08 April 2021
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The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is currently accepting public comments on a provision in the recently enacted Corporate Transparency Act (CTA) which requires some privately-held business entities to disclose ownership information directly to a law enforcement agency. Interested parties should consider commenting before the May 5th deadline, and companies who may be impacted should take this opportunity to review their anti-money laundering compliance programs. Vince Farhat and Samuel Buchman of JMBM’s White Collar Defense and Investigations Group have written an article detailing this legislation below.
FinCEN Seeks Comments on Ownership Disclosure Requirements in New Federal Anti-Money Laundering Law
by
Vince Farhat, Chair and Samuel Buchman, Associate
JMBM’s White Collar Defense & Investigations Group
On April 1, 2021, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) published an advance notice of proposed rulemaking giving companies and individuals the chance to comment on the new beneficial ownership disclosure requirements contained in the recently-enacted Corporate Transparency Act (“CTA”), which is part of the Anti-Money Laundering Act of 2020 (“AMLA”) included in the National Defense Authorization Act (“NDAA”). Under the CTA, some privately-held business entities will be required, for the first time, to disclose ownership information directly to a law enforcement agency. FinCEN is accepting public comments on the CTA disclosure requirements through May 5, 2021, and companies and other interested parties should consider commenting by this deadline to help shape the anticipated rulemaking process at this early stage. This article focuses on two specific legislative changes which could lead to an uptick in federal anti-money laundering enforcement: (1) the CTA beneficial ownership disclosure requirements; and (2) enhanced whistleblower incentives and protections under the AMLA. It is critical for companies to stay abreast of regulatory developments in order to maintain proper compliance with these changing enforcement rules.
Background
Congress enacted the NDAA on January 1, 2021. This year’s iteration of the NDAA gained notoriety when former President Trump vetoed the bill, taking issue with the bill’s failure to repeal Section 230 of the Communications Decency Act. However, following a veto override, the NDAA became law, marking the 59th consecutive year in which some form of the NDAA has been passed. This Section 230 scuffle diverted attention away from the AMLA, a separately named Act within the NDAA. The AMLA represents the most significant reform to anti-money laundering laws in two decades since the 2001 USA PATRIOT Act.
Among the AMLA’s sweeping reforms are efforts to strengthen FinCEN, extend the reach of the Bank Secrecy Act (“BSA”), and expand the Department of Justice and Treasury Department’s ability to subpoena foreign financial institutions.
In its advance notice of proposed rulemaking (“ANPR”), FinCEN requested comments on the new CTA beneficial ownership disclosure requirements. The comment period will last until May 5. The ANPR solicits comments on a variety of topics, including: definitions of the various ambiguous terms in the law; the disclosure procedure; determining the scope and content of the disclosures; the means by which entities will seek an exemption from the reporting requirements; and how the disclosures will be shared with state and local law enforcement and financial institutions.
CTA Beneficial Ownership Registry
For years, federal regulators have grappled with the issue of so-called “shell companies” utilized by bad actors, such as money launderers and terrorists, to funnel money into illicit activities. The Treasury Department estimates that $300 billion is laundered through the United States each year.
Financial institutions have been tasked with the responsibility of discerning the true ownership of business entities under “know your customer” guidelines, instituted as part of the 2001 PATRIOT Act. The CTA attempts to shift this burden from financial institutions to companies themselves. For the first time, the CTA requires certain companies to disclose ownership information directly to a government agency.
Widely considered to be a crackdown on shell companies, Section 6403 of the CTA, a separately named Act within the AMLA, introduces new disclosure requirements, under which “reporting companies” must disclose their “beneficial owners” to FinCEN.
Paired with this new disclosure requirement is the establishment of a beneficial ownership registry, also maintained by FinCEN. This new registry furnishes law enforcement with added capabilities to lift the shroud of anonymity underlying the true ownership of certain business entities. The new registry also raises privacy concerns, especially for the many legitimate businesses which will nonetheless be tasked with complying with the new disclosure requirements.
A “beneficial owner” is one who either “exercises substantial control over the entity” or who “owns or controls not less than 25 percent of the ownership interests of the entity.”
The key issue for businesses is determining whether they are a “reporting company” required to disclose their beneficial owner(s). A “reporting company” is defined broadly to include a “corporation, limited liability company, or other similar entity” registered under state law, or, formed under the laws of a foreign country and registered to do business in the United States.
However, the CTA includes numerous exemptions, the most significant of which include:
- Publicly traded companies;
- Banks, bank holding companies, and credit unions;
- Securities brokers or dealers;
- Investment companies and advisors;
- Insurance companies;
- Public accounting firms; and
- 501(c) and political organizations
The rationale for these exemptions is that these types of companies typically already disclose beneficial ownership information pursuant to other state and federal laws.
There is another, more general exemption geared towards rooting out suspected shell companies. An entity is exempt from the reporting requirement if it:
- Employs more than 20 full-time employees;
- Files taxes demonstrating more than $5,000,000 in gross receipts or sales; and
- Has an operating presence at a physical office in the United States.
If an entity does not fall within a statutory exemption, then it must disclose the full legal name, date of birth, current residential or business address, and unique identifying number (driver’s license number, passport number, etc.) for each of its beneficial owners.
FinCEN is required to promulgate implementing regulations on the beneficial ownership provisions no later than January 1, 2022. As noted above, FinCEN issued the ANPR on April 1 seeking public comments on the forthcoming regulations. Entities formed prior to the regulations will have two years to comply with the disclosure requirements, but those entities formed after the regulations are promulgated will have to disclose immediately.
Regulations should hopefully clarify a number of significant ambiguities in the law, and consequently, the regulations will dictate the content and scope of the disclosures.
Notably, the regulations should pinpoint the definition of “beneficial owner” which may require disclosures that probe the often complicated ownership structures of privately-held businesses.
Particularly, FinCEN is seeking comments on what it means to exercise “substantial control” over an entity, and whether the regulations should include a definition of the terms “own” and “control.” The regulations should also determine what entities would qualify under the “other similar entities” catchall, and FinCEN is soliciting comments as to how the regulations should define this phrase. Further, the regulations should clarify the full extent of the statutory exemptions, as well as how entities will ultimately seek to qualify under these exemptions.
Regardless of the regulations, another test of the importance of these beneficial ownership provisions will be their enforcement by the new Biden Administration. These provisions, indeed the entire law, arrived at the same time as the new Administration. It will take some time for the DOJ’s new priorities to take root. Any assessment of these new provisions’ importance will necessarily follow how the Administration chooses to direct the DOJ more broadly.
Enhanced Whistleblower Incentives and Protections
The AMLA enhances incentives, as well as protections, for whistleblowers who provide information leading to a successful money laundering enforcement action under the Bank Secrecy Act (“BSA”).
Whereas the Securities and Exchange Commission’s (“SEC”) whistleblower program has led to more than 40,200 tips (6,900 in FY 2020 alone), over $2.7 billion in monetary sanctions, and approximately $562 million in whistleblower awards, the comparable BSA whistleblower program – which existed 26 years prior to its SEC equivalent – has hardly been utilized.
One explanation for the BSA program’s lack of traction was the relatively paltry awards available to whistleblowers. To start, awards, which have been and will continue to be determined by the Secretary of the Treasury, were entirely discretionary, meaning a whistleblower could have walked away with no award at all. Furthermore, the awards were strictly capped at the lesser of $150,000 or 25 percent of the net amount of the fine, penalty, or forfeiture collected. Considering that whistleblowers sometimes risk their careers to disclose potentially explosive information, a maximum award of $150,000 (and potentially nothing given the discretionary element of the award) had offered little security, especially given the potential firestorm following disclosure.
Modeled after the SEC’s program, the BSA’s reinvigorated whistleblower program reflects a more robust approach to whistleblower incentives and protections.
Now, whistleblowers will be eligible for awards when they volunteer “original information” to the DOJ, the Treasury Department or the whistleblower’s employer, and when that information results in a successful enforcement action and monetary sanctions exceeding $1 million.
“Original information” is defined as information that is derived from one’s own knowledge or independent analysis, not known to the DOJ or Treasury Department, and which does not derive from an allegation made in a judicial or administrative hearing, a government report, hearing, audit or investigation, or from the news media (unless the whistleblower is the source of the information).
The BSA whistleblower incentive structure also has been entirely overhauled under the AMLA. The $150,000 cap on awards has been eliminated. Instead, awards can reach up to 30 percent of the total monetary sanction collected – a potentially multi-million dollar award (for an example of just how large these sanctions can be, consider the recent $390 million civil penalty assessed against Capital One).
Moreover, the Secretary of the Treasury now has no discretion as to whether to award the whistleblower (“the Secretary . . . shall pay an award”), although the Secretary does retain discretion to determine the amount of the award. Only in limited circumstances may whistleblowers be denied an award, such as when they are convicted of a criminal offense related to the violation they disclose, or when they are an employee at DOJ, the Treasury Department, or other law enforcement agency.
The AMLA also bolsters whistleblower protections. First, the program permits whistleblowers to both report a BSA violation and qualify for an award anonymously. The AMLA directs the Treasury Department and DOJ to maintain whistleblower confidentiality, unless necessary to disclose to a defendant or respondent and in accordance with the Privacy Act (5 U.S.C. § 552a).
Additionally, the AMLA contains staunch anti-retaliation measures, strictly forbidding employers from discharging, demoting, suspending, threatening, blacklisting, harassing, or in any other manner discriminating against a whistleblower in the terms and conditions of employment or post-employment.
The AMLA also creates a private right of action, whereby whistleblowers can seek relief by filing a complaint with the Secretary of Labor, or if the Secretary of Labor fails to reach a final decision within 180 days, then the whistleblower can bring an action in federal district court.
The reinvigorated BSA whistleblower program is not without its critics. Some commentators have argued that the lack of a minimum award could continue to dissuade potential whistleblowers from coming forward. For instance, the SEC equivalent sets a minimum of 10 percent of the monetary sanctions, whereas the BSA program only establishes a maximum of 30 percent. In addition, the monetary sanctions used to determine the award include penalties, disgorgement, and interest, but notably exclude forfeiture, restitution, or victim compensation payments. Some contend that this could diminish potential awards and further dissuade whistleblowers, especially depending on the type of violation they are thinking of reporting.
Regardless, it appears that the AMLA’s updates to the BSA whistleblower program, bringing it closer in line with the highly successful SEC program, should spur more anti-money laundering enforcement.
Next Steps: Comments and Compliance
The reinvigorated BSA whistleblower program, together with the beneficial ownership reporting requirements, will alter the anti-money laundering enforcement landscape moving forward. How these new provisions fit into the broader anti-money laundering enforcement regime is dependent in part on their respective treatment under the new Administration. Given these sweeping new rules, it is important for companies to stay abreast of regulatory developments in order to maintain proper compliance. Interested parties should consider providing comments to FinCEN by the May 5 deadline to address any concerns regarding ambiguities in the new beneficial ownership registry. In addition, companies potentially impacted by the new rules should take this opportunity to review their AML compliance programs and consider whether to update their programs to reflect changes in the law.
JMBM’s White Collar Defense & Investigations Group is keenly focused on our clients’ business objectives and is committed to minimizing the disruption, anxiety, and public scrutiny that can arise from criminal and civil investigations and litigation. We are leaders in the representation of companies, boards of directors, management, and individuals in connection with a broad range of government investigations, enforcement actions, remediation and compliance, administrative proceedings, internal investigations, and white collar criminal investigations and prosecutions.
Vince Farhat is Chair of JMBM’s White Collar Defense and Investigations practice. Vince has extensive jury trial experience and focuses his practice on representing companies and individuals in criminal and civil investigations and prosecutions by government enforcement agencies, as well as complex federal litigation.
He also advises companies in connection with complex and sensitive internal investigations. Prior to joining JMBM, Vince served as an assistant United States attorney in the Major Frauds Section of the U.S. Attorney’s Office for the Central District of California. Contact Vince Farhat at 310.785.5382 or VFarhat@jmbm.com.
This is Jim Butler, author of www.HotelLawBlog.com and founding partner of JMBM and JMBM’s Global Hospitality Group®. We provide business and legal advice to hotel owners, developers, independent operators and investors. This advice covers critical hotel issues such as hotel purchase, sale, development, financing, franchise, management, ADA, and IP matters. We also have compelling experience in hotel litigation, union avoidance and union negotiations, and cybersecurity & data privacy.
JMBM’s Global Hospitality Group® has helped clients around the world with more than 4,300 hospitality properties worth more than $104.7 billion. Contact me at +1-310-201-3526 or jbutler@jmbm.com to discuss how we can help.