WASHINGTON — The Corporate Transparency Act was supposed to make banks’ anti-money-laundering compliance burdens lighter, but more than a year since the landmark law’s passage, experts say that outcome is far from assured.
Signed into law in early 2021, the Corporate Transparency Act requires businesses to report their beneficial ownership information directly to a registry database maintained by the Financial Crimes Enforcement Network. The reform was intended to crack down on the use of anonymous shell companies in the U.S. — a frequent component of modern illicit finance and tax-avoidance schemes.
But as Fincen’s rulemaking process to implement the CTA unfolds in the coming months and years, legal analysts and banking advocates say it’s unclear whether the industry will see the relief touted by lawmakers who supported the law’s passage. They also warn that the regulatory road to securing that relief will be a long one.
“Congress's vision on this was to get banks out of the position of having to collect beneficial ownership information from all their legal-entity customers — perhaps they would do it on a risk basis, or just rely upon the registry,” said Daniel Stipano, a partner at Davis Polk specializing in anti-money-laundering law. “But it remains to be seen whether it will work out that way, because the implementing rules haven’t been issued yet.”
Under the existing framework, the task of verifying a company’s beneficial owners has fallen almost exclusively to banks complying with
“One of the things that we are emphasizing pretty consistently is that we can't do things the way we've always done them, because there's a lot of time and effort that's being expended, and it's not producing good results,” said Rob Rowe, vice president and senior counsel at the American Bankers Association.
The complete implementation of the CTA will be no small task for Fincen, a bureau of the Treasury Department that acts as the nation’s top financial intelligence unit. The agency’s rulemaking process will be split into three separate components, the first of which was
Once Fincen has implemented the law’s core changes and created its beneficial ownership database, the agency will need to issue a final rulemaking to modify banks’ customer due diligence requirements in response to the CTA’s changes. According to the law’s text, Fincen will be required to “reduce any burdens on financial institutions” that are “unnecessary or duplicative” after the new regulations have been implemented.
But until those preceding rules are introduced and finalized, it’s unclear just how much burden will be reduced, if any at all.
“We don't know yet how [the customer due diligence rule] is going to be amended,” Stipano said. “We also don’t know if it will end up being a good or bad thing for banks and other financial institutions with respect to their regulatory burden — it all depends on the implementing rules.”
Near the heart of the issue is exactly how Fincen’s beneficial owner database will function. Anti-money-laundering experts widely agree that in order for the database to be useful for law enforcement and financial institutions, the information entered by businesses has to be verified. Up until now, that task has fallen to banks via their customer due diligence requirements — a job that much of the industry is anxious to shed.
And while the Corporate Transparency Act doesn’t specify whether the information in Fincen’s database must be verified, anti-money-laundering experts widely agree that if the database’s information is not verified it will be of limited value to banks.
“I think Democrats and Republicans have a common goal, and they agree on at least two things: One, this database should be as useful as possible for law enforcement and financial institutions that have AML obligations, and two, that the ongoing costs of compliance for businesses should be kept low,” said Erica Hanichak, government affairs director at the Financial Accountability and Corporate Transparency Coalition, a nongovernmental watchdog that opposes anonymous shell companies.
“One thing in particular helps both those things happen: verifying the information as it's entered into the database,” Hanichak said.
Some analysts say it will be tempting for Fincen, a relatively small government agency, to continue to rely on the private banking sector and its existing expertise to verify customer information in the beneficial ownership database.
“It’s unlikely that banks will no longer be required to collect beneficial ownership information,” Stipano said. “Even if the rules are relaxed, some banks may continue to collect it for their own risk management purposes.”
And others point out that banks, despite their existing customer due diligence expertise, would likely have a hard time verifying information beyond their own customers, and a reliance on them would miss wide swaths of the U.S. business community.
“The industry has always suggested that the best source for this information was always either the secretaries of states in the relevant states, or to have the actual companies themselves to record [their beneficial ownership information] directly,” said Gabriel Caballero Jr., a partner at Holland & Knight.
The industry itself has made clear it will push back on any attempt by Fincen to rely on them for such a crucial function.
“We believe it’s important that if Fincen is managing the database, they should have processes in place to validate the information coming in, rather than taking it at face value,” said the ABA’s Rowe. “Now that we have this database, we should take some of the burden off and free up resources that we've been spending time on customer due diligence and allocate it to actually finding criminal activity.”
In a statement provided to American Banker, a spokesperson for Fincen said that the agency was “working diligently to implement these requirements and give full consideration to the many complex issues associated with implementation.”
“We know that stakeholder comments and perspectives are essential to the development of an effective rule,” the spokesperson said. “As such, we are carefully considering the more than 240 comments received regarding the [notice of proposed rulemaking] as we draft the various rules required by the CTA.”
Analysts say that bolstering Fincen’s budget and staffing could go a long way towards equipping the agency with the necessary tools to maintain a database of accurate beneficial ownership information.
“Fincen is understaffed, under-resourced and needs updates to its software and hardware in order to do the best job possible in protecting the US financial system,” said Hanichak. “It needs the resources to be able to get the job done, and folks who are able to rise to the moment but also to pass these long-term structural reforms.”
The spokesperson for Fincen said that the
But others say that Fincen doesn’t necessarily need to bulk up to relieve banks of burdensome customer due diligence requirements. The Bank Policy Institute, for instance, has
Still, others remain skeptical that the legislative reforms introduced by the CTA will ultimately do much to relieve bank regulatory burdens.
“We've been talking about this issue through legislative reform for well over a decade,” said Caballero. “We got the [2016 customer due diligence rule], which was this big, crowning achievement. It's really not clear that it's made life any easier for law enforcement, but it's definitely imposing a massive burden on the financial services industry.
“I think institutions were hopeful” about the CTA, Caballero added, “but unfortunately, what has historically happened with these types of laws is that they really don’t alleviate regulatory burden. All they do is expand investigative powers.“
