Beneficial Ownership Information Reporting – Will it Reduce Financial Crimes?

On September 29, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published a final rule setting out the beneficial ownership reporting requirements required by section 6403 of the Corporate Transparency Act (CTA) of 2020. Very simply, the CTA requires that all “reporting companies” – about 32.6 million small businesses – submit the names of their beneficial owners (people with substantial control of the company, or who own or control at least 25 percent of the ownership interests) to a database to be built and run by FinCEN. This is a new requirement, and it replaces a rule that was put in place in 2016, and implemented in 2018, that required these companies to provide the names of their beneficial owners to their bank when they opened accounts.
The final rule as published in the Federal Register on September 30th is 99 pages long (the link above is to a pre-release version that is 330 pages long). Actually, the final rule is only a few pages long, but the explanations on how FinCEN got to the final version of the rule – after two proposed versions – and the required analysis of the costs and benefits of the rule ran to about 310 pages in the pre-release version, and 95 pages in the published version.
And this is just one of three rules FinCEN needs to publish to implement the CTA. There is an “access” rule – which will determine how the law enforcement agencies and financial institutions can access the database – as well as a rule to rescind most of the existing 2016 rule.
There’s some interesting things in the BOI reporting requirements rule. Let’s start with the basics.
  • “Reporting companies” are defined as all corporations, limited liability companies, and other legal entities created by the fifty US states (and Tribal governments), with twenty-three categories of exemptions. The exemptions are intended to cover legal entities whose beneficial owners are known: publicly-traded companies, financial institutions, registered charities, etc. And Congress carved out “large operating companies” (those with more than 20 full-time employees, $5 million in revenue, and operations in the United States) on the theory that these companies cannot be used as “shell” companies. Oddly, and as I pointed out in my comments to the proposed rule, those “large operating companies” are ideal front companies for criminal organizations. It was, in my opinion, a bizarre exemption and one that criminals and their enablers will flock to.
  • “Beneficial owner” is “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least twenty-five percent of the ownership interests of such reporting company”. “Substantial control” is exhaustively defined, and means pretty much what you’d expect it to mean. It includes trustees of trusts that can directly or indirectly exercise substantial control. And “ownership interests” is also exhaustively defined, and includes ownership of equity interests by a trustee or beneficiary of a trust.
  • In the existing (2016) beneficial ownership rule, FinCEN required only one owner with substantial control, and up to four individuals with ownership interests. This rule is very different (and FinCEN made a point of explaining why this was a good idea). With this rule, in theory there could be dozens of individuals who are beneficial owners through the exercise of substantial control. There should be a maximum of four beneficial owners under the “ownership” component (given the 25 percent or more threshold), but given the complexities of options, etc., in the definition, there is a possibility that there are more than four. Regardless, even though FinCEN emphasized why multiple “control” persons was a good idea, the rule itself does not require at least one person with substantial control (even though FinCEN wrote that it “expects that a reporting company will always identify at least one beneficial owner under the ‘substantial control’ component.” See page 92).
  • Reporting companies in existence prior to January 1, 2014 must submit an initial report to FinCEN no later than January 1, 2025 that includes its information (legal name, physical address, EIN) as well as the name, date of birth, residential address, and an identifying number from an official identification document (passport, drivers license) for every beneficial owner.
  • Reporting companies that come into existence on or after January 1, 2024 must submit an initial report to FinCEN within 30 days of coming into existence. That report includes the same beneficial ownership information and information on the “company applicant”, which is one or more persons that filed the creation or registration documents with the state (for domestic and foreign companies, respectively).
  • Any changes in the filed information – of the reporting company, beneficial owner(s), or company applicant(s) – must be reported within 30 days of the change.
  • There’s a thing called a “FinCEN Identifier” – any individual or reporting company can apply for a FinCEN Identifier by submitting all the identifying information they would otherwise need to submit. Thereafter, a reporting company can use that FinCEN Identifier in lieu of the person’s or entity’s name and information.
  • The beneficial ownership reporting rule only covers what goes into the database. Which public and private sector agencies and institutions can access the database, how, and for what information and purposes, will be set out in the separate “access” rule.
The effective date for the BOI reporting rule is January 1, 2024. At 87FR59547 FinCEN writes that it will have the beneficial ownership information database (BOSS) up and running, and the “access” final rule published, by January 1, 2024. But later on that page FinCEN wavers, and writes “absent additional appropriations, FinCEN may need to adjust its implementation and outreach plans.”
What additional appropriations does FinCEN need?
In the lengthy Regulatory Impact Analysis section beginning on page 173, FinCEN gets very specific and writes (at 87FR59578) that the costs to build the BOSS will be $72 million in Fiscal Year 2023 (FY23) and the costs to maintain it will be $25.7 million per year. Add in $10 million per year in extra personnel costs that FinCEN says it needs, and FinCEN concludes that the cost will be $82 million in FY23 and $35.6 million per year thereafter.
This will be a massive database. In 2024 FinCEN can expect about 100,000 submissions each day, on average. Those are additions to the database: there will also be requests from public and private sector agencies and institutions for BOI.
Do these numbers make sense? Does $82 million to build and $36 million a year to operate make sense? There is a comparison. The current BSA Database, which holds the Bank Secrecy Act reports that are filed by the private sector, took five years to build back in 2010-2014, cost ~$100 million to build, and it costs $27 million a year to operate.
It’s inconceivable to me that this BOI Database will cost less to build and operate than the BSA Database. We’ll see.
Back to the question of what additional appropriations FinCEN might need to build and operate the BOI Database.
FinCEN’s budget was $127 million in FY21. It is $161 million in the current (for one more day, as the fiscal year ends September 30th) FY22. It’s asked for $210 million for FY23 (plus some extra millions for Ukraine-related work). My recollection is that most of the increase related to the CTA-related work. It’s unclear what additional appropriations FinCEN needs, and can spend, in 2023 to ensure the BOSS is up and running by January 1, 2024.
Those are FinCEN’s costs. What about the costs that will be borne by the companies that need to submit their beneficial owners’ information? Keep in mind that almost all of these companies are American small businesses. Many of then are “mom and pop” businesses.
The number of, and costs to, these reporting companies, is also interesting. There are assumptions galore, but FinCEN did a good job in this section. Bottom line is that there will be 32.6 million small businesses registering in the first year (2024) and 5 million new small businesses registering every year thereafter. Add in the updated reports required when there are changes in beneficial ownership (or even changes in a beneficial owner’s information, such as a change of address) or to correct incomplete registrations, and FinCEN estimates those costs will be $22.7 billion in 2024 and $5.6 billion a year thereafter.
There are other costs that aren’t considered, and the time and money estimates FinCEN used may be low, so let’s round it up a bit and call it $25 billion in costs for American small businesses in 2024, and $6 billion a year thereafter.
At 87FR59579 FinCEN repeats the 2018 National Money Laundering Risk Assessment estimate that domestic financial crime, excluding tax evasion, generates approximately $300 billion of proceeds for potential laundering annually.
So the Corporate Transparency Act will cost $25 billion in 2024, and $6 billion a year thereafter, to help to address a $300 billion problem.
So we have a new program costing billions of dollars and impacting millions of American small businesses that is intended to reduce the $300 billion a year domestic financial crimes problem. What did FinCEN write about the benefits of collecting beneficial ownership information? Shifting to the published version of the rule, we can see the following:
  • At 87FR59498 (Introduction): “Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system. Not only do such acts undermine U.S. national security, but they also threaten U.S. economic prosperity: shell and front companies can shield beneficial owners’ identities and allow criminals to illegally access and transact in the U.S. economy, while creating an uneven playing field for small U.S. businesses engaged in legitimate activity.”
  • At 87FR59498: “For more than two decades, the U.S. Government has documented the use of legal entities by criminal actors to purchase real estate, conduct wire transfers, burnish the appearance of legitimacy when dealing with counterparties (including financial institutions), and control legitimate businesses for ultimately illicit ends, and has published extensively on this topic to raise awareness.”
  • At 87FR59499 (quoting Deputy Secretary Wally Adeyemo): “Kleptocrats, human rights abusers, and other corrupt actors often exploit complex and opaque corporate structures to hide and launder the proceeds of their corrupt activities. They use these shell companies to hide their true identities and the illicit sources of their funds. By requiring beneficial owners—that is, the people who actually own or control a company—to disclose their ownership, we can much better identify funds that come from corrupt sources or abusive means.”
  • At 87FR54549: “While many of the rule’s benefits are not currently quantifiable, FinCEN assesses that the rule will have a significant positive impact and that the benefits justify the costs. The rule will likely improve investigations by law enforcement and assist other authorized users in a variety of activities. All of this should in turn strengthen national security, enhance financial system transparency and integrity, and align the U.S. financial system more thoroughly with international financial standards. The RIA [Regulatory Impact Analysis] includes a discussion of these benefits, and this discussion should be kept firmly in mind alongside the quantitative discussion of costs.”
  • At 87FR59500: “Access to BOI reported under the CTA would significantly aid efforts to protect the U.S. financial system from illicit use. It would impede illicit actors’ ability to use legal entities to conceal proceeds from criminal acts that undermine U.S. national security and foreign policy interests, such as corruption, human smuggling, drug and arms trafficking, and terrorist financing.”
  • At 87FR59501: “The integration of BOI reported pursuant to the CTA with the current data collected under the BSA, and other relevant government data, is expected to significantly further efforts to identify illicit actors and combat their financial activities.”
  • At 87FR59579: “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, but entities are frequently used in money laundering schemes and provide a layer of anonymity to the natural persons involved in such transactions.”
  • At 87FR59597: “FinCEN did not receive comments that specifically addressed the qualitative discussion of benefits from the reporting requirements in the RIA.”
So what do we know?
We know that anonymous shell companies are used by bad actors to launder money. That’s pretty clear. We know that if we reduced the number of anonymous shell companies, we’d reduce the ability of those bad actors to launder money. That sounds reasonable. And we’re pretty sure that one way to reduce the number of anonymous shell companies is to require companies to submit the names of their beneficial owners into a national database, and make that database available to law enforcement. That makes sense.
What isn’t as clear, though, is the connection between the disclosure and collection of beneficial ownership information and the actual reduction in financial crimes. We know that anonymous shell companies are used to launder the proceeds of financial crime, but we still don’t know what correlation there is between collecting beneficial ownership information and the actual reduction in financial crimes. Financial institutions have been collecting beneficial ownership information for four years. In fact, when the 2016 rule was published it included a preamble that provided, in part:
“BOI collected by financial institutions pursuant to the 2016 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 the Department’s broad strategy to enhance financial transparency of legal entities.” 87FR59501 citing 81 FR 29399–29402 (May 11, 2016).
Has BOI collected by financial institutions since May 2018 assisted investigations by law enforcement? Has it increased the ability of the intelligence community to address threats to national security? Has any of that information been included in Suspicious Activity Reports (SARs)? Have any of those SARs had an impact on domestic financial crimes?
None of these questions have been asked, let alone answered. FinCEN had an opportunity to (ask and) answer these questions, but did not. Why not? Was it because after four years of collecting beneficial ownership information, that information has not led to any measurable decrease in domestic financial crimes? If that is the case, then American small businesses are being adversely impacted by a solution that doesn’t solve the problem.
What can be done to find out whether the billions of dollars being spent by millions of American small businesses is having the intended effect of reducing financial crimes?
Law enforcement should be required to report on its use of beneficial ownership information obtained from the FinCEN database: what information was used, how it was used, whether it led to investigations, indictments, convictions, seizures of criminal proceeds, and – most importantly – whether it led to a reduction in financial crimes. If the purpose of collecting beneficial ownership information from more than 30 million American small businesses is to reduce financial crimes, we need confirmation from law enforcement that this purpose is being met.