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In this video, Esteban Santana, Regology's Financial Services Industry Lead and former Senior Special Agent with the FDIC, addresses what you need to know about beneficial ownership.
Welcome to today’s video on the beneficial ownership registration provision under the Anti-Money Laundering Act of 2020 (AMLA) and the Corporate Transparency Act of 2021 (CTA). A weakness in the struggle against money laundering has been the ability for individuals to create legal entities without having to routinely disclose or even update beneficial ownership information (for example identifiable information of the natural person who owns or controls the entity). Disclosures have been inconsistent among jurisdictions and there was no role for the government to collect and disseminate the information. AMLA and CTA changed that.
At the time of passage on January 1, 2021, AMLA was considered the most significant anti-money laundering legislation passed by Congress in decades. It built upon the existing anti-money laundering framework, originally established under the Bank Secrecy Act in 1970. CTA is part of AMLA which for the first time imposed a federal requirement for identifying beneficial owners of certain entities. The purpose was to combat financing of terrorism and other financial crimes. 31 USC Section 5336 eq. set. established the requirements for the beneficial ownership, to include a registration database administered by FinCEN.
FinCEN is the federal agency responsible for implementing many of AMLA’s provisions. Under AMLA, FinCEN must store the information for at least five years and allow U.S. government entities and financial institutions access to the information. Before AMLA and CTA, the lack of a national beneficial ownership registry facilitated criminal activities which weakened law enforcement efforts to combat money laundering. In particular, it made it difficult for financial institutions to satisfy their internal procedures for safe banking and customer due diligence. AMLA closed those loopholes by establishing a uniform federal beneficial ownership registry.
In September 2022, FinCEN issued a final rule implementing the beneficial ownership information reporting requirements of CTA which was a major step towards unmasking shell companies and protecting the U.S. financial system. In March 2023, FinCEN published guidance to aid the public, in particular small businesses, to understand the beneficial ownership information taking effect on January 1, 2024.
Under AMLA, the law applies to reporting companies defined as corporations, limited liability companies or similar entities and includes foreign entities registered to do business in the U.S. AMLA requires disclosure of beneficial owners defined as those who directly or indirectly exercise substantial control over the entity or who own or control more than 25 percent of the ownership interest. An example of an ultimate beneficial owner would be an investor in securities through a broker.
Although the broker remains the security owner, he holds it on behalf of the investor. Here the investor becomes the ultimate beneficial owner, and the broker becomes the security custodian. Businesses forming new legal entities and those who own an existing entity will be required to provide their full name, date of birth, current residential or business address, and a copy of an acceptable identification document of the person who owns or controls the entity.
When I worked for the Federal Deposit Insurance Corporation as a Senior Special Agent, the issue of primary ownership came up often during investigations for various reasons. The same applied to regulators during examinations of loans. Whether it was an income tax business that provided fraudulent income tax returns to a loan applicant or a business that provided a complex ownership structure to a financial institution for a loan, it becomes important to identify the owner or beneficiary of the business entity even more if the loan goes into default. This is important because financial institutions may unknowingly provide inaccurate information to regulators during loan reviews.
The lack of a national beneficial ownership registry facilitated criminal activities which weakened law enforcement efforts to combat money laundering. In particular, it made it difficult for financial institutions to satisfy their internal procedures for safe banking and regulators’ customer due diligence obligations. AMLA closed those loopholes by establishing a uniform federal beneficial ownership registry. Under AMLA, the law applies to reporting companies defined as corporations, limited liability companies or similar entities and includes foreign entities registered to do business in the U.S. It requires a range of entities, to include smaller and otherwise unregulated companies, to file a report with FinCEN identifying the entities’ beneficial owners and to identify the person who formed the entity.
This is a major step towards unmasking shell companies and protecting the U.S. financial system and financial institutions. CTA also authorized FinCEN to disclose the information to law enforcement, regulators, and to financial institutions for the purpose of customer due diligence. In today’s global financial landscape, money laundering and terrorist financing have become increasingly sophisticated and difficult to detect. As a result, financial institutions are under increasing pressure to take proactive measures to combat these illegal activities. Therefore, during the onboarding process of a new entity, the financial institution should obtain information about the beneficial owner or owners.
That information is then used to conduct a risk assessment and verify the true beneficial owner. Depending on the level of risk, the financial institution may ask for additional documentation or conduct ongoing monitoring to ensure the customer’s activities remain within acceptable parameters. It’s important to note that the responsibility for collecting and verifying beneficial ownership information lies with the financial institution. It’s imperative that the financial institution have a process in place for identifying beneficial owners and conducting appropriate due diligence.
Although the process can be time consuming and complex, it’s essential to ensure compliance with regulatory requirements. Failure to comply with these regulations can result in severe penalties and reputational damage. Willful failure to file beneficial ownership information can result in civil penalties of $500 per day that the violation continues, as well as imprisonment of not more than two years (under 31 USC Section 5336(h)(3)(A).
As I previously mentioned, CTA authorized FinCEN to disclose the information to law enforcement, regulators, and to financial institutions for the purpose of customer due diligence. BeWith that being said, anyone who knowingly makes an unauthorized disclosure of beneficial ownership information obtained from FinCEN can result in civil liability and imprisonment of not more than five years (31 USC Section 5336(h)(3)(B).In summary, beneficial ownership information reporting is a critical component of banking regulatory compliance. Financial institutions play a critical role in combating money laundering and terrorist financing. By adhering to these regulations and collecting accurate information, financial institutions can help promote a safer global financial system. By staying up to date with the latest regulatory requirements and implementing best practices, financial institutions can meet and exceed their obligations.
Additional information and exceptions can be found in the Federal Register under Beneficial Ownership Information Reporting Requirements, dated September 30, 2022 and FinCEN’s home page under the Resources tab titled, Beneficial Ownership Information Reporting Rule Fact Sheet. Until the next video, thank you for watching.
The information on the site is provided in good faith and strictly for educational purposes and does not amount to professional service or legal advice. While the information on this video is about laws, regulations, and procedures, the information is intended for educational purposes and not legal advice.
