On April 5, 2021, the Financial Crimes Enforcement Network (“FinCEN”) released its advance notice of proposed rulemaking (“ANPRM”) to solicit public comments on questions pertinent to its implementation of the Corporate Transparency Act’s (“CTA”) beneficial owner reporting requirements. As discussed in a previous Energy Law Blog post, the CTA was adopted as part of the 2021 National Defense Authorization Act and requires that certain business entities disclose to FinCEN the identities of their beneficial owners and applicants. The information will then be stored in a secure, private database that may be accessed by, among others, law enforcement agencies for crime prevention and certain financial institutions for customer due diligence purposes. FinCEN has until January 1, 2022, to implement the regulations regarding reporting requirements, although FinCEN is also using this ANPRM to solicit comments on the implementation of the related database maintenance use and disclosure provisions. Final rules on customer due diligence requirements for financial institutions will be the subject of separate rulemaking and comment periods.

The ANPRM seeks comment on five groups of questions:

• Definitions (questions #1-9)
• Reporting of Beneficial Ownership Information (questions #10-25)
• FinCEN Identifier (questions #26-31)
• Security and Use of Beneficial Ownership and Application Information (questions #32-38)
• Cost, Process, Outreach, and Partnership (questions #39-48)

Some of the key issues raised by the ANPRM are addressed below.

Who Must Report and What Must be Reported

At its simplest, the CTA requires “reporting companies” to disclose their “beneficial owners” and their “applicants” to FinCEN. The ANPRM seeks to better develop these definitions for the final regulations. Reporting companies are defined by the CTA to include “corporations, LLCs, and ‘other similar entities’” which are created by the filing of a document with the secretary of state or similar office of a state or American Indian tribe. The CTA contains many enumerated exceptions. The ANPRM seeks comments on how “other similar entities” should be interpreted and which qualifications should factor into the definition. Entities other than LLCs and corporations which are not excepted by the CTA, such as limited partnerships and trusts, should consider providing comments to inform FinCEN on any disclosure requirements currently placed on them by their state.

Beneficial owner is defined in the CTA as “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise . . . exercises substantial control over the entity [or] owns or controls not less than 25 percent of the ownership interests of the entity.” Early reviewers of the CTA noted that this requirement could be complicated by the fact that some entities have complex capital structures which do not create clean ownership percentages. To address this, the ANPRM seeks comment on the definition of beneficial owner and posits whether the definition should be similar to the customer due diligence rule’s definition or the standards used under 17 CFR 240.13d-3, adopted under the Securities Exchange Act of 1934, as well as whether the terms “own” and “control” should be defined with respect to the ownership interests of an entity. As for the “substantial control” requirement, the ANPRM seeks comment on whether the regulations should define substantial control to mean that no reporting company may have more than one beneficial owner who is considered to be in substantial control of the entity, or whether entities may have multiple beneficial owners who exercise substantial control.

The ANPRM also seeks feedback on the clarity of the CTA’s definition of “applicant” which is defined in the CTA as an individual who files “an application to form” or “registers or files an application to register” the reporting company. This requirement may have major ramifications on attorneys or other fiduciaries who act as the organizer of a client’s entity or who file applications with the state. It is unclear whether the fiduciary will need to be disclosed as part of the CTA and whether they will face liability if not disclosed. Attorneys and others who regularly file organizational documents or act as agents for service of process on behalf of these entities are encouraged to consider providing feedback on this question. Attorneys acting in such roles should consider the possibility of whether they will be responsible for making the filings on behalf of the reporting company, and whether they will have the information necessary to do so or may do so ethically without the express consent of their clients. Such attorneys may also want to address any possible adverse consequences resulting from the required disclosures that FinCEN may require about the “applicants” in addition to information regarding the ownership of the reporting company.

Reporting of Information

The CTA states that each reporting company will be required to submit four pieces of information on each beneficial owner or applicant: 1) full legal name; 2) date of birth; 3) current residential or business street address; and 4) a unique identifying number. The ANPRM seeks comments on the type of information that should be reported to make the database the most useful to authorized users. Specifically, the ANPRM seeks feedback on what information should be required about the reporting company’s corporate affiliates, parents, and subsidiaries, as well as information on the nature of the reporting company’s relationship to its beneficial owners (including any corporate intermediaries or any other contract, arrangement, understanding, or relationship). Other questions include whether the reporting companies should be required to provide verification as to the accuracy of the reported information and whether the reporting companies should be required to affirmatively confirm the continuing accuracy of previously submitted disclosures. The final regulations which result from these questions will have major impacts on the burden placed on reporting companies and the financial and human capital which will be required in order to comply with the reporting requirements.

Security and Use of Beneficial Ownership and Application Information

The ANPRM seeks feedback on security and privacy concerns regarding the use of the database to ensure that the private information contained is secure, yet readily accessible and highly useful to the user. The CTA allows a court of competent jurisdiction the ability to authorize enforcement agencies access to the database in civil and criminal proceedings. One of the principal purposes of the CTA is to assist law enforcement and financial institutions in protecting against terrorism and money laundering. Yet many believe that the CTA constitutes excessive governmental intrusion in a way that interferes with traditional business practices and are concerned about the security of the proposed FinCEN database when much of the information as to ownership of the companies which are to be subject to the CTA reporting requirements is already in the possession of and is determinable by the government through IRS tax filings. The ANPRM seeks comment on how FinCEN should authenticate or confirm authorizations for access to the database and what criteria should be used to determine that a court has competent jurisdiction. The ANPRM also poses the question of whether a requestor who has previously received beneficial ownership information concerning a particular entity should automatically receive notification from FinCEN that a subsequent update to the beneficial ownership information was submitted by that entity. Law enforcement agencies and financial institutions who perform customer due diligence are encouraged to provide comments in order to ensure that the database best serves their needs.

Costs to Businesses

The ANPRM also seeks information on the specific costs – in terms of time, money, and human resources – that would be imposed on small businesses based on the CTA’s requirements. Small businesses who worry about the capital required to comply with the CTA are encouraged to comment to share concerns or to share less costly alternatives to the requirements.

How to Submit Comments

Interested parties must submit their written comments on the ANPRM on or before May 5, 2021. Comments may be submitted using the following two methods:

Federal E-rulemaking Portal: http://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.