:
24 national securities exchanges and 14 clearing agencies, which
includes Proposed Rule Change Filings and Advance Notice Filings,
totaling 38.
9. Other Exchange Act registered entities: The SEC provided the
following estimates of other 1934 Act entities in August 2021: Two
securities information processors, the Consolidated Quotation System
and the Unlisted Trading Privileges (competing consolidators are not
yet required to be registered, but the transition period and compliance
dates begin this year); one national securities association, FINRA; 525
municipal advisors (FinCEN did not include in this count 21 banks that
are municipal securities dealers due to the bank exemption estimated
above); nine nationally recognized statistical rating organizations;
two security-based swap repositories; three OTC derivatives dealers;
and 373 registered transfer agents as of mid-2018. Totaling these
estimates, 2 + 1 + 525 + 9 + 2 + 3 + 373 = 915. SEC also noted that
security-based swap dealers and execution facilities would be included
in this exemption in the future, but registration is not yet
required.\235\
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\235\ SEC also provided data regarding its general exemption
authority pursuant to Section 36 of the 1934 Act: Maybe 30 entities
have been granted exemptions from registration over the years, and
many were temporary, and maybe 300 entities did not have to register
due to exemptions from defined terms granted under this authority.
However, these are rough estimates, and given their relatively small
value, FinCEN is not including them in the estimate of this
exemption.
---------------------------------------------------------------------------
10. Investment companies or investment advisers: According to
information provided by the SEC, there are 2,773 registered investment
companies (number of trusts, not funds) and 14,381 registered
investment advisers as of June 30, 2021. This totals 17,154.
11. Venture capital fund advisers: According to information
provided by the SEC, there are 1,498 exempt reporting advisers
utilizing the exemption from registration as an adviser solely to one
or more venture capital funds as of June 30, 2021.
12. Insurance companies: According to the Treasury Department's
Federal Insurance Office, there are 4,738 insurance companies, which
include the following U.S. insurance underwriting entities by type:
3,471 members of an insurance group; 1,103 standalone; and 164 alien
surplus lines. These totals were aggregated using a best efforts
scrubbing approach applied to a S&P Global regulatory filings dataset
on July, 2, 2021 and, for that reason, should be regarded as estimates
or broadly indicative of the sector.
13. State licensed insurance producers: According to the National
Association of Insurance Commissioners' website, as of January 26, 2021
there were more than 236,000 business entities licensed to provide
insurance services in the United States.\236\
---------------------------------------------------------------------------
\236\ NAIC, Producer Licensing, (January 26, 2021), available at
https://content.naic.org/cipr_topics/topic_producer_licensing.htm.
---------------------------------------------------------------------------
14. Commodity Exchange Act registered entities: The Commodity
Futures Trading Commission (CFTC) provided the following breakdown of
companies related to this exemption as of July 2021. For part I:
Designated Contract Market (16); Swap Execution Facility (20);
Designated Clearing Organization (15); and Swap Data Repository,
Provisionally-registered (3)--totaling 54. For part II: Futures
Commission Merchant (61); Introducing Broker in Commodities (1,055);
Commodity Pool Operators (1,266); Commodity Trading Advisory (1,757);
Retail Foreign Exchange Dealer (4); Swap Dealer, Provisionally-
registered (109); and Major Swap Participant (0)--totaling 4,252. These
totals combined equal 4,306.
15. Accounting firms: FinCEN searched the Public Company Accounting
Oversight Board's (PCAOB) Registered Firms list, accessible on their
website, and identified 851 firms as of October 20, 2021.\237\ FinCEN
searched for firms in the United States, Northern Mariana Islands, and
Puerto Rico and totaled those with the status of ``Currently
Registered'' or ``Withdrawal Pending.''
---------------------------------------------------------------------------
\237\ See PCAOB, Registration, Annual and Special Reporting,
available at https://rasr.pcaobus.org/Search/Search.aspx.
---------------------------------------------------------------------------
16. Public utilities: FinCEN relies upon the U.S. Census Bureau's
2018 Statistics of U.S. Businesses (SUSB) data for this estimate.
FinCEN accessed the publicly available 2018 SUSB annual data tables by
establishment industry and the ``U.S. & states, 6-digit NAICS'' Excel
file. The Excel file lists the total firms in the United States with
the NAICS code of 22: Utilities as 6,028.\238\ SUSB data only includes
entities that reported employees in the reporting year. FinCEN
understands that firms may operate in multiple NAICS code industries;
therefore this number could include firms that partly operate as
utilities and partly as other types of exempt entities. Additionally,
each ``firm'' in Census data may include multiple entities. FinCEN
scaled this estimate to 6,100.17.\239\
---------------------------------------------------------------------------
\238\ See U.S. Census Bureau, U.S. & states, 6-digit NAICS,
(2018), available at https://www.census.gov/data/tables/2018/econ/susb/2018-susb-annual.html.
\239\ This was calculated by multiplying the estimate by a
``2018 scaling factor'' of 1.011972411.
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17. Financial market utilities: According to the designated
financial market utilities listed on the Federal Reserve's website,
there are eight such entities.\240\ While the website has not been
updated since January 29, 2015, FinCEN understands this estimate is
still applicable.
---------------------------------------------------------------------------
\240\ Federal Reserve Board of Governors, Designated Financial
Market Utilities, (January 29, 2015), available at https://www.federalreserve.gov/paymentsystems/designated_fmu_about.htm.
---------------------------------------------------------------------------
18. Pooled investment vehicles: According to information provided
by SEC, as of June 30, 2021 there were 114,765 pooled investment
vehicle clients reported by registered investment advisers. Of these,
5,671 are registered with a foreign financial regulatory authority.
FinCEN subtracted these for a total of 109,094.\241\
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\241\ This estimate may not account for foreign pooled
investment vehicles advised by banks, credit unions, or broker-
dealers. FinCEN requests any available information on estimates of
pooled investment vehicles advised by such entities.
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19. Tax-exempt entities: FinCEN relies upon IACA survey data, which
requested specific counts of nonprofits. FinCEN used the same per
capita methodology described with respect to the IACA survey numbers
above to identify an estimate of total nonprofits. FinCEN identified
the total number of nonprofit corporations reported by each
[[Page 69960]]
state that responded to the 2018 IACA survey, and then calculated a per
capita rate for each state by dividing the number of nonprofit
corporations by state population. FinCEN then calculated a weighted
average per capita, and multiplied this average by the U.S. population
in 2021 to obtain an estimate of the number of nonprofits in the U.S.
This estimate is 2,826,260.79.
20. Entities assisting a tax-exempt entity: FinCEN could not find
an estimate for these entities, and a comment to the ANPRM suggested
that the public is also not aware of a possible estimate; therefore, to
calculate this estimate, FinCEN assumes that approximately a quarter of
the entities in the preceding exemption would have a related entity
that falls under this exemption, totaling 706,565.20.\242\ FinCEN
welcomes comments on this assumption.
---------------------------------------------------------------------------
\242\ 2,826,260.79 X 0.25.
---------------------------------------------------------------------------
21. Large operating companies: This estimate is based on tax
information. There were approximately 231,000 employers' tax filings in
2019 that reported more than 20 employees and receipts over $5
million.\243\ FinCEN scaled this number to 232,564.47.\244\
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\243\ The gross receipts include all receipts from activities
conducted directly by the entity, including foreign sales to the
extent that the entity has a branch in a foreign country. However,
it would not include, for example, the gross receipts earned by a
foreign subsidiary of the entity.
\244\ This was calculated by multiplying the estimate by a
``2019 scaling factor'' of 1.006772611.
---------------------------------------------------------------------------
22. Subsidiaries of certain exempt entities: According to a
commercial database provider, as of 2021 there were 239,892 businesses
in the United States that were majority-owned subsidiaries, either with
a parent company inside or outside of the United States. While this
estimate is not refined further to consider only wholly-owned
subsidiaries of certain exempt entities, FinCEN is still providing this
estimate for a point of reference.
23. Inactive entities: FinCEN is not proposing an estimate for this
exemption given lack of available data. FinCEN also assumes that
inactive companies are not included in the estimates from the IACA
annual reports survey,\245\ so there is no need to subtract this
exemption from the prior estimate. However, there are likely to be some
companies on corporate registries in the United States that fall under
this exemption; such companies that were included in the 2018 IACA
survey responses would impact FinCEN's estimates by increasing the
total number of reporting companies. FinCEN solicits comments on an
estimate of these companies, and whether FinCEN's assumption that
inactive companies are not included in the numbers estimated herein is
accurate.
---------------------------------------------------------------------------
\245\ IACA's 2017 survey specified in its questions that
entities be in good standing or active. FinCEN assesses that this
same expectation applies to the 2018 survey, but recognizes that
does not mean no such companies were included.
---------------------------------------------------------------------------
After identifying these estimates, FinCEN further considered
whether each of the entities described in the exemptions: (1) Meet the
proposed definition of ``reporting company''; and (2) is included in
the IACA annual reports survey estimates. FinCEN understands that some
of the exempt categories may not register with the secretaries of state
or similar offices in certain jurisdictions. For example, banks, credit
unions, and insurance companies may only be required to register with
the state regulator and not with the secretaries of state in certain
jurisdictions.\246\ Additionally, governmental authorities are more
likely to be chartered directly by a legislative body rather than
formed by registration with a secretary of state. Because of this,
FinCEN assesses that these entities are not included in the IACA annual
reports survey estimates, and therefore do not need to be subtracted
from the total companies' estimate. As previously noted, FinCEN also
assumes that inactive companies are generally not included in the IACA
annual reports survey estimates, and that in response to this survey,
states provided counts of entities ``in good standing or active.''
---------------------------------------------------------------------------
\246\ For example, Indiana's Secretary of State's website notes
that its forms are not for use by insurance corporations or
financial institutions, and that the appropriate state agency
(Department of Insurance or Department of Financial Institutions)
should be contacted for filings instructions. See Indiana Secretary
of State, Business Forms, available at https://www.in.gov/sos/business/division-forms/business-forms/.
---------------------------------------------------------------------------
FinCEN also considered whether the exemption categories were likely
to overlap, and therefore include counts of the same entities that
would result in a duplicative subtraction. For example: A variety of
entities, such as public utilities, SEC reporting issuers, and brokers/
dealers in securities, could be large operating companies with more
than 20 employees and $5 million in gross receipts/sales; certain
subsidiaries of exempt entities may themselves be exempt entities; or
specific exemptions may overlap, such as insurance companies and state-
licensed insurance producers. Another scenario could be that the
exemption estimates include entities that are not in the IACA annual
reports survey (such as a bank that is a large operating company with
more than 20 employees and $5 million in gross receipts/sales),
resulting in an unnecessary subtraction.
Estimating the precise number of overlap for each of these
possibilities and other potential overlaps is difficult due to lack of
data. Critically, however, FinCEN assumes that any overlap would have a
relatively minor effect on the burden estimate as a whole. With that in
mind, FinCEN has not attempted to estimate each category of
overlap.\247\ However, FinCEN welcomes comment on any material
inaccuracies that not estimating these overlaps more precisely may
cause, and suggestions for mitigation.
---------------------------------------------------------------------------
\247\ FinCEN considered whether it may be able to address the
overlap between the large operating company exemption and the public
utility exemption that was calculated using SUSB data. Because the
SUSB data may be filtered by employee size, FinCEN could remove from
the estimate the number of entities with greater than 20 employees.
However, this estimate would be imprecise given that SUSB data does
not consider the threshold of $5 million gross receipts/sales.
---------------------------------------------------------------------------
Table 2 contains a list of exemptions and the estimates to be
subtracted from the total number of reporting companies estimated based
on IACA data.
[[Page 69961]]
Table 2--Exemption Estimates To Be Subtracted
------------------------------------------------------------------------
Final estimate
Exemption No. Exemption description \248\
------------------------------------------------------------------------
1.......................... SEC reporting issuers... 4,294.89
5.......................... Depository institution 3,649
holding companies.
6.......................... Money transmitting 24,124
businesses.
7.......................... Brokers or dealers in 3,532
securities.
8.......................... Securities exchanges and 38
clearing agencies.
9.......................... Other Exchange Act 915
registered entities.
10......................... Investment companies or 17,154
investment advisers.
11......................... Venture capital fund 1,498
advisers.
13......................... State-licensed insurance 236,000
producers.
14......................... Commodity Exchange Act 4,306
registered entities.
15......................... Accounting firms........ 851
16......................... Public utilities........ 6,100.17
17......................... Financial market 8
utilities.
18......................... Pooled investment 109,094
vehicle.
19......................... Tax-exempt entities..... 2,826,260.79
20......................... Entities assisting a tax- 706,565.20
exempt entity.
21......................... Large operating 232,564.47
companies.
22......................... Subsidiaries of certain 239,892
exempt entities.
------------------------------------------------------------------------
Given this analysis, FinCEN estimates that the total number of
exempt entities is approximately 4,416,847. Subtracting this number
from the first estimate of entities that could be reporting companies,
FinCEN estimates that there are 25,873,739 entities that would meet the
definition of a reporting company with exemptions considered. To
estimate new exempt companies annually, FinCEN multiplied the estimate
of total exempt companies, 4,416,847, by the overall ratio of new
entities to total entities from the per capita calculations based on
IACA data (3,771,993.58/30,247,071.10). The resulting estimate of new
exempt entities is approximately 550,807.7. Therefore, FinCEN estimates
that there would be 3,226,613 new entities per year that meet the
definition of reporting company with exemptions considered. FinCEN
welcomes comment on whether the method it has used to estimate the
number of new entities that are eligible for an exemption from the
definition of reporting company--that is, by assuming that number would
be proportionate to the share of existing entities that are eligible
for an exemption--is sound.
---------------------------------------------------------------------------
\248\ This table includes the ``scaled for 2021'' estimate for
those with historical data sources.
---------------------------------------------------------------------------
FinCEN assumes that each reporting company would make one initial
BOI report; FinCEN does not separately calculate the burden of the need
to issue a corrected report where mistaken information was initially
reported, but that can be considered as part of the estimate of the
cost per initial report. Given the proposed implementation period of
one year to comply with the rule for entities that were formed or
registered prior to the effective date of the final rule, FinCEN
assumes that all of the entities that meet the definition of reporting
company would submit their initial BOI reports in Year 1, totaling
25,873,739 reports. While new reporting companies may be created during
this year as well, FinCEN assumes that companies are created and
dissolved at roughly the same rate; therefore, FinCEN assumes as many
new companies would file as old companies would dissolve and not file
within the first year. In Year 2 and beyond, FinCEN estimates that the
number of initial BOI reports would be 3,226,613, which is the same
estimate as the number of new entities per year that meet the
definition of reporting company.
c. Number of BOI Updated Reports
FinCEN considered multiple data sources in order to estimate the
number of BOI reports that may be updated on an annual basis. These
updates would require additional burden and cost to filers. FinCEN
first considered whether it may be able to apply data from the District
of Columbia (DC), which recently imposed beneficial ownership reporting
requirements in January 2020 on owners with more than 10 percent
ownership and certain control persons.\249\ FinCEN received information
from the DC Department of Consumer and Regulatory Affairs (DCRA) during
outreach related to the NPRM regarding the number of updates to this
reporting. DCRA reported that since the effective date of their
beneficial ownership requirement, there have been 24,865 new entity
filings and 69,019 biennial reports from existing entities received.
There were 567 amendments filed by the new entities in this timeframe,
approximately 2 percent, and approximately 55,200 biennial corrections
filed, about 80 percent. FinCEN understands that the biennial
corrections could account for existing entities that are reporting
their beneficial ownership for the first time since the effective date,
rather than solely counting updates or corrections to previously
reported information. Thus, given the differences in how DC defines
``beneficial owner'' and uncertainties as to whether the data on
biennial reports reflects updated or initial reports, FinCEN reviewed
other sources in order to estimate BOI updated reports.
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\249\ The Background section in this preamble includes more
information on DC's requirements. See DC Code sec. 29-102.01.
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[[Page 69962]]
FinCEN considered likely triggers for updated reports and the
likelihood of these events, in order to estimate the number of updates.
FinCEN assessed that the most likely causes for updates to reporting
companies' initial reports are: (1) Change in address of a beneficial
owner or applicant; (2) death of a beneficial owner; or (3) a
management decision resulting in a change in beneficial owner.\250\ In
order to estimate the likelihood of these updates on a monthly basis,
given that the proposed rule requires updates within 30 days, FinCEN
approximated probabilities for these causes from other sources:
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\250\ There may be other causes for updating BOI reports, such
as change of beneficial owner or applicant name, expiration of the
provided identification number document, or change in the
identifying information for the reporting company, such as address
or name/DBA. However, FinCEN assesses that these changes would occur
at a relatively minor rate compared to the reasons described above.
In particular, FinCEN understands that a renewed driver's license is
likely to have the same identification number as the previously
submitted expired document, and therefore is less likely to require
an updated report. FinCEN welcomes comments that address whether
there are, and if so which, states that do not follow this
convention. FinCEN also assumes that reports notifying FinCEN that a
reporting company has become eligible for an exemption from the
reporting requirement would be negligible burden and has not
separately estimated it.
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1. Change in address: According to the Census Bureau's Geographic
Mobility data, 29,780,000 people one year or older moved from 2019-
2020.\251\ This is approximately 8.9824695 percent of the 2020 U.S.
population.\252\ Therefore, FinCEN assesses that 8.9824695 percent of
beneficial owners may have a change in address within a year, resulting
in an updated BOI report.
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\251\ See U.S. Census Bureau, Table 1. General Mobility, by Race
and Hispanic Origin and Region, and by Sex, Age, Relationship to
Householder, Educational Attainment, Marital Status, Nativity,
Tenure, and Poverty Status: 2019 to 2020--United States, available
at https://www.census.gov/data/tables/2020/demo/geographic-mobility/cps-2020.html. The total movers, in thousands, is 29,780.
\252\ The U.S. population on July 1, 2020 was 331,534,662
according to the Census Bureau. See U.S. Census Bureau, U.S. and
World Population Clock, available at https://www.census.gov/popclock/. The percentage was calculated by: (29,780,000/
331,534,662) x 100 = 8.9824695.
---------------------------------------------------------------------------
2. Death: FinCEN utilized data published in the Social Security
Administration's 2019 Period Life Table to estimate this
probability.\253\ FinCEN narrowed the range of ages to 30-90 and
calculated the median probability of death for males (0.011447) and
females (0.00688). FinCEN then averaged these numbers, resulting in a
0.9164 percent probability of death within a year.
---------------------------------------------------------------------------
\253\ See Social Security Administration, Actuarial Life Table,
Period Life Table, 2019, available at https://www.ssa.gov/oact/STATS/table4c6.html.
---------------------------------------------------------------------------
3. Management decision: Changes to beneficial ownership due to
management decisions could encompass items such as a sale of an
ownership interest or a change in substantial control (the removal,
change, or addition of a beneficial owner with substantial control).
FinCEN is not aware of a current data source that could accurately
estimate such updates to BOI, though FinCEN invites comment on an
appropriate way to estimate these numbers. FinCEN is assuming that 10
percent of beneficial owners may change within a year due to management
decisions.
Totaling these estimated probabilities, there is an approximately
20 percent probability of a change for a given beneficial owner
resulting in an updated BOI filing within a year.\254\ FinCEN divided
this by 12 to find the monthly probability of an update: 1.6582
percent.
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\254\ As a point of comparison, the UK found that 10 percent of
businesses reported a change in beneficial ownership information
following an initial report. United Kingdom Department for Business,
Energy & Industrial Strategy, Review of the Implementation of the
PSC Register, (March 2019), p. 16, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/822823/review-implementation-psc-register.pdf.
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Given that each BOI report may contain multiple beneficial owners,
each of which could contribute to a change resulting in an updated
report, FinCEN reviewed data published by the UK in a 2019 study on
their BOI reporting requirements.\255\ The UK requirements define
beneficial owners (People with Significant Control, or PSC) as those
that directly or indirectly hold more than 25 percent of shares or
voting rights in a company, has the right to appoint or remove the
majority of the board of directors, or otherwise exercises significant
influence or control.\256\ The UK study reported the following
distribution of the number of reported beneficial owners per report: 0
(8 percent of reports); 1 (43 percent); 2 (37 percent); 3 (9 percent);
4 (2 percent); 5 to 10 (2 percent); and don't know (1 percent).\257\
---------------------------------------------------------------------------
\255\ The UK study used a ``mixed-method'' research approach,
which consisted of a quantitative survey with 500 businesses and in-
depth qualitative interviews with 30 stakeholder organizations and 2
members of staff from Companies House. United Kingdom Department for
Business, Energy & Industrial Strategy, Review of the implementation
of the PSC Register, (March 2019), p. 4, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/822823/review-implementation-psc-register.pdf.
\256\ Id., p. 8.
\257\ Id., p. 14.
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In order to use this distribution for its estimation purposes,
FinCEN is modifying the percentage of reports with one beneficial owner
to 50 percent. This is to account for the fact that the beneficial
ownership requirements proposed herein would not include an option for
zero reported beneficial owners. Increasing the estimate of the
percentage of reports with one beneficial owner is reasonable because
FinCEN assumes that many of the reporting companies would be small
businesses with simple ownership structures.\258\ FinCEN is adding 7
percent to the distribution for one beneficial owner rather than 9
percent (the total of the 0 beneficial owners and ``don't know''
responses in the UK's study) in order to ensure that the distribution
totals 1. Additionally, FinCEN averaged 5, 6, 7, 8, 9, 10 to calculate
7.5 beneficial owners for the distribution category labeled in the UK
study as ``5 to 10'' beneficial owners, although this is likely a high
estimate of the true number in the UK data given the otherwise left-
skewed nature of the distribution based on the available data. Please
see the following table:
---------------------------------------------------------------------------
\258\ For purposes of the IRFA above, FinCEN assumes that all
reporting companies will be small entities. However, there may be
reporting companies that are small, but have complex ownership
structures. Therefore, FinCEN assumes here that ``many'' reporting
companies will be small with a simple ownership structure.
Table 3--Estimated Distribution of Beneficial Owners per Report
------------------------------------------------------------------------
Estimated
Number of beneficial owners per report distribution
------------------------------------------------------------------------
1..................................................... 0.50
2..................................................... 0.37
3..................................................... 0.09
4..................................................... 0.02
7.5................................................... 0.02
------------------------------------------------------------------------
[[Page 69963]]
FinCEN calculated the number of updated reports using the following
general approach. FinCEN assumed that 1/12 of the initial reports that
must be filed by reporting companies in existence on the effective date
of the proposed rule would be filed in each month of the one year
implementation period. The first month of implementation is assumed to
have zero updated reports. To estimate the number of updated reports in
the second month of implementation, FinCEN multiplied the estimated
distribution by (1/12) of the estimated initial reports within the
first year, which is the estimated distribution of initial report
filings in the first month with varying levels of beneficial owners
reported. FinCEN then multiplied each element of the distribution by 1-
(1-0.016582)[caret]N, where N is the number of beneficial owners on the
respective line of the distribution; this is the probability that a
given company with N beneficial owners would experience a change in at
least one beneficial owner's reportable information in each month.\259\
This assumes that changes for a beneficial owner would be independent
from changes for other beneficial owners of the same company. The
following table provides the estimated number of updated reports for
the second month of implementation using the described methodology:
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\259\ Assuming that the probability of change in a given period
for a single beneficial owner is p, then the probability of no
change of a single beneficial owner is (1-p). The probability of a
company with one beneficial owner having a change is therefore 1-(1-
p). The probability of a company with two beneficial owners having a
change is 1-(1-p)[caret]2, etc.
Table 4--Estimated Number of Beneficial Ownership Updated Reports in
Year 1, Month 2
------------------------------------------------------------------------
Number of beneficial owners Estimated Estimated number of
per report distribution updated reports
------------------------------------------------------------------------
1........................... 0.50 \260\ 17,877
2........................... 0.37 \261\ 26,239
3........................... 0.09 \262\ 9,494
4........................... 0.02 \263\2,790
7.5......................... 0.02 \264\ 5,083
-------------------------------------------
Total................... .................... 61,483
------------------------------------------------------------------------
FinCEN replicated this analysis for each remaining month of the
first year. The estimated initial reports monthly increase was captured
by increasing the (1/12) ratio in the above equation. Therefore, the
equations in the prior table remained the same per month with the
following change to (1/12): 2/12 (Month 3); 3/12 (Month 4); 4/12 (Month
5); 5/12 (Month 6); 6/12 (Month 7); 7/12 (Month 8); 8/12 (Month 9); 9/
12 (Month 10); 10/12 (Month 11); and 11/12 (Month 12). The total of all
monthly estimates for Year 1 calculated in this fashion is 4,057,848
updated reports. Estimated monthly updated reports for all subsequent
months were calculated using the same equation, but with a 12/12 ratio
of initial reports (all initial reports). This estimate is
approximately 737,790.50, multiplied by 12 for an annual estimate of
8,853,486 updated reports.
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\260\ 0.5 x (25,873,739 x (1/12)) x (1-(1-0.016582).
\261\ 0.37 x (25,873,739 x (1/12)) x (1-(1-0.016582)[caret]2).
\262\ 0.09 x (25,873,739 x (1/12)) x (1-(1-0.016582)[caret]3).
\263\ 0.02 x (25,873,739 x (1/12)) x (1-(1-0.016582)[caret]4).
\264\ 0.02 x (25,873,739 x (1/12)) x (1-(1-0.016582)[caret]7.5).
---------------------------------------------------------------------------
FinCEN conducted similar analysis to estimate the number of updates
to applicant information on a monthly basis.\265\ FinCEN assessed that
the most likely causes for updates to reporting companies' initial
reports involving an applicant is a change in address. Given data
referenced above, there is an 8.9824695 percent probability of a change
in address in a year, with a monthly probability of 0.0074854. FinCEN
assumes that a probable distribution of the number of applicants per
report is 90 percent with one applicant and 10 percent with two
applicants. Using this probability and distribution, FinCEN calculated
the monthly number of updates related to an applicant by using the same
calculation as beneficial owner updated reports.
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\265\ FinCEN recognizes this is a simplification, because it
assumes that a single reporting company which was required to file
an updated report based on updated beneficial owner information in
the same month as an applicant's information change would have to
file two updates in the same month. FinCEN nevertheless calculated
the number of updated applicant reports separately for analytical
simplicity.
Table 5--Estimated Number of Applicant Updated Reports in Year 1, Month
2
------------------------------------------------------------------------
Estimated
Number of applicants per report Estimated number of
distribution updated reports
------------------------------------------------------------------------
1................................... 0.90 \266\ 14,526
2................................... 0.10 \267\ 3,216
-----------------------------------
Total........................... ................ 17,742
------------------------------------------------------------------------
The total of all monthly estimates for Year 1 calculated in this
fashion is 1,170,937 updated reports. Estimated monthly updated reports
for all subsequent months were calculated using the same equation, but
with a 12/12 ratio of initial reports (all initial reports). This
estimate is approximately 212,897.60 multiplied by 12 for an annual
estimate of 2,554,771 updated reports. Combining the estimates of
beneficial ownership and applicant updates, FinCEN estimates 5,228,785
updated reports in Year 1 and 11,408,257 updated reports in Year 2 and
beyond. FinCEN welcomes comments on the appropriateness of this
analysis for calculating the total required number of updated reports.
---------------------------------------------------------------------------
\266\ 0.9 x (25,873,739 x (1/12)) x (1-(1-0.0074854).
\267\ 0.10 x (25,873,739 x (1/12)) x (1-(1-0.0074854)[caret]2).
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[[Page 69964]]
d. Estimated PRA Burden of BOI Reports
Reporting Requirements: The proposed rule would require certain
entities to report to FinCEN information about the reporting company,
their beneficial owners and company applicants, in accordance with the
CTA.\268\ Entities would also be required to update the information in
these reports as needed. The collected information would be maintained
by FinCEN in a database accessible to authorized users.
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\268\ See 31 U.S.C. 5336(b) and proposed 31 CFR 1010.380(b).
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OMB Control Number: 1506-XXXX..
Frequency: As required.\269\
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\269\ For BOI reports, there is an initial filing and subsequent
filings are required as information changes.
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Description of Affected Public: Domestic entities that are
corporations, limited liability companies, or other entities that are
created by the filing of a document with a secretary of state or any
similar office under the law of a state or Indian Tribe or foreign
entities that are corporations, limited liability companies, or other
entities which are: (1) Formed under the law of a foreign country; and
(2) registered to do business in any state or Tribal jurisdiction by
the filing of a document with a secretary of state or any similar
office under the laws of a state or Indian Tribe. The proposed
regulation does not require corporations, limited liability companies,
or other entities that are described in any of 23 specific exemptions
from the general definition to file BOI reports.
Estimated Number of Respondents: As explained in detail above, the
number of entities that are reporting companies is difficult to
estimate. FinCEN assumes that existing entities that meet the
definition of reporting company and are not exempt would submit their
initial BOI reports in Year 1. Therefore, the estimated number of
initial BOI reports in Year 1 is 25,873,739. In Year 2 and beyond,
FinCEN estimates that the number of initial BOI reports would be
3,226,613, which is the same estimate as the number of new entities per
year that meet the definition of reporting company and are not exempt.
FinCEN estimates that 5,228,785 updated reports would be filed in Year
1, and 11,408,257 such reports would be filed in Year 2 and beyond.
Estimated Time per Respondent: Most of the information required to
be reported to FinCEN is basic information that reporting companies
would have access to as part of conducting their business. FinCEN
estimates the average burden of the reporting BOI as 70 minutes per
response (20 minutes to read the form and understand the requirement,
30 minutes to identify and collect information about beneficial owners
and applicants, 20 minutes to fill out and file the report, including
attaching a scanned copy of an acceptable identification document for
each beneficial owner and applicant). FinCEN estimates the average
burden of updating such reports as 30 minutes per update (20 minutes to
identify and collect information about beneficial owners or applicants
and 10 minutes to fill out and file the update).
Estimated Total Reporting Burden Hours: FinCEN estimates that
during Year 1, the filing of initial BOI reports would result in
approximately 30,186,029 burden hours per year on reporting
companies.\270\ In Year 2 and beyond, FinCEN estimates that the filing
of initial BOI reports would result in 3,764,381 burden hours annually
on new reporting companies.\271\ FinCEN estimates that filing BOI
updated reports in Year 1 would result in approximately 2,614,392
burden hours on reporting companies.\272\ In Year 2 and beyond, the
estimated number of burden hours is 5,704,129.\273\
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\270\ (25,873,739 x 70)/60.
\271\ (3,226,613 x 70)/60. While this calculation equals
3,764,382, FinCEN's model includes decimal points that result in the
total of 3,764,381.
\272\ (5,228,785 x 30)/60.
\273\ (11,408,257 x 30)/60.
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Estimated Total Reporting Cost: To estimate the average cost,
FinCEN used the estimate of an average cost of $27.07 per hour, the
mean hourly wage for all employees \274\ from the May 2020 National
Occupational Employment and Wage Estimates report \275\ and multiplied
by a private industry benefits factor of 1.42 \276\ to estimate a fully
loaded wage rate of $38.44 per hour. The estimated cost of filing
initial BOI reports in Year 1 is $1,160,332,854.17 per year.\277\ The
estimated cost of filing initial BOI reports annually in Year 2 and
beyond is $144,700,558.43.\278\ The estimated cost of filing updated
reports in Years 1 is $100,495,669.61 per year.\279\ The estimated cost
of filing updated reports annually in Year 2 and beyond is
$219,263,279.14.\280\ FinCEN estimates that it will cost each reporting
company approximately $45 to prepare and submit an initial report for
the first year that the BOI reporting requirements are in effect.\281\
---------------------------------------------------------------------------
\274\ FinCEN's selection of the ``all employees'' estimate is
reflective of its goal to develop the BOI reporting requirement so
that a range of businesses' ordinary employees, with no specialized
knowledge or training, may file the reports. Additionally, the CDD
Rule also used the weighted average hourly wage for all employees
from the National Occupational Employment and Wage Estimates report
to estimate client costs in opening a new account. 81 FR 29437.
\275\ See U.S. Bureau of Labor Statistics, National Occupational
Employment and Wage Estimates, (May 2020), available at https://www.bls.gov/oes/current/oes_nat.htm.
\276\ The ratio between benefits and wages for private industry
workers is $10.83 (hourly benefits)/$25.80 (hourly wages) = 0.42.
The benefit factor is 1 plus the benefit/wages ratio, or 1.42. See
U.S. Bureau of Labor Statistics, Table 4. Employer Costs for
Employee Compensation for private industry workers by occupational
and industry group, (March 2021), available at https://www.bls.gov/news.release/ecec.t04.htm.
\277\ 30,186,029 x $38.44. While this calculation equals
$1,160,350,954.76, FinCEN's model includes decimal points that
result in the total of $1,160,332,854.17.
\278\ 3,764,381 x $38.44. While this calculation equals
$144,702,805.64, FinCEN's model includes decimal points that result
in the total of $144,700,558.43.
\279\ 2,614,392 x $38.44. While this calculation equals
$101,535,108.48, FinCEN's model includes decimal points that result
in the total of $100,495,669.61.
\280\ 5,704,129 x $38.44. While this calculation equals
$219,266,718.76, FinCEN's model includes decimal points that result
in the total of $219,263,279.14.
\281\ $1,160,332,854.17/25,873,739 = $44.85, approximately $45.
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ii. Individuals Applying for a FinCEN Identifier
Reporting Requirements: The proposed rule would require the
collection of information from individuals in order to issue them a
FinCEN identifier.\282\ This is a voluntary collection. Per the CTA,
individuals are required to provide their full name, date of birth,
current street address, a unique identifying number from an acceptable
identification document; furthermore, consistent with the CTA, FinCEN
is proposing to require individuals to provide a scanned image of that
document in order to receive a FinCEN identifier.\283\ An individual is
also required to submit updates of their identifying information as
needed. FinCEN would store such information in its BOI database for
access by authorized users.
---------------------------------------------------------------------------
\282\ FinCEN is not separately calculating a cost estimate for
entities requesting a FinCEN identifier, because FinCEN assumes this
would be part of the process and cost already estimated in
submitting the BOI reports.
\283\ 31 U.S.C. 5336(b)(3)(A)(i) and proposed 31 CFR
1010.380(b)(5).
---------------------------------------------------------------------------
OMB Control Number: 1506-XXXX
Frequency: As required.
Description of Affected Public: In terms of estimating the number
of individuals requesting a FinCEN identifier, FinCEN acknowledges that
anyone with an acceptable identification document could apply for a
FinCEN identifier under the proposed rule. However, the primary
incentives
[[Page 69965]]
for individual beneficial owners to apply for a FinCEN identifier are
likely data security (an individual may desire not to send personal
information to a reporting company but rather prefer to file that data
with FinCEN directly); administrative efficiency where an individual is
likely to be identified as a beneficial owner of numerous reporting
companies; and anonymity from reporting companies that are not directly
owned, but are indirectly owned through another entity, by the
individual. FinCEN assesses that there may be less incentive for
individuals who only directly own reporting companies to obtain FinCEN
identifiers because their identity is already known to the reporting
company. Company applicants that are responsible for registering many
reporting companies may have incentive to request a FinCEN identifier
in order to limit the number of companies with access to their personal
information. This reasoning assumes that there is a one-to-many
relationship between the company applicant and reporting companies.
Estimated Number of Respondents: Given the cases described above,
which are based on FinCEN's speculation of possible incentives for
individuals to obtain a FinCEN identifier, FinCEN estimates the number
of individuals that would apply for a FinCEN identifier may be
relatively low. FinCEN is estimating that number to be approximately 1
percent of the reporting company estimates above. FinCEN assumes that,
similar to reporting companies' initial filings, there would be an
initial influx of applications for a FinCEN identifier (primarily by
those beneficial owners with complex corporate structures) that would
then decrease to a smaller annual rate of requests. Therefore, FinCEN
estimates that 258,737 individuals would apply for a FinCEN identifier
during Year 1 \284\ and 32,266 individuals would apply for on a FinCEN
identifier annually moving forward.\285\ To estimate the number of
updated reports for individuals' FinCEN identifier information per
year, FinCEN used the same methodology explained in the BOI report
estimate section to calculate, and then total, monthly updates.
However, FinCEN only applied the monthly probability of 0.0074854
(8.9824695 percent, the annual likelihood of a change in address,
divided by 12 to find a monthly rate), as this was the sole probability
of those previously estimated that would result in a change to
individual identifying information.\286\ This analysis estimated 10,652
updates in Year 1 and 23,241 in Year 2 and beyond.
---------------------------------------------------------------------------
\284\ Assuming that individuals applying for FinCEN identifiers
would generally request the identifier around the time when the
company files its initial BOI report, one percent of the estimated
initial BOI reports in Year 1 (25,873,739) is 258,737.
\285\ One percent of the estimated new reporting companies
annually (3,226,613) is 32,266.
\286\ FinCEN understands that other circumstances may cause an
update to be submitted for an individual's identifying information
linked to a FinCEN identifier, but is using this probability as a
rough estimate.
---------------------------------------------------------------------------
Estimated Time per Respondent: FinCEN anticipates that initial
FinCEN identifier applications would require approximately 20 minutes
(10 minutes to read the form and understand the information required
and 10 minutes to fill out and file the request, including attaching a
scanned copy of an acceptable identification document), given that the
information to be submitted to FinCEN would be readily available to the
person requesting the FinCEN identifier. FinCEN estimates that updates
would require 10 minutes (10 minutes to fill out and file the update).
Estimated Total Reporting Burden Hours: FinCEN estimates the total
burden hours of individuals initially applying for a FinCEN identifier
during Year 1 to be 86,246.\287\ In years after this period, FinCEN
estimates that individuals applying for a FinCEN identifier would
result in 10,755 burden hours annually.\288\ FinCEN estimates that the
burden hours of individuals updating FinCEN identifier related
information would be 1,775 in Year 1 \289\ and 3,874 in Year 2 and
beyond.\290\
---------------------------------------------------------------------------
\287\ (258,737 x 20)/60.
\288\ (32,266 x 20)/60.
\289\ (10,652 x 10)/60.
\290\ (23,241 x 10)/60.
---------------------------------------------------------------------------
Estimated Total Reporting Cost: To estimate the average cost,
FinCEN used the May 2020 fully loaded wage rate of $38.44 per hour for
all employees. FinCEN estimates the total cost of individuals initially
applying for a FinCEN identifier during Year 1 to be
$3,315,236.73.\291\ In Year 2 and beyond, FinCEN estimates that
individuals initially applying for a FinCEN identifier would result in
an annual cost of $413,430.17.\292\ FinCEN estimates that the cost of
updating individual FinCEN identifier information would be $68,243.57
in Year 1 \293\ and $148,895.06 in Year 2 and beyond.\294\
---------------------------------------------------------------------------
\291\ 86,246 x $38.44. While this calculation equals
$3,315,296.24, FinCEN's model includes decimal points that result in
the total of $3,315,236.73.
\292\ 10,755 x $38.44. While this calculation equals
$413,422.20, FinCEN's model includes decimal points that result in
the total of $413,430.17.
\293\ 1,775 x $38.44. While this calculation equals $68,231.00,
FinCEN's model includes decimal points that result in the total of
$68,243.57.
\294\ 3,874 x $38.44. While this calculation equals $148,916.56,
FinCEN's model includes decimal points that result in the total of
$148,895.06.
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iii. Foreign Pooled Investment Vehicle Reports
Reporting Requirements: The proposed rule requires that any entity
that would be a reporting company but for the pooled investment vehicle
exemption and is formed under the laws of a foreign country shall file
with FinCEN a written certification that provides identification
information of an individual that exercises substantial control over
the pooled investment vehicle. This requirement is being implemented in
accordance with the CTA.\295\ FinCEN would maintain this information in
its BOI database for access by authorized users.
---------------------------------------------------------------------------
\295\ 31 U.S.C. 5336(b)(2)(C) and proposed 31 CFR
1010.380(b)(3)(iii).
---------------------------------------------------------------------------
OMB Control Number: 1506-XXXX.
Frequency: As required.
Description of Affected Public: Any entity that would be a
reporting company but for the pooled investment vehicle exemption \296\
and is formed under the laws of a foreign country.
---------------------------------------------------------------------------
\296\ This applies to any pooled investment vehicle that is
operated or advised by a person that is an exempt bank, credit
union, broker or dealer, registered investment company or adviser,
or venture capital fund adviser. A pooled investment vehicle is
defined in the CTA as any investment company as defined in section
3(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-(a)); or
any company that would be an investment company under that section
but for the exclusion provided from that definition by paragraph (1)
or (7) of section 3(c) of that Act; and is identified by its legal
name by the applicable investment adviser in its Form ADV (or
successor form) filed with the SEC. 31 U.S.C. 5336(a)(10).
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[[Page 69966]]
Estimated Number of Respondents: Based on information provided by
the SEC, FinCEN estimates that at least 8,884 entities would be
obligated to make initial reports when the proposed rule would come
into effect.\297\ Assuming that these entities file initial reports in
Year 1, the estimated number of initial reports in Year 1 is 8,884. In
years after this period, FinCEN estimates that the number of entities
required to file reports would be approximately 1,108.\298\ To estimate
the number of updated reports per year, FinCEN used the same
methodology explained in the BOI report estimate section to calculate,
and then total, monthly updates. However, FinCEN did not account for
differing numbers of beneficial owners per report, given the
requirement is to report one beneficial owner. This analysis estimated
810 updates in Year 1 and 1,768 in Year 2 and beyond.
---------------------------------------------------------------------------
\297\ As of June 30, 2021, registered investment advisers
reported 5,671 pooled investment vehicle clients registered with a
foreign financial regulatory authority and venture capital fund
advisers reported 3,213 advised private funds registered with a
foreign financial regulatory authority. These two counts total
8,884. However, this estimate may not account for foreign pooled
investment vehicles advised by banks, credit unions, or broker-
dealers. FinCEN requests any available information on estimates of
foreign pooled investment vehicles advised by such entities.
\298\ FinCEN calculated the estimated foreign pooled investment
vehicle filers per year (8,884) by the ratio of estimated new
entities to total entities based on the IACA data analysis above
(3,771,993.58/30,247,071.10).
---------------------------------------------------------------------------
Estimated Time per Respondent: The information required to be
reported to FinCEN is basic information that reporting companies would
have access to as part of conducting their business. In addition, this
requirement is likely less costly than the prior BOI reporting
requirement because it only requires the identification and reporting
of one beneficial owner with substantial control (not ownership).
Therefore, FinCEN estimates the burden of the reporting the report as
40 minutes per response (10 minutes to read the form and understand the
requirement, 20 minutes to identify and collect information about
beneficial owners, 10 minutes to fill out and file the report and
attach a scanned copy of an acceptable identification document). FinCEN
estimates the burden of updating or correcting such reports as 20
minutes per update (10 minutes to identify and collect information
about beneficial owners and 10 minutes to fill out and file update).
Estimated Total Reporting Burden Hours: FinCEN estimates the total
burden hours for Year 1 to be 5,923 hours.\299\ After this period,
FinCEN estimates the annual burden hours to be 739 hours.\300\ FinCEN
estimates that the burden hours of updating reports would be 270 in
Year 1,\301\ and 589 in Year 2 and beyond.\302\
---------------------------------------------------------------------------
\299\ (8,884 x 40)/60.
\300\ (1,108 x 40)/60.
\301\ (810 x 20)/60.
\302\ (1,768 x 20)/60.
---------------------------------------------------------------------------
Estimated Total Reporting Cost: To estimate the average cost,
FinCEN used the May 2020 fully loaded wage rate of $38.44 per hour for
all employees. The estimated total cost for initial reports in Year 1
is $227,663.75.\303\ After this period, FinCEN estimates the annual
cost to be $28,391.05.\304\ FinCEN estimates that the cost of updating
reports would be $10,381.80 in Year 1 \305\ and $22,651.20 in Year 2
and beyond.\306\
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\303\ 5,923 x $38.44. While this calculation equals $227,680.12,
FinCEN's model includes decimal points that result in the total of
$227,663.75.
\304\ 739 x $38.44. While this calculation equals $28,407.16,
FinCEN's model includes decimal points that result in the total of
$28,391.05.
\305\ 270 x $38.44. While this calculation equals $10,378.80,
FinCEN's model includes decimal points that result in the total of
$10,381.80.
\306\ 589 x $38.44. While this calculation equals $22,641.16,
FinCEN's model includes decimal points that result in the total of
$22,651.20.
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iv. Total Burden and Cost
The following table totals the burden and cost estimated in the
prior sections.
Table 6--Total Burden and Cost
----------------------------------------------------------------------------------------------------------------
Information collection Count of reports Burden hours Cost
----------------------------------------------------------------------------------------------------------------
Year 1
----------------------------------------------------------------------------------------------------------------
Initial BOI reports................................ 25,873,739 30,186,029 $1,160,332,854.17
Updates for BOI.................................... 5,228,785 2,614,392 \307\ 100,495,669.61
Initial identifier applications.................... 258,737 86,246 3,315,236.73
Updates for identifiers............................ 10,652 1,775 68,243.57
Initial foreign pooled investment vehicle reports.. 8,884 5,923 227,663.75
Updates for foreign pooled investment vehicles..... 810 270 10,381.80
------------------------------------------------------------
Totals......................................... 31,381,608 32,894,635 $1,264,450,049.62
----------------------------------------------------------------------------------------------------------------
Year 2 and Beyond
----------------------------------------------------------------------------------------------------------------
Initial BOI reports................................ 3,226,613 3,764,381 $144,700,558.43
Updates for BOI.................................... 11,408,257 5,704,129 \308\ $219,263,279.14
Initial identifier applications.................... 32,266 10,755 413,430.17
Updates for identifiers............................ 23,241 3,874 148,895.06
Initial foreign pooled investment vehicle reports.. 1,108 739 28,391.05
Updates for foreign pooled investment vehicles..... 1,768 589 22,651.20
------------------------------------------------------------
Totals......................................... 14,693,252 9,484,467 364,577,205.05
----------------------------------------------------------------------------------------------------------------
The following table shows a summary of total cost over ten years.
FinCEN is selecting the time period of ten years, a relatively short
time period given that the requirement is permanent. This is because
FinCEN cannot predict how the burden and cost of compliance may change
after it is widely adopted by reporting companies. Please note, there
are no non-labor costs associated with this collection of information
because FinCEN assumes that active businesses already have the
necessary equipment and tools to comply with the proposed regulatory
requirements.
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\307\ FinCEN conducted analysis on what this cost would be if
applicant updates were not included; the cost decreased by
approximately $23 million.
\308\ FinCEN conducted analysis on what this cost would be if
applicant updates were not included; the cost decreased by
approximately $49 million.
Table 7--Total Costs Over Ten Years
------------------------------------------------------------------------
Year Total cost
------------------------------------------------------------------------
Year 1......................................... $1,264,450,049.62
Year 2......................................... 364,577,205.05
Year 3......................................... 364,577,205.05
Year 4......................................... 364,577,205.05
[[Page 69967]]
Year 5......................................... 364,577,205.05
Year 6......................................... 364,577,205.05
Year 7......................................... 364,577,205.05
Year 8......................................... 364,577,205.05
Year 9......................................... 364,577,205.05
Year 10........................................ 364,577,205.05
------------------------------------------------------------------------
In addition, FinCEN calculated the net present value of cost for a
10-year horizon at discount rates of seven and three percent,\309\
totaling approximately $3.4 billion and $3.98 billion, respectively
(see Table 8 below for exact figures). FinCEN calculated the cost over
a ten-year horizon to capture the immediate impact, but expects that
from Year 2 onwards the annual aggregate costs would be the same in
each subsequent year.
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\309\ These discount rates were applied based on OMB guidance in
Circular A-4. See Office of Management and Budget, Circular A-4
(September 17, 2003), available at https://obamawhitehouse.archives.gov/omb/circulars_a004_a-4/.
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v. Alternative Scenario Analyses
FinCEN considered alternatives while shaping the specific reporting
requirements of the rule, including: (1) The length of the initial
reporting period; and (2) the length of time to file an updated report.
The analyses of these alternatives rely upon the analysis used thus far
in the PRA cost estimate. Each alternative is considered fully below.
In the first alternative, FinCEN considered whether to lengthen the
timeframe in which initial reports may be submitted by companies that
are in existence when the eventual final rule comes into effect. The
CTA states that existing companies shall submit a BOI report to FinCEN
``in a timely manner, and not later than 2 years after the effective
date of the regulations'' addressed by this proposed rule.\310\ FinCEN
currently proposes that existing companies submit a BOI report one year
after the effective date, which is ``not later than 2 years''; however,
given that the CTA permits FinCEN to select up to a two-year period for
initial reports of companies that already exist when the final rule
comes into effect, FinCEN compared the cost to the public for these two
scenarios.
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\310\ See 31 U.S.C. 5336(b)(1)(B).
---------------------------------------------------------------------------
FinCEN assumed that if the reporting period was two years, half of
the existing reporting companies would file their initial BOI report in
Year 1 and the other half would file in Year 2. The same logic was
applied to individuals applying for FinCEN identifiers and submitting
foreign pooled investment vehicle reports: Half of the initial
applications or reports would be filed in Year 1, and the other half in
Year 2. FinCEN also assumed that updated reports would increase at an
incremental rate throughout the two-year period, and therefore
calculated the number of updated reports by extending the methodology
described above to a 24-month timeframe (rather than a 12-month
timeframe). This comparison shows that the cost of the rule is
approximately $637 million less in Year 1 with this change, and
approximately $358 million more in Year 2, but then is the same in
following years. This also decreased the ten-year horizon net present
value by approximately $281 million at a three percent discount rate or
$283 million at a seven percent discount rate. However, the benefits of
a one-year reporting period would outweigh the increase in cost during
Year 1 of the rule. The public would bear the cost of initial report
filings regardless and FinCEN has sought to maximize the usefulness of
the database to law enforcement by obtaining BOI for existing entities
as soon as possible.
In the second alternative, FinCEN considered whether to lengthen
the timeframe for updated reports from 30 days to one year. The CTA
states that updated reports shall be filed ``not later than 1 year
after the date on which there is a change.'' \311\ FinCEN currently
proposes that updates be submitted 30 days after the change date, which
is ``not later than 1 year''; however, given that the CTA permits
FinCEN to select up to a one-year timeframe, FinCEN compared the cost
to the public of these two scenarios. FinCEN assumed that permitting
updates to be reported within one year would result in updates being
``bundled,'' meaning that a reporting company could submit one updated
report to account for multiple updates, as opposed to reporting each
update singularly as would likely be the case under the 30-day
reporting requirement. FinCEN therefore assumed that there would be
approximately half as many updated reports overall if the timeframe is
lengthened to one year. FinCEN also assumed that because more
information may be reported on a ``bundled'' report, the burden of
filing an update would increase. FinCEN increased the estimated burden
for an updated BOI report to be 50 minutes, rather than the 30 minutes
estimate for 30-day updated reports.\312\ FinCEN estimated that
increasing the timeframe for updated reports results in a net present
value cost decrease by approximately $238 million at a seven percent
discount rate or $293 million at a three percent discount rate.
However, the benefits of having information updated on a monthly basis,
which would make the database current and accurate and by extension
highly useful, outweigh these costs. As noted in Section IV above,
allowing reporting companies to report updates on an annual basis could
cause a significant degradation in accuracy and usefulness of the BOI.
FinCEN also believes that a 30-calendar-day deadline is necessary to
limit the possible abuse of shelf companies--i.e., entities formed as
generic corporations without assets and then effectively assigned to
new owners. The longer updates are delayed, the longer a shelf company
can be ``off the shelf'' without notice to law enforcement of the
company's new beneficial owners, and without any notice to financial
institutions that they should scrutinize transactions involving the
company from the perspective of its new beneficial owners.
---------------------------------------------------------------------------
\311\ See 31 U.S.C. 5336(b)(1)(D).
\312\ There may also be a burden decrease to reporting companies
that FinCEN does not separately account for in its estimate: If the
timeframe for updated reports is increased to one year, reporting
companies that choose to regularly survey their beneficial owners
for information changes would not have to reach out on a monthly
basis to request any updates from beneficial owners. FinCEN has not
accounted for this burden other than in the time required to collect
information for an updated report, but welcomes comment on its
significance, and the extent it may vary depending based on the
permissible update period selected. FinCEN's cost estimates for
updated reports also does not currently account for decrease in cost
that may be associated with increased use of FinCEN identifiers. If
individuals request FinCEN identifiers, reporting companies would
not be required to update the individuals' information on the BOI
form; individuals with FinCEN identifiers would update their own
information with FinCEN directly, consistent with the requirements
of the proposed rule.
---------------------------------------------------------------------------
The following table provides the detailed cost estimates for the
proposed rule, as well as the two alternatives discussed. Please note
that ``NPV'' refers to the net present value of cost for a ten-year
time horizon, which is calculated at two different discount rates.
[[Page 69968]]
Table 8--Cost Comparison of Alternatives
----------------------------------------------------------------------------------------------------------------
Timeframe Proposed rule Alt. 1 Alt. 2
----------------------------------------------------------------------------------------------------------------
Year 1........................................ $1,264,450,049.62 $626,598,761.41 $1,247,700,771.35
Year 2........................................ 364,577,205.05 723,017,733.35 328,033,325.19
Years 3+...................................... 364,577,205.05 364,577,205.05 328,033,325.19
NPV 7%........................................ 3,401,640,386.12 3,118,593,526.06 3,163,471,093.78
NPV 3%........................................ 3,983,580,464.64 3,702,171,944.94 3,691,071,816.82
----------------------------------------------------------------------------------------------------------------
In addition to the three scenarios described, FinCEN also compared
how the estimated cost changed if more or less burden per report were
assumed. A summary table of this comparison is included below. This
illustrates that the time burden is a significant component of the
overall cost of the rule. This highlights the importance of training,
outreach, and compliance assistance in the implementation of this rule
in order to decrease the burden and cost to the public.
Table 9--Cost Comparison for Burden Changes
----------------------------------------------------------------------------------------------------------------
Proposed burden More time Less time
----------------------------------------------------------------------------------------------------------------
Minutes to file initial BOI report............ 70 120 45
Minutes to file BOI update.................... 30 60 15
Minutes to file identifier application........ 20 45 20
Minutes to file identifier update............. 10 30 10
Minutes to file initial foreign pooled 40 90 30
investment vehicle report....................
Minutes to file update foreign pooled 20 45 15
investment vehicle report....................
Year 1........................................ $1,264,242,966.42 $2,197,972,962.43 $799,607,136.88
Years 2+...................................... $364,517,497.03 $687,963,718.01 $203,220,746.46
NPV 7%........................................ $3,401,083,288.12 $6,243,192,863.55 $1,984,707,941.90
NPV 3%........................................ $3,982,928,060.37 $7,334,498,451.60 $2,312,530,100.97
----------------------------------------------------------------------------------------------------------------
Finally, FinCEN compared how the estimated cost changed if the
benefits factor was increased from 1.42 to 2. FinCEN is conducting this
analysis due to the Department of Health and Human Services 2016
``Guidelines for Regulatory Impact Analysis,'' which recommends that
employees undertaking administrative tasks while working should have an
assumed benefits factor of 2, which accounts for overhead as well as
benefits.\313\ This increased the fully loaded wage rate to
approximately $54.14. A summary table of this comparison is included
below. FinCEN welcomes comment on the appropriate overhead factor
FinCEN should use to estimate the burden of the proposed rule.
---------------------------------------------------------------------------
\313\ See Department of Health and Human Services, Guidelines
for Regulatory Impact Analysis, (2016), p. 33, available at https://aspe.hhs.gov/sites/default/files/migrated_legacy_files//171981/HHS_RIAGuidance.pdf.
Table 10--Cost Comparison of Increased Benefits Factor
----------------------------------------------------------------------------------------------------------------
Proposed rule-- Comparison--benefits
Timeframe benefits factor 1.42 factor 2
----------------------------------------------------------------------------------------------------------------
Year 1........................................................... $1,264,450,049.62 $1,780,915,562.85
Years 2+......................................................... 364,577,205.05 513,489,021.20
NPV 7%........................................................... 3,401,640,386.12 4,791,042,797.35
NPV 3%........................................................... 3,983,580,464.64 5,610,676,710.76
----------------------------------------------------------------------------------------------------------------
Overall, FinCEN acknowledges that all costs cited herein are based
on estimates and welcomes comments illuminating additional
considerations or offering estimates, whether they contrast or align
with those made above. FinCEN requests that such comments provide a
breakdown of the estimates, the reasoning behind costs and numbers
provided, and sources when applicable. This will help FinCEN integrate
such information into the analysis.
vi. Questions for Comment
General Request for Comments Under the Paperwork Reduction Act:
Comments submitted in response to this notice will be summarized and
included in the request for Office of Management and Budget approval.
All comments will become a matter of public record. Comments are
invited on: (a) Whether the collection of information is necessary for
the proper performance of the functions of the agency, including
whether the information shall have practical utility; (b) the accuracy
of the agency's estimate of the burden of the collection of
information; (c) ways to enhance the quality, utility, and clarity of
the information to be collected; (d) ways to minimize the burden of the
collection of information on respondents, including through the use of
technology; and (e) estimates of capital or start-up costs and costs of
operation, maintenance, and purchase of services required to provide
information.
Other Requests for Comment. In addition, FinCEN generally invites
comment on the accuracy of FinCEN's regulatory analysis. FinCEN
specifically requests comment on the following, most of which are
mentioned in the preceding text.
[[Page 69969]]
1. What are likely data sources for identifying non-compliance with
BOI reporting requirements? What potential costs may be incurred by
third parties, particularly state, local, and Tribal authorities and
financial institutions, through this process?
2. Are there data or methods available for estimating potential
benefits generated by this rule?
3. Is there is a precise way to estimate the number of small
businesses that would meet the definition of reporting company with
exemptions considered?
4. Are there additional points to add to FinCEN's discussion of
possible costs to state, local, and Tribal governments under the
proposed rule, including specific estimates of costs if available?
i. In particular, are there specifics FinCEN should add to its
discussion of costs to small governmental jurisdictions, pursuant to
the Regulatory Flexibility Act? Particularly, what costs might these
jurisdictions incur, what types of small governmental jurisdictions
could expect to face such costs, whether small governmental
jurisdictions may face costs that are different in kind from those
which larger jurisdictions may face, and how FinCEN could mitigate the
burden on small governmental jurisdictions.
5. Is it feasible for state or Tribal governments that collect BOI
to transmit that information to FinCEN by way of existing or revised
procedures?
i. In the alternative scenario analysis, is FinCEN's estimate of
potential costs to states from collecting and transmitting BOI to
FinCEN accurate?
6. Would reporting companies prefer to file BOI via state or Tribal
governments rather than directly with FinCEN?
7. Are there available data sources to determine the total number
of trusts, and to determine what portion of the total are created or
registered with a secretary of state or similar office?
8. Do small businesses anticipate requiring professional expertise
to comply with the BOI requirements described herein and what could
FinCEN do to minimize the need for such expertise or accurately
estimate for such a cost?
9. Are there any significant alternatives that would minimize the
impact of the proposed rule on small entities while accomplishing the
objectives of the CTA?
10. Are there certain regions that would be disproportionately
impacted by the proposed rule, due to corporation formation practices
or laws, or another reason? Are there likely disproportionate budgetary
effects for particular segments of the private sector in complying with
the proposed rule?
11. Is there a way in which FinCEN can make the overall BOI burden
estimate, or some component of the burden estimate, more accurate? How
could burden of complying with the proposed collection of information
be minimized, including through the application of automated collection
techniques or other forms of information technology?
12. Are there additional data sources or ways to clarify or improve
FinCEN's estimation of the number of existing entities that qualify for
each exemption? Specifically:
ii. Is the governmental authorities exemption category less likely
to scale by population?
iii. FinCEN does not have data on the number of entities assisting
a tax-exempt entity and instead assumes approximately a quarter of the
entities in the preceding exemption (i.e., tax-exempt entities) would
have a related entity that falls under this exemption. Is this a
reasonable assumption to make to estimate the number of entities
assisting a tax-exempt entity?
iv. Is any commenter able to offer an estimation of inactive
companies? In light of the lack of data on such entities, is it
reasonable for FinCEN to assume that inactive companies are not
included in the IACA data used to estimate the number of reporting
entities?
13. Is FinCEN's approach of not precisely estimating overlapping
entity exemptions reasonable? Is there reason to believe that not
precisely estimating may result in material inaccuracies?
14. Is FinCEN's methodology for estimating the number of new
entities eligible for an exemption from the definition of a reporting
company, that is, by assuming that number would be proportionate to the
share of existing entities that are eligible for an exemption,
reasonable and appropriate?
15. Is there data or a better methodology to appropriately estimate
the quantity of updates to BOI due to changes in beneficial ownership
as a result of management's decision (e.g., such as from a sale of an
ownership interest or a change in substantial control)?
16. Do some states change a driver's license number when a driver's
license is renewed? If so, which states?
17. Is FinCEN's methodology for calculating the total number of
updated reports reasonable and appropriate?
18. Is any commenter able to provide data or information for the
estimation of the number of foreign pooled investment vehicles that are
advised by banks, credit unions, or broker-dealers?
19. Are FinCEN's per-report burden estimates reasonable?
20. Does FinCEN need to account in a specific way for the burden of
tracking potential changes in beneficial owner or company applicant
information? If so, how?
21. What is the appropriate factor that FinCEN should use to
estimate the burden of the proposed rule beyond wage costs? Is a factor
of 1.42 based on FinCEN's analysis of Bureau of Labor Statistics data
appropriate? Is a factor of 2 based on the Department of Health and
Human Services' guidance more appropriate because of its inclusion of
overhead? Would a factor of 2 be an accurate estimate of benefits and
overhead for the proposed rule or is that overhead factor excessive?
22. Are FinCEN's overall cost estimates reasonable and accurate,
and if not, what other cost estimates would be?
List of Subjects in 31 CFR Part 1010
Administrative practice and procedure, Aliens, Authority
delegations (Government agencies), Banks and banking, Brokers, Business
and industry, Commodity futures, Currency, Citizenship and
naturalization, Electronic filing, Federal savings associations,
Federal-States relations, Foreign persons, Holding companies, Indian--
law, Indians, Indians--tribal government, Insurance companies,
Investment advisers, Investment companies, Investigations, Law
enforcement, Penalties, Reporting and recordkeeping requirements, Small
businesses, Securities, Terrorism, Time.
Authority and Issuance
For the reasons set forth in the preamble, part 1010 of chapter X
of title 31 of the Code of Federal Regulations is proposed to be
amended as follows:
PART 1010--GENERAL PROVISIONS
0
1. The authority citation for part 1010 is revised to read as follows:
Authority: 12 U.S.C. 1829b and 1951-1959; 31 U.S.C. 5311-5314,
5316-5336; title III, sec. 314 Pub. L. 107-56, 115 Stat. 307; sec.
701 Pub. L. 114-74, 129 Stat. 599; sec. 6403, Pub. L. 116-283, 134
Stat. 3388.
0
2. Add Sec. 1010.380 to read as follows:
Sec. 1010.380 Reports of beneficial ownership information.
(a) Reports required--(1) Initial report. Each reporting company
shall file an initial report in the form and manner specified in
paragraph (b) of this section as follows:
[[Page 69970]]
(i) Any domestic reporting company formed on or after [effective
date of final rule] shall file a report within 14 calendar days of the
date it was formed as specified by a secretary of state or similar
office.
(ii) Any entity that becomes a foreign reporting company on or
after [effective date of the final rule] shall file a report within 14
calendar days of the date it first becomes a foreign reporting company.
(iii) Any domestic reporting company created before [effective date
of the final rule] and any entity that became a foreign reporting
company before [effective date of the final rule] shall file a report
not later than [one year after effective date of the final rule].
(iv) Any entity that no longer meets the criteria for an exemption
under paragraph (c)(2) of this section shall file a report within 30
calendar days after the date that it no longer meets the criteria for
any such exemption.
(2) Updated report. A reporting company shall file an updated
report in the form and manner specified in paragraph (b)(4) of this
section within 30 calendar days after the date on which there is any
change with respect to any information previously submitted to FinCEN,
including any change with respect to who is a beneficial owner of a
reporting company and any change with respect to information reported
for any particular beneficial owner or applicant.
(i) If a reporting company meets the criteria for any exemption
under paragraph (c)(2) of this section subsequent to the filing of an
initial report, this change will be deemed a change with respect to
information previously submitted to FinCEN, and the entity shall file
an updated report.
(ii) If an individual is a beneficial owner of a reporting company
because the individual owns at least 25 percent of the ownership
interests of the reporting company and such individual dies, a change
with respect to required information will be deemed to occur when the
estate of a deceased beneficial owner is settled, either through the
operation of the intestacy laws of a jurisdiction within the United
States or through a testamentary deposition. The updated report shall
remove the deceased former beneficial owner and, to the extent
appropriate, identify any new beneficial owners.
(3) Corrected report. A reporting company shall file a corrected
report in the form and manner specified in paragraph (b) of this
section within 14 calendar days after the date on which such reporting
company becomes aware or has reason to know that any required
information contained in any report under this section was inaccurate
when filed and remains inaccurate. A corrected report filed under this
paragraph (a)(3) within this 14-day period shall be deemed to satisfy
31 U.S.C. 5336(h)(3)(C)(i)(I)(bb) if filed within 90 calendar days
after the date on which an inaccurate report is filed.
(b) Form and manner of reports. Each report or application
submitted under this section shall be filed with FinCEN in the form and
manner that FinCEN shall prescribe in the forms and instructions for
such report or application, and each person filing such report shall
certify that the report is accurate and complete.
(1) Initial report. An initial report of a reporting company shall
include the following information:
(i) For the reporting company:
(A) The full name of the reporting company;
(B) Any trade name or ``doing business as'' name of the reporting
company;
(C) The business street address of the reporting company;
(D) The State or Tribal jurisdiction of formation of the reporting
company (or for a foreign reporting company, State, or Tribal
jurisdiction where such company first registers); and
(E) The Internal Revenue Service (IRS) Taxpayer Identification
Number (TIN) (including an Employer Identification Number (EIN)) of the
reporting company, or where a reporting company has not yet been issued
a TIN, one of the following:
(1) Dun & Bradstreet Data Universal Numbering System (DUNS) Number
of the reporting company; or
(2) Legal Entity Identifier (LEI).
(ii) For every individual who is a beneficial owner of such
reporting company, and every individual who is a company applicant with
respect to such reporting company:
(A) The full legal name of the individual;
(B) The date of birth of the individual;
(C) The complete current address consisting of:
(1) In the case of a company applicant who files a document
described in paragraph (e) of this section in the course of such
individual's business, the business street address of such business; or
(2) In any other case, the residential street address that the
individual uses for tax residency purposes;
(D) A unique identifying number from one of the following
documents:
(1) A non-expired passport issued to the individual by the United
States Government;
(2) A non-expired identification document issued to the individual
by a State, local government, or Indian tribe for the purpose of
identifying the individual;
(3) A non-expired driver's license issued to the individual by a
State; or
(4) A non-expired passport issued by a foreign government to the
individual, if the individual does not possess any of the documents
described in paragraph (b)(1)(ii)(D)(1), (2), or (3) of this section;
and
(E) An image of the document from which the unique identifying
number in paragraph (b)(1)(ii)(D) of this section was obtained, which
includes both the unique identifying number and photograph in
sufficient quality to be legible or recognizable.
(2) Additional voluntary information. In addition to the
information required under paragraph (b)(1) of this section, a
reporting company may include in its initial or any subsequent report
the TIN of any beneficial owner or company applicant, provided that:
(i) The reporting company notifies each such beneficial owner or
company applicant; and
(ii) Obtains consent from each such beneficial owner or company
applicant on a form prescribed by FinCEN.
(3) Special rules--(i) Reporting company owned by exempt entity. If
an exempt entity under paragraph (c)(2) of this section has or will
have a direct or indirect ownership interest in a reporting company and
an individual is a beneficial owner of the reporting company by virtue
of such ownership interest, the report shall include the name of the
exempt entity rather than the information required under paragraph
(b)(1) of this section with respect to such beneficial owner.
(ii) Minor child. If a reporting company reports the information
required under paragraph (b)(1) of this section with respect to a
parent or legal guardian of a minor child consistent with paragraph
(d)(4)(i) of this section, then the report shall indicate that such
information relates to a parent or legal guardian.
(iii) Foreign pooled investment vehicle. If an entity would be a
reporting company but for paragraph (c)(2)(xviii) of this section, and
is formed under the laws of a foreign country, such entity shall be
deemed a reporting company for purposes of paragraphs (a) and (b) of
this section, except the report shall include the information required
under paragraph (b)(1) of this section solely with respect to an
individual who exercises substantial control over the entity. If more
than one individual exercises substantial control over the
[[Page 69971]]
entity, the entity shall report information with respect to the
individual who has the greatest authority over the strategic management
of the entity.
(iv) Deceased company applicant. If a reporting company was created
or registered before [effective date of the final rule], and any
company applicant died before [one year after effective date of the
final rule], the report shall include that fact, as well as any
information required under paragraph (b)(1) of this section of which
the reporting company has actual knowledge with respect to such company
applicant.
(4) Contents of updated or corrected report. If any required
information in an initial report is inaccurate or there is a change
with respect to any such required information, an updated or corrected
report shall include all information necessary to make the report
accurate and complete at the time it is filed with FinCEN. If a
reporting company meets the criteria for any exemption under paragraph
(c)(2) of this section subsequent to the filing of an initial report,
its updated report shall include a notification that the entity is no
longer a reporting company.
(5) FinCEN identifier--(i) Application for FinCEN identifier. (A)
An individual may obtain a FinCEN identifier by submitting to FinCEN an
application containing the information about themselves required under
paragraph (b)(1) of this section.
(B) A reporting company may obtain a FinCEN identifier by
submitting to FinCEN an application at or after the time that the
entity submits an initial report required under paragraph (b)(1) of
this section.
(C) Each FinCEN identifier shall be specific to each such
individual or reporting company, and each such individual or reporting
company may obtain only one FinCEN identifier.
(ii) Use of FinCEN identifier. (A) If an individual has obtained a
FinCEN identifier and provided such FinCEN identifier to a reporting
company, the reporting company may include such FinCEN identifier in
its report in lieu of the information required under paragraph (b)(1)
of this section with respect to such individual.
(B) If a reporting company has obtained a FinCEN identifier, the
reporting company may include such FinCEN identifier in a report in
lieu of the information required under paragraph (b)(1) of this section
with respect to such reporting company.
(C) If an individual is or may be a beneficial owner of a reporting
company by an interest held by the individual in an entity that,
directly or indirectly, holds an interest in the reporting company, and
if such intermediary entity has obtained a FinCEN identifier and
provided the entity's FinCEN identifier to the reporting company, then
the reporting company may include such entity's FinCEN identifier in
its report in lieu of the information required under paragraph (b)(1)
of this section with respect to such individual.
(D) Any individual or entity that obtains a FinCEN identifier shall
file an updated or corrected report to update or correct any
information previously submitted to FinCEN in an application for a
FinCEN identifier. Such updated or corrected report shall be filed at
the same time and in the same manner as updated or corrected reports
filed under paragraph (a) of this section.
(c) Reporting company--(1) Definitions. For purposes of this
section, the term ``reporting company'' means either a domestic
reporting company or a foreign reporting company.
(i) The term ``domestic reporting company'' means any entity that
is:
(A) A corporation;
(B) Limited liability company; or
(C) Other entity that is created by the filing of a document with a
secretary of state or any similar office under the law of a State or
Indian tribe.
(ii) The term ``foreign reporting company'' means any entity that
is:
(A) A corporation, limited liability company, or other entity;
(B) Formed under the law of a foreign country; and
(C) Registered to do business in any State or tribal jurisdiction
by the filing of a document with a secretary of state or any similar
office under the law of a State or Indian tribe.
(2) Exemptions. Notwithstanding paragraph (c)(1) of this section,
the term ``reporting company'' does not include:
(i) SEC reporting issuer. Any issuer of securities that is:
(A) An issuer of a class of securities registered under section 12
of the Securities Exchange Act of 1934 (15 U.S.C. 78l); or
(B) Required to file supplementary and periodic information under
section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(d)).
(ii) Governmental authority. Any entity that:
(A) Is established under the laws of the United States, an Indian
tribe, a State, or a political subdivision of a State, or under an
interstate compact between two or more States; and
(B) Exercises governmental authority on behalf of the United States
or any such Indian tribe, State, or political subdivision.
(iii) Bank. Any bank, as defined in:
(A) Section 3 of the Federal Deposit Insurance Act (12 U.S.C.
1813);
(B) Section 2(a) of the Investment Company Act of 1940 (15 U.S.C.
80a-2(a)); or
(C) Section 202(a) of the Investment Advisers Act of 1940 (15
U.S.C. 80b-2(a)).
(iv) Credit union. Any Federal credit union or State credit union,
as those terms are defined in section 101 of the Federal Credit Union
Act (12 U.S.C. 1752).
(v) Depository institution holding company. Any bank holding
company as defined in section 2 of the Bank Holding Company Act of 1956
(12 U.S.C. 1841), or any savings and loan holding company as defined in
section 10(a) of the Home Owners' Loan Act (12 U.S.C. 1467a(a)).
(vi) Money transmitting business. Any money transmitting business
registered with FinCEN under 31 U.S.C. 5330 and 31 CFR 1022.380.
(vii) Broker or dealer in securities. Any broker or dealer, as
those terms are defined in section 3 of the Securities Exchange Act of
1934 (15 U.S.C. 78c), that is registered under section 15 of that Act
(15 U.S.C. 78o).
(viii) Securities exchange or clearing agency. Any exchange or
clearing agency, as those terms are defined in section 3 of the
Securities Exchange Act of 1934 (15 U.S.C. 78c), that is registered
under section 6 or 17A of that Act (15 U.S.C. 78f, 78q-1).
(ix) Other Exchange Act registered entity. Any other entity not
described in paragraph (c)(2)(i), (vii), or (viii) of this section that
is registered with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
(x) Investment company or investment adviser. Any entity that is:
(A) An investment company as defined in section 3 of the Investment
Company Act of 1940 (15 U.S.C. 80a-3), or is an investment adviser as
defined in section 202 of the Investment Advisers Act of 1940 (15
U.S.C. 80b-2); and
(B) Registered with the Securities and Exchange Commission under
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) or the
Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.).
(xi) Venture capital fund adviser. Any investment adviser that:
(A) Is described in section 203(l) of the Investment Advisers Act
of 1940 (15 U.S.C. 80b-3(l)); and
(B) Has filed Item 10, Schedule A, and Schedule B of Part 1A of
Form ADV, or
[[Page 69972]]
any successor thereto, with the Securities and Exchange Commission.
(xii) Insurance company. Any insurance company as defined in
section 2 of the Investment Company Act of 1940 (15 U.S.C. 80a-2).
(xiii) State-licensed insurance producer. Any entity that:
(A) Is an insurance producer that is authorized by a State and
subject to supervision by the insurance commissioner or a similar
official or agency of a State; and
(B) Has an operating presence at a physical office within the
United States.
(xiv) Commodity Exchange Act registered entity. Any entity that:
(A) Is a registered entity as defined in section 1a of the
Commodity Exchange Act (7 U.S.C. 1a); or
(B) Is:
(1) A futures commission merchant, introducing broker, swap dealer,
major swap participant, commodity pool operator, or commodity trading
advisor, each as defined in section 1a of the Commodity Exchange Act (7
U.S.C. 1a), or a retail foreign exchange dealer as described in section
2(c)(2)(B) of the Commodity Exchange Act (7 U.S.C. 2(c)(2)(B); and
(2) Registered with the Commodity Futures Trading Commission under
the Commodity Exchange Act.
(xv) Accounting firm. Any public accounting firm registered in
accordance with section 102 of the Sarbanes-Oxley Act of 2002 (15
U.S.C. 7212).
(xvi) Public utility. Any entity that is a regulated public utility
as defined in 26 U.S.C. 7701(a)(33)(A) or (D) that provides
telecommunications services, electrical power, natural gas, or water
and sewer services within the United States.
(xvii) Financial market utility. Any financial market utility
designated by the Financial Stability Oversight Council under section
804 of the Payment, Clearing, and Settlement Supervision Act of 2010
(12 U.S.C. 5463).
(xviii) Pooled investment vehicle. Any pooled investment vehicle
that is operated or advised by a person described in paragraph
(c)(2)(iii), (iv), (vii), (x), or (xi) of this section.
(xix) Tax-exempt entity. Any entity that is:
(A) An organization that is described in section 501(c) of the
Internal Revenue Code of 1986 (Code) (determined without regard to
section 508(a) of the Code) and exempt from tax under section 501(a) of
the Code, except that in the case of any such organization that ceases
to be described in section 501(c) and exempt from tax under section
501(a), such organization shall be considered to be continued to be
described in this paragraph (c)(2)(xix)(A) for the 180-day period
beginning on the date of the loss of such tax-exempt status;
(B) A political organization, as defined in section 527(e)(1) of
the Code, that is exempt from tax under section 527(a) of the Code; or
(C) A trust described in paragraph (1) or (2) of section 4947(a) of
the Code.
(xx) Entity assisting a tax-exempt entity. Any entity that:
(A) Operates exclusively to provide financial assistance to, or
hold governance rights over, any entity described in paragraph
(c)(2)(xix) of this section;
(B) Is a United States person;
(C) Is beneficially owned or controlled exclusively by one or more
United States persons that are United States citizens or lawfully
admitted for permanent residence; and
(D) Derives at least a majority of its funding or revenue from one
or more United States persons that are United States citizens or
lawfully admitted for permanent residence.
(xxi) Large operating company. Any entity that:
(A) Employs more than 20 full time employees in the United States,
with ``full time employee in the United States'' having the meaning
provided in 26 CFR 54.4980H-1(a) and 54.4980H-3, except that the term
``United States'' as used in 26 CFR 54.4980H-1(a) and 54.4980H-3 has
the meaning provided in Sec. 1010.100(hhh);
(B) Has an operating presence at a physical office within the
United States; and
(C) Filed a Federal income tax or information return in the United
States for the previous year demonstrating more than $5,000,000 in
gross receipts or sales, as reported as gross receipts or sales (net of
returns and allowances) on the entity's IRS Form 1120, consolidated IRS
Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS
form, excluding gross receipts or sales from sources outside the United
States, as determined under Federal income tax principles. For an
entity that is part of an affiliated group of corporations within the
meaning of 26 U.S.C. 1504 that filed a consolidated return, the
applicable amount shall be the amount reported on the consolidated
return for such group.
(xxii) Subsidiary of certain exempt entities. Any entity of which
the ownership interests of such entity are controlled or wholly owned,
directly or indirectly, by one or more entities described in paragraph
(c)(2)(i), (ii), (iii), (iv), (v), (vii), (viii), (ix), (x), (xi),
(xii), (xiii), (xiv), (xv), (xvi), (xvii), (xix), or (xxi) of this
section.
(xxiii) Inactive entity. Any entity that:
(A) Was in existence on or before January 1, 2020;
(B) Is not engaged in active business;
(C) Is not owned by a foreign person, whether directly or
indirectly, wholly or partially;
(D) Has not experienced any change in ownership in the preceding
12-month period;
(E) Has not sent or received any funds in an amount greater than
$1,000, either directly or through any financial account in which the
entity or any affiliate of the entity had an interest, in the preceding
12-month period; and
(F) Does not otherwise hold any kind or type of assets, whether in
the United States or abroad, including but not limited to any ownership
interest in any corporation, limited liability company, or other
similar entity.
(d) Beneficial owner. For purposes of this section, the term
``beneficial owner,'' with respect to a reporting company, means any
individual who, directly or indirectly, either exercises substantial
control over such reporting company or owns or controls at least 25
percent of the ownership interests of such reporting company.
(1) Substantial control. Substantial control over a reporting
company includes:
(i) Service as a senior officer of the reporting company;
(ii) Authority over the appointment or removal of any senior
officer or a majority or dominant minority of the board of directors
(or similar body);
(iii) Direction, determination, or decision of, or substantial
influence over, important matters affecting the reporting company,
including but not limited to:
(A) The nature, scope, and attributes of the business of the
reporting company, including the sale, lease, mortgage, or other
transfer of any principal assets of the reporting company;
(B) The reorganization, dissolution, or merger of the reporting
company;
(C) Major expenditures or investments, issuances of any equity,
incurrence of any significant debt, or approval of the operating budget
of the reporting company;
(D) The selection or termination of business lines or ventures, or
geographic focus, of the reporting company;
(E) Compensation schemes and incentive programs for senior
officers;
(F) The entry into or termination, or the fulfillment or non-
fulfillment of significant contracts; and
[[Page 69973]]
(G) Amendments of any substantial governance documents of the
reporting company, including the articles of incorporation or similar
formation documents, bylaws, and significant policies or procedures;
and
(iv) Any other form of substantial control over the reporting
company.
(2) Direct or indirect exercise of substantial control. An
individual may directly or indirectly exercise substantial control over
a reporting company through a variety of means, including through board
representation; through ownership or control of a majority or dominant
minority of the voting shares of the reporting company; through rights
associated with any financing arrangement or interest in a company;
through control over one or more intermediary entities that separately
or collectively exercise substantial control over a reporting company;
through arrangements or financial or business relationships, whether
formal or informal, with other individuals or entities acting as
nominees, or through any other contract, arrangement, understanding,
relationship, or otherwise. An individual who has the right or ability
to exercise substantial control as specified in paragraph (d)(1) of
this section and this paragraph (d)(2) shall be deemed to exercise such
substantial control.
(3) Ownership interests. (i) The term ``ownership interest'' means:
(A) Any equity, stock, or similar instrument, certificate of
interest or participation in any profit sharing agreement,
preorganization certificate or subscription, transferable share, voting
trust certificate or certificate of deposit for an equity security,
interest in a joint venture, or certificate of interest in a business
trust, without regard to whether any such instrument is transferable,
is classified as stock or anything similar, or represents voting or
non-voting shares;
(B) Any capital or profit interest in a limited liability company
or partnership, including limited and general partnership interests;
(C) Any proprietorship interest;
(D) Any instrument convertible, with or without consideration, into
any instrument described in paragraph (d)(3)(i)(A), (B), or (C) of this
section, any future on any such instrument, or any warrant or right to
purchase, sell, or subscribe to a share or interest described in
paragraph (d)(3)(i)(A), (B), or (C) of this section, regardless of
whether characterized as debt; or
(E) Any put, call, straddle, or other option or privilege of buying
or selling any of the items described in paragraph (d)(3)(i)(A), (B),
(C), or (D) of this section without being bound to do so.
(ii) An individual may directly or indirectly own or control an
ownership interest of a reporting company through a variety of means,
including but not limited to:
(A) Joint ownership with one or more other persons of an undivided
interest in such ownership interest;
(B) Through control of such ownership interest owned by another
individual;
(C) With regard to a trust or similar arrangement that holds such
ownership interest:
(1) As a trustee of the trust or other individual (if any) with the
authority to dispose of trust assets;
(2) As a beneficiary who:
(i) Is the sole permissible recipient of income and principal from
the trust; or
(ii) Has the right to demand a distribution of or withdraw
substantially all of the assets from the trust; or
(3) As a grantor or settlor who has the right to revoke the trust
or otherwise withdraw the assets of the trust:
(i) Through ownership or control of one or more intermediary
entities, or ownership or control of the ownership interests of any
such entities, that separately or collectively own or control ownership
interests of the reporting company; or
(ii) Through any other contract, arrangement, understanding, or
relationship.
(iii) In determining whether an individual owns or controls 25
percent of the ownership interests of a reporting company, the
ownership interests of the reporting company shall include all
ownership interests of any class or type, and the percentage of such
ownership interests that an individual owns or controls shall be
determined by aggregating all of the individual's ownership interests
in comparison to the undiluted ownership interests of the company.
(4) Exceptions. Notwithstanding any other provision of paragraph
(d) of this section, the term ``beneficial owner'' does not include:
(i) A minor child, as defined under the law of the State or Indian
tribe in which a domestic reporting company is created or a foreign
reporting company is first registered, provided the reporting company
reports the required information of a parent or legal guardian of the
minor child as specified in paragraph (b)(3)(ii) of this section;
(ii) An individual acting as a nominee, intermediary, custodian, or
agent on behalf of another individual;
(iii) An employee of a reporting company, acting solely as an
employee and not as a senior officer, whose substantial control over or
economic benefits from such entity are derived solely from the
employment status of the employee;
(iv) An individual whose only interest in a reporting company is a
future interest through a right of inheritance;
(v) A creditor of a reporting company. For purposes of this
paragraph (d)(4)(v), a creditor is an individual who would be a
beneficial owner under the other provisions of paragraph (d) of this
section solely through rights or interests in the company for the
payment of a predetermined sum of money, such as a debt and the payment
of interest on such debt. For the avoidance of doubt, any capital
interest in the reporting company, or any right or interest in the
value of the reporting company or its profits, are not such rights or
interests for payment of a predetermined sum, regardless of whether
they take the form of a debt instrument. If the individual has a right
or ability to convert the right to payment of a predetermined sum to
any form of ownership interest in the company, that individual is not a
creditor of a reporting company for purposes of this section.
(e) Company applicant. For purposes of this section, the term
``company applicant'' means:
(1) For a domestic reporting company, any individual who files the
document that creates the domestic reporting company as described in
paragraph (c)(1)(i) of this section, including any individual who
directs or controls the filing of such document by another person; and
(2) For a foreign reporting company, any individual who files the
document that first registers the foreign reporting company as
described in paragraph (c)(1)(ii) of this section, including any
individual who directs or controls the filing of such document by
another person.
(f) Definitions. For purposes of this section, the following terms
have the following meanings.
(1) Employee. The term ``employee'' has the meaning given the term
in 26 CFR 54.4980H-1(a)(15).
(2) FinCEN identifier. The term ``FinCEN identifier'' means the
unique identifying number assigned by FinCEN to an individual or
reporting company under this section.
(3) Foreign person. The term ``foreign person'' means a person who
is not a United States person.
(4) Indian tribe. The term ``Indian tribe'' has the meaning given
the term ``Indian tribe'' in section 102 of the Federally Recognized
Indian Tribe List Act of 1994 (25 U.S.C. 5130).
[[Page 69974]]
(5) Lawfully admitted for permanent residence. The term ``lawfully
admitted for permanent residence'' has the meaning given the term in
section 101(a) of the Immigration and Nationality Act (8 U.S.C.
1101(a)).
(6) Operating presence at a physical office within the United
States. The term ``has an operating presence at a physical office
within the United States'' means that an entity regularly conducts its
business at a physical location in the United States that the entity
owns or leases, that is not the place of residence of any individual,
and that is physically distinct from the place of business of any other
unaffiliated entity.
(7) Pooled investment vehicle. The term ``pooled investment
vehicle'' means:
(i) Any investment company, as defined in section 3(a) of the
Investment Company Act of 1940 (15 U.S.C. 80a-3(a)); or
(ii) Any company that:
(A) Would be an investment company under that section but for the
exclusion provided from that definition by paragraph (1) or (7) of
section 3(c) of that Act (15 U.S.C. 80a-3(c)); and
(B) Is identified by its legal name by the applicable investment
adviser in its Form ADV (or successor form) filed with the Securities
and Exchange Commission.
(8) Senior officer. The term ``senior officer'' means any
individual holding the position or exercising the authority of a
president, secretary, treasurer, chief financial officer, general
counsel, chief executive officer, chief operating officer, or any other
officer, regardless of official title, who performs a similar function.
(9) State. The term ``State'' means any state of the United States,
the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the
United States Virgin Islands, and any other commonwealth, territory, or
possession of the United States.
(10) United States person. The term ``United States person'' has
the meaning given the term in section 7701(a)(30) of the Internal
Revenue Code of 1986.
(g) Reporting violations. (1) It shall be unlawful for any person
to willfully provide, or attempt to provide, false or fraudulent
beneficial ownership information, including a false or fraudulent
identifying photograph or document, to FinCEN in accordance with this
section, or to willfully fail to report complete or updated beneficial
ownership information to FinCEN in accordance with this section.
(2) For purposes of this paragraph (g), the term ``person''
includes any individual, reporting company, or other entity.
(3) For purposes of this paragraph (g), the term ``beneficial
ownership information'' includes any information provided to FinCEN
under this section.
(4) A person provides or attempts to provide beneficial ownership
information to FinCEN if such person does so directly or indirectly,
including by providing such information to another person for purposes
of a report or application under this section.
(5) A person fails to report complete or updated beneficial
ownership information to FinCEN if such person directs or controls
another person with respect to any such failure to report, or is in
substantial control of a reporting company when it fails to report
complete or updated beneficial ownership information to FinCEN.
Himamauli Das,
Acting Director, Financial Crimes Enforcement Network.
[FR Doc. 2021-26548 Filed 12-7-21; 11:15 am]
BILLING CODE 4810-02-P