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DOJ appeals District Court's ruling on the Corporate Transparency Act’s constitutionality
On April 15, the DOJ submitted a brief to the U.S. Court of Appeals for the Eleventh Circuit in support of an appeal of a summary judgment from the Northern District of Alabama that found the Corporate Transparency Act (CTA) unconstitutional, specifically its reporting provision (covered by InfoBytes here). On appeal, the government emphasized that the District Court misunderstood the scope and purpose of the CTA and made two key errors in invalidating it. The first error, according to the DOJ, is that the court mistakenly viewed the CTA as merely regulating the act of filing the incorporation papers, which generally falls under State domain, as opposed to regulating commerce, which Congress has the power to regulate. As to the second error, the DOJ noted that the District Court mischaracterized the CTA as a “single-subject statute” that is unrelated to the federal government’s broader efforts to combat financial crimes, such as money laundering and terrorism financing. The DOJ pointed out that, ownership records often do not exist, which makes the CTA necessary in order to help investigators trace illicit funds by creating easily accessible ownership records. The DOJ also stressed that the determination by Congress that the CTA’s reporting requirements are necessary to detect and prosecute financial crimes should be subject only to “rational basis” review, a standard that the CTA satisfies.
Alabama judge finds the Corporate Transparency Act unconstitutional, DOJ quickly appeals
On March 1, the federal district court in the Northern District of Alabama entered a final declaratory judgment concluding that the Corporate Transparency Act (CTA) is unconstitutional. The plaintiffs, including a non-profit small business association consisting of more than 60,000 small business members as well as an individual small business owner, sued the Treasury Department, Secretary Janet Yellen, and FinCEN Acting Director Himamauli Das in their official capacities, alleging that the CTA’s mandatory disclosure requirements violate the First, Fourth, Fifth, Ninth, and Tenth Amendments and exceed Congress’s authority under Article I of the Constitution.
Corporations, LLCs, or other similar entities that are either “(i) created by the filing of a document with a secretary of state… or (ii) formed under the law of a foreign country and registered to do business in the United States” are required to provide certain beneficial ownership information, as well as disclose any related changes to FinCEN under the CTA, excluding exempt entities. The CTA was passed in 2021 as part of the National Defense Authorization Act and required most entities incorporated under state law to disclose beneficial ownership information to FinCEN to prevent financial crimes often committed through shell corporations. In September 2022, FinCEN issued a final rule implementing the CTA, which went into effect on January 1 of this year, and required currently existing entities and five million new entities formed each year from 2025 to 2034 to disclose the identity and information of any “beneficial owner” to FinCEN (see Orrick Insight here).
According to the court, the CTA exceeds the Constitution’s limits on Congress’s power and does not have a strong enough connection to any of Congress’s listed powers to be considered a necessary or appropriate way to reach Congress’s policy objectives. The court rejected the government’s claims that the CTA is covered by various constitutional provisions, including the Commerce Clause, Taxing Clause, Necessary and Proper Clause, and Congress’s powers related to foreign affairs and national security.
The judgment permanently enjoined the Department of the Treasury and FinCEN from enforcing the CTA against the plaintiffs and as a result they are not required to report beneficial ownership information to FinCEN at this time. The order does not ban enforcement of the CTA and its beneficial ownership disclosure requirements to FinCEN generally.
On March 11, the U.S. Department of Justice filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit after U.S. District Judge Liles C. Burke’s March 1 ruling.
The Corporate Transparency Act: FinCEN Finalizes Beneficial Ownership Information Access Rule as Reporting Rule Takes Effect
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has issued a final rule (the Access Rule) regarding access to and use of beneficial ownership information (BOI) maintained by FinCEN.
The Access Rule details the circumstances under which FinCEN can disclose BOI to authorized recipients. It also spells out how FinCEN will protect that information and outlines data protection protocols and oversight mechanisms for those who receive beneficial ownership information. The rule takes effect February 20, 2024. It is the second of three FinCEN rulemakings to implement the Corporate Transparency Act (CTA).
The first rule, the Beneficial Ownership Reporting Rule, took effect January 1, 2024. As covered previously, it requires certain domestic and foreign companies created, or registered to conduct business, in the United States to report information to FinCEN regarding their beneficial owners – individuals who directly or indirectly own or control 25 percent or more of the ownership interests of a reporting company or who exercise substantial control over such an entity.
FinCEN releases beneficial ownership reporting guidance
On March 24, FinCEN released its first set of guidance materials to aid the public and small businesses in reporting beneficial ownership information (i.e., individuals who directly or indirectly own or control a company). As previously covered by InfoBytes, last September, FinCEN published a final rule establishing beneficial ownership information requirements, as required by the Corporate Transparency Act. The final rule, which becomes effective January 1, 2024, will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States, to report information about their beneficial owners to FinCEN. Reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. The guidance materials include FAQs, information on key filing dates, and informational videos. Additional guidance will be published in the coming months, including a Small Entity Compliance Guide, FinCEN said in the announcement.
CSBS says state regulators need access to FinCEN’s beneficial ownership database
On February 14, the Conference of State Bank Supervisors commented that FinCEN should be more explicit in its inclusion of state regulators as agencies that can request access to FinCEN’s forthcoming secure, non-public beneficial ownership information database. (See comment letter here.) As previously covered by InfoBytes, last December FinCEN issued a notice of proposed rulemaking (NPRM) to implement provisions of the Corporate Transparency Act (CTA) that govern the access to and protection of beneficial ownership information (BOI). The NPRM proposed regulations for establishing who may request beneficial ownership information, how the information must be secured, and non-compliance penalties, and also addressed aspects of the database that are currently in development. Agreeing that the new database would help enhance anti-money laundering and countering the financing of terrorism standards and help prevent the use of privacy to hide illicit activity from law enforcement and government authorities, CSBS asked that the final rule “explicitly define state regulators so that there is no confusion about their ability to access BOI when examining state-chartered banks and non-depository trust companies for compliance with customer due diligence requirements under the Bank Secrecy Act (BSA).” According to CSBS, state regulators conducted over 1,200 BSA exams in 2021. CSBS further pointed out that being able request BOI on an as needed basis would aid investigative and enforcement responsibilities for both state-chartered banks and state-licensed nonbank financial services providers.
FinCEN issues proposed beneficial ownership information access and safeguards rulemaking
On December 15, FinCEN issued a notice of proposed rulemaking (NPRM) to implement provisions of the Corporate Transparency Act (CTA) that govern the access to and protection of beneficial ownership information. (See also FinCEN fact sheet here.) The NPRM follows a final rule issued by FinCEN at the end of September (effective January 1, 2024), which establishes a beneficial ownership information reporting requirement (Reporting Rule) and requires most corporations, limited liability companies, and other entities created in or registered to do business in the U.S. to report information about their beneficial owners to FinCEN. (Covered by InfoBytes here.)
In accordance with CTA requirements related to beneficial ownership information access and safeguard provisions, FinCEN’s NPRM proposes regulations for establishing who may request beneficial ownership information, how the information must be secured, and non-compliance penalties. Specifically, the proposal would limit the disclosure of beneficial information to “[f]ederal agencies engaged in national security, intelligence, or law enforcement activities; state, local, and Tribal law enforcement agencies with court authorization; financial institutions with customer due diligence requirements and regulators supervising them for compliance with such requirements; foreign law enforcement agencies, prosecutors, judges, and other agencies that meet specific criteria; and Treasury officers and employees under certain circumstances.” The proposal would also require authorized recipients to maintain security and confidentiality protocols that align with the scope of access and use provisions.
Among other things, the NPRM addresses aspects of the secure, non-public beneficial ownership database that is currently in development, and specifies when and how reporting companies may report FinCEN identifiers tied to entities. Under the proposal, foreign requesters would be required to make their requests for beneficial ownership information through intermediary federal agencies, and financial institutions would only be allowed to request this information from FinCEN for purposes of complying with customer due diligence (CDD) requirements and only after receiving consent from the reporting company to which the information pertains.
Comments on the NPRM are due by February 14, 2023. FinCEN explained that this is the second of three rulemakings planned to implement the CTA. The third rulemaking, which will revise FinCEN’s CDD rule, will occur no later than one year after the effective date of the Reporting Rule.
FinCEN’s Das discusses agency’s priorities
On December 6, FinCEN acting Director Himamauli Das spoke before the ABA/ABA Financial Crimes Enforcement Conference about how FinCEN is addressing new threats, new innovations, and new partnerships, in addition to its efforts to implement the AML Act. Das first began by speaking about beneficial ownership requirements of the Corporate Transparency Act (CTA). He noted that a final rule was issued in September, which implemented the beneficial ownership information reporting requirements (covered by InfoBytes here). He also stated that a second rulemaking, concerning access protocols to the beneficial ownership database by law enforcement and financial institutions, may be released before the end of the year, and that work is currently underway on a third rulemaking concerning revisions to the customer due diligence rule. With regard to anti-corruption, Das noted that the agency has been working with the Biden administration, and highlighted three alerts issued by FinCEN in 2022 that highlight “the risks of sanctions and export controls evasion by Russian actors, including through real estate, luxury goods, and other high-value assets.” Das explained that the alerts “complement ongoing U.S. government efforts to isolate sanctioned Russians from the international financial system.”
Transitioning into discussing effective AML/CFT programs, Das said that the “AML Act’s goal of a strengthened, modernized, and streamlined AML/CFT framework will ultimately play out over a series of steps as we implement all of the provisions of the AML Act.” He then described how the AML Act requires FinCEN to work with the FFIEC and law enforcement agencies to establish training for federal examiners in order to better align the examination process. He further noted that the AML/CFT priorities and their incorporation into risk-based programs as part of the AML Program Rule are “crucial” for providing direction to examiners on approaches that improve outcomes for law enforcement and national security.
Das also highlighted the digital asset ecosystem as a key priority area for FinCEN and acknowledged that the area has seen “continuing evolution” since 2013 and 2019, when the agency released its latest related guidance documents on the topic. Das explained that FinCEN is taking a “close look” at the elements of its AML/CFT framework applicable to virtual currency and digital assets to determine whether additional regulations or guidance are necessary, which “includes looking carefully at decentralized finance and its potential to reduce or eliminate the role of financial intermediaries that play a critical role in our AML/CFT efforts.”
FinCEN provides timing on CTA rulemaking
On October 12, FinCEN acting Director Himamauli Das provided timelines on recent agency efforts to combat financial crime. Speaking during the ACAMS AML Conference, Das pointed to actions taken by bad actors to hide assets behind shell/front companies and evade U.S. sanctions, and highlighted measures, including beneficial ownership information reporting, suspicious activity reporting, and geographic targeting, designed to combat illicit activity. Das also provided an update on recent rulemakings mandated by the Corporate Transparency Act (CTA), including (i) the beneficial ownership reporting rule (which takes effect January 1, 2024, and is covered by InfoBytes here); (ii) the access rule, which would establish protocols for accessing the beneficial ownership database by law enforcement and financial institutions (FinCEN is currently working on the notice of proposed rulemaking and expects to issue it in the near term); and (iii) the Customer Due Diligence rule, which Das said will be revised “no later than one year after the effective date of the reporting rule” as required by the CTA. He added that FinCEN is also developing an “infrastructure to build a secure and confidential database that meets the highest security standards” to ensure only authorized users can access information. This system is expected to be operational by the time the beneficial ownership reporting rule takes effect. Additionally, FinCEN will, among other things, develop guidance and educational materials to assist companies when preparing their beneficial ownership information reports and will continue to regularly update its dedicated resource page on this subject.
FinCEN releases final rule on beneficial ownership reporting
On September 29, FinCEN issued a final rule establishing a beneficial ownership information reporting requirement, pursuant to the bipartisan Corporate Transparency Act. According to FinCEN, the final rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the U.S. to report information about their beneficial owners to FinCEN. FinCEN noted that the final rule is designed to protect national security and strengthen the integrity and transparency of the U.S. financial system. FinCEN also released a Fact Sheet clarifying the final rule. The final rule is effective January 1, 2024. Reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information, according to FinCEN. The same day, Treasury Secretary Janet L. Yellen released a statement, noting that the final rule is “a major step forward in giving law enforcement, national security agencies, and other partners the information they need to crack down on criminals, corrupt individuals, and other bad actors who seek to take advantage of America’s financial system for illicit purposes.”
FinCEN to issue second beneficial ownership NPRM later this year
On April 28, FinCEN acting Director Himamauli Das informed the House Financial Services Committee during a hearing on the oversight of the agency that FinCEN is currently developing a second notice of proposed rulemaking (NPRM) this year proposing “regulations governing access to beneficial ownership information by law enforcement, national security agencies, financial institutions and others.” The NPRM will be published this year and follows a previous proposal to implement the beneficial ownership information reporting provisions of the Corporate Transparency Act (CTA), which addresses who must report beneficial ownership information, when to report it, and what information must be provided (covered by InfoBytes here). In his written testimony, Das stated the agency also plans to issue a third and final proposal revising the Customer Due Diligence (CDD) regulation for financial institutions “no later than one year after the effective date of the final reporting rule,” as required by the statute. “The CTA directs that the revisions should bring the CDD regulation into conformance with the beneficial ownership rules under the CTA and reduce unnecessary or duplicative requirements, among other things,” Das said. “We are considering all options as we develop the Access Rule NPRM, and look forward to receiving public comments on our proposal when it is issued.” Das also noted that FinCEN is currently developing the beneficial ownership database, which will allow users to search and access certain beneficial ownership information. However, Das warned that limited resources “have presented significant challenges to meeting the implementation requirements of [FinCEN’s] expanded mandate under the Anti-Money Laundering Act, including the CTA’s beneficial ownership requirements . . . we are missing deadlines, and we will likely continue to do so.”