The Corporate Transparency Act and its progeny of required filings are a well publicized topic in itself, and it brings a wave of potential implications for the financial services industry. The Financial Crimes Enforcement Network's (FinCEN) latest release on the Corporate Transparency Act (CTA) and Beneficial Ownership Information (BOI) filings signals a substantial transformation in the KYC (Know Your Customer) process, due diligence process, and underwriting.
Overview of the Corporate Transparency Act (CTA)
The CTA is a bipartisan initiative designed to enhance the transparency of corporations and limited liability companies in the U.S. Its primary objective is to mandate these entities to report beneficial ownership information, thereby aiding in the fight against illicit finance activities such as money laundering and corruption. This legislation marks a critical step in sealing the gaps that have historically allowed criminal enterprises to misuse corporate structures.
Significance of Beneficial Ownership Information (BOI)
BOI is the foundation of the CTA, necessitating businesses to disclose information about their true owners or controlling individuals. This data is pivotal for financial institutions and law enforcement in identifying the actual participants in financial transactions, which is crucial in preventing financial crimes.
BOI filings are mandatory and apply to most small businesses and holding companies, including Corporations, Partnerships, and Limited Liability Companies (including single-member LLCs disregarded for tax purposes). BOI filings do not apply to most trusts set up for estate planning purposes. BOI filings apply to existing entities and entities created moving forward. In certain circumstances, BOI filings are required upon changes in the entity’s ownership structure or management. Failure to file may result in fines and prosecution.
Access to BOI filings under Recent FinCEN Release and its impact on the financial services industry
FinCEN's latest framework outlines the ability to access BOI, among others, by institutions with due diligence requirements.
The Corporate Transparency Act (CTA) designates financial institutions as one of the authorized recipients of Beneficial Ownership Information (BOI) to aid in customer due diligence. FinCEN's proposal defines "customer due diligence requirements under applicable law" as their own regulations, which necessitate financial institutions to identify and verify beneficial owners of legal entity customers.
For a financial institution to access BOI from FinCEN, a reporting company's consent is required. FinCEN suggests that financial institutions should be responsible for obtaining this consent, leveraging their direct customer relationships and existing processes. Although financial institutions must certify consent, they are not required to submit proof to FinCEN. Compliance will be monitored by Federal functional regulators and self-regulatory organizations (SROs) during routine Bank Secrecy Act (BSA) examinations.
FinCEN also plans to provide financial institutions with a limited interface for accessing BOI, requiring specific identifying information for each reporting company. In return, institutions receive an electronic transcript of the BOI.
Subject to certain conditions, financial institutions may share BOI with regulators and SROs, enhancing efficiency in customer due diligence and aiding in detecting compliance failures. FinCEN Director Andrea Gacki emphasizes, "This final rule is a significant step forward in our efforts to protect our financial system and curb illicit activities." It appears that FinCEN continues to view financial institutions as an integral part of its pursuits.
Impact on Business Owners and Financial Institutions
Business owners must prepare for compliance with these new transparency standards.
Financial institutions may soon find BOI filings to be an integral part of their due diligence processes.
While the full extent and mechanism of accessing BOI are still being clarified, it's clear that this data will be a vital tool in assessing the legitimacy and risk profile of businesses and their owners. The ability to access detailed ownership information will provide a new depth to due diligence, enabling more thorough assessments of potential risks associated with business relationships.
For financial institutions, the challenge lies in integrating BOI into their existing due diligence frameworks while adhering to the new guidelines. The BOI access rule becomes effective on February 20, 2024. A subsequent rulemaking to revise FinCEN’s Customer Due Diligence rule is also anticipated.
The final rule on BOI access by FinCEN is a turning point in enhancing corporate transparency and fighting financial crimes. The potential integration of BOI filings into the due diligence processes of financial institutions signifies a major shift in how business relationships are vetted and managed. For anyone in the financial services industry or involved in conducting due diligence on clients and customers, it is crucial to stay attuned to developments in this area.