Whitehouse and Wyden applaud new FinCEN anti-money laundering rule to protect Americans from international corruption

02.07.22

Senators played key role in crafting groundbreaking legislation to prevent abuse of U.S. incorporation laws by kleptocrats and criminals

washington d.c. – Senators Sheldon Whitehouse (D-RI) and Ron Wyden (D-OR) today submitted a comment to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) on its new rule implementing the most important reform law anti-money laundering in two decades, the Corporate Transparency Act (CTA).

The senators both played a key role in crafting the CTA and are champions for greater transparency in U.S. corporate incorporation laws to crack down on front companies used to facilitate money laundering, kleptocracy and international corruption. Wyden, as chairman of the Senate Finance Committee, and Whitehouse, as chairman of the IRS Finance Subcommittee on Taxation and Oversight, also wield significant oversight jurisdiction over the Treasury Department.

“[T]The CTA is the product of a sensitive and painstaking legislative process, and its passage represents perhaps the most significant anti-money laundering reform in two decades,” write the senators in their commentary. “Despite the legislative success, this achievement can only be achieved if the system works in practice. As such, we commend FinCEN’s efforts to produce a workable and complete report proposal in a short period of time, and we appreciate the work you have done to minimize gaps that could dilute the quality of the information collected or allow bad actors to escape reporting.

As the senators applaud the work of FinCEN, they raise potential issues that could present opportunities for criminals, kleptocrats or terrorists to hide their interests in American businesses. They also urge FinCEN to remain vigilant as the CTA rule takes effect to ensure bad actors have not discovered flaws in the new system.

Congress passed the CTA to combat kleptocracy by cracking down on criminals and foreign enemies hiding assets from law enforcement and tax authorities. Legislation requires FinCEN to obtain information on the beneficial owners of corporations and LLCs formed in the United States, and to create a database to help law enforcement and national security officials access this information if necessary. Its adoption marked the culmination of a years-long effort to combat money laundering, international corruption and kleptocracy.

The full text of the senators’ commentary is below. A PDF copy of the dossier is available here.

Dear Director Das,

We are writing in response to the Financial Crimes Enforcement Network (FinCEN) Notice of Proposed Rulemaking regarding “Beneficial Ownership Information Reporting Requirements”. These regulations are an important part of the implementation of the Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act for the fiscal year 2021. Overall, the proposal greatly contributes to the implementation of CTA reporting requirements. consistent with Congressional intent, but we suggest a few areas where the rule should be strengthened.

As we noted in our May 2021 comments on your Notice of Proposed Rulemaking,[1] the CTA is the product of a delicate and painstaking legislative process, and its passage represents perhaps the most significant anti-money laundering reform in two decades. Despite the legislative success, this achievement can only be achieved if the system works in practice. As such, we commend FinCEN’s efforts to produce a workable and comprehensive report proposal in a short period of time, and we appreciate the work you have undertaken to “minimize gaps that could dilute the quality of the information collected or allowing bad actors to escape reporting. ”[2]

We particularly applaud the proposal’s comprehensive and clear definitions for beneficial owner and applicant. FinCEN has correctly interpreted that each individual who exercises substantial control, directly or indirectly, over an entity must be identified in reports to FinCEN. The proposed list of types of individuals likely to meet this standard provides clarity to reporting companies on how to report while minimizing the risk that bad actors may evade disclosure. In addition, the proposed timelines for reporting and updating beneficial ownership information strike the right balance between ensuring that law enforcement and national security officials have access to timely information without impose unreasonable expectations on reporting companies.

We also appreciate the broad definition of “other similar entities” that are required to report beneficial ownership information. Reports, such as the October 2021 publication of the Pandora Papers, continue to demonstrate the widespread abuse of anonymous entities formed in the United States.[3] While we understand that further legislative action may be required to fully capture each type of entity at risk of abuse, we encourage FinCEN to do everything within its statutory power to ensure that complete ownership information are collected for each entity formed or operating in the United States. .

While we are pleased that FinCEN has generally interpreted which companies are exempt from reporting in accordance with the clear text of the law, there is one notable exception. FinCEN appropriately clarifies that only “wholly owned” subsidiaries of certain exempt entities qualify for an exemption under 31 USC 5336(a)(11)(B)(xxii).[4] We are concerned, however, that the rule could be interpreted as opening an unintended loophole by merely exempting partially “controlled” entities. The current interpretation risks exempting any entity whose ownership interests are even partially held by a criminal, kleptocrat or terrorist, as long as some of that entity’s voting rights are controlled by certain other exempt entities. As such, we encourage you to amend 31 CFR 1010.380(c)(2)(xxii) to clarify that this exemption only applies to entities that are “wholly controlled or 100% owned” by certain exempt entities. . This revision is consistent with the plain language of the law, which reads: “any corporation, limited liability company or other similar entity whose interests are owned or controlled…”[5]. As the proposed rule recognizes, “the defined section ‘the’ in the cited enactment as requiring an entity to be wholly owned by one or more specified exempt entities in order to qualify.”[6] The same definite article “the” that applies to “owned” in 31 USC 5336(a)(11)(B)(xxii) clearly also applies to “controlled”.

We strongly support FinCEN’s decision to exclude any additional exemptions from the proposal. In crafting the CTA, Congress negotiated many complex policy issues, and each exemption was carefully considered and carefully negotiated. We and other drafters of this law have sought to strike the right balance between collecting accurate and useful information and not burdening companies with compliance obligations. We doubt that additional exemptions are warranted and would oppose their inclusion prior to careful, data-based scrutiny of their potential risks to national security and the financial system.

Going forward, we also encourage FinCEN to regularly review system data – and legally mandated data audits – to ensure that bad actors have not uncovered regulatory loopholes that could be exploited. .

Finally, we know that FinCEN’s work to implement these necessary reforms is ongoing. As you turn your attention to the proposed beneficial ownership directory access rule, we remind you that the directory “is only useful if authorized users can effectively access the data.”[7] Therefore, FinCEN should ensure that authorized users, including law enforcement and national security officials, financial institutions with customer consent, banking supervisors, foreign allies, and Government Accountability Office, all have fast, timely and comprehensive access to beneficial ownership information. Access procedures should build on existing protocols and those provided for in legislation, and avoid creating redundant barriers that would unnecessarily delay access.

Additionally, as you begin work on revisions to the Customer Due Diligence Requirements for Financial Institutions (the “CDD Rule”),[8] we encourage you to ensure that any new CDD rules (1) adopt the definition of beneficial owner included in the CTA, and (2) require financial institutions to verify the beneficial owner information of each corporate client, whether whether or not that entity is covered under the OTC reporting company definition.

Again, we commend the work of FinCEN to produce a solid framework. Pending consideration of our comments, we look forward to the rapid implementation of the beneficial ownership declaration system.

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Rich Davidson (202) 228-6291 (press office)