Fincen issues final beneficial ownership access rule

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WASHINGTON — The Financial Crimes Enforcement Network issued a final rule Thursday detailing how law enforcement, financial institutions and regulators will be able to access a comprehensive list of who owns which corporate entities in the U.S.

This final rule is part of a trio of regulations Fincen is developing governing the forthcoming beneficial ownership information (BOI) database, mandated by the 2021 Corporate Transparency Act and aimed at combating money laundering by revealing who owns shell companies and other opaque groups. The access rule details the conditions under which BOI, reported in accordance with the initial BOI Reporting Rule, can be disclosed.

The final rule outlines which authorized entities may access BOI. These include federal agencies involved in national security, intelligence, or law enforcement activities; state, local, and tribal law enforcement agencies with court authorization; law enforcement agencies overseas; judges and prosecutors; financial institutions and the regulators overseeing them for use towards customer due diligence requirements; and officers and employees of the U.S. Department of the Treasury. Each authorized recipient category is bound by legally binding security and confidentiality protocols including maintaining a secure and auditable system for storing BOI, restricting access to the system and providing reports to Fincen.

Authorized recipients are generally prohibited from re-disclosing BOI to other parties, except in exceptional circumstances. These include re-disclosure within their entity, among financial institutions and regulators, or in compliance with international treaties or agreements.

Under the Corporate Transparency Act, disclosing or using BOI obtained from Fincen can lead to a civil penalty of $500 per day for unremedied violations and criminal penalties of up to $250,000, imprisonment up to 5 years, or both with enhanced criminal penalties for illegal activity exceeding $100,000 in a year. A Fincen release also notes violations may result in Fincen revoking entities’ access to the Beneficial Ownership IT system.

FinCEN will adopt a phased approach to BOI access, beginning with a pilot program for key Federal agency users in 2024. Subsequent stages will extend access to various government agencies, law enforcement partners, and financial institutions.

The road to the launch of the final reporting regime — which goes into effect January 1, 2024 -- has been a long time coming. The reporting rule — finalized September 30, 2022 — mandated certain entities, such as corporations and limited liability companies operating in the United States, to report comprehensive information about their beneficial owners to FinCEN.

The initially proposed beneficial ownership "access" rule received criticism from lawmakers, state attorneys general and anti-corruption advocates who said the rule was unnecessarily complex, and called on Fincen to make many of the revisions — like the ability of institutions to use BOI for customer due diligence — that appear in the final access rule.

In September the agency released guidance aimed at providing clarity about the reporting requirements for small businesses. This all came after Fincen saw a major leadership shift as Treasury veteran Andrea Gacki replaced acting Fincen head Himamauli Das in July.

Political pushback has been mounting against the database as the reporting deadline approaches. Republican lawmakers, led by House Financial Services Chairman Patrick McHenry, R-N.C., wrote to Treasury Secretary Janet Yellen, and Gacki urging them to postpone the BOI reporting requirements specifically for small businesses.

Following the final rule and only days after he sent the letter, McHenry said Thursday while the tweaks were a positive step, he still had reservations about the database ten days out from its launch. He doubled down on calls to delay mandated reporting, saying Fincen was overcomplicating the database.

“While Fincen’s final rule regarding access to beneficial ownership information is a step in the right direction, it remains a significant deviation from what Congress intended,” said McHenry. “Considering we are ten days from the reporting regime’s effective date, the existing duplicative CDD regime has not been rescinded, and millions of small business owners remain unaware of their beneficial ownership reporting obligations, it’s imperative that the Biden Administration delay its effective date until these issues are resolved.”

While the American Bankers Association previously urged Fincen to withdraw the rule earlier this year, saying it was fatally flawed and onerous, the bank trade group changed its tune Thursday after the final rule contained some of the revisions it had requested.

“These improvements will help enable the registry to deliver on its promise of providing law enforcement and financial institutions with highly useful information, the true owners of businesses,” said ABA President Rob Nichols. “This information will make it harder for criminals, terrorists and other bad actors to access the U.S financial system and do harm to our country.”

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The Financial Accountability and Corporate Transparency Coalition, an anti-corruption advocacy group, welcomed the final rule, characterizing the commencement of reporting next year as the single biggest leap forward for U.S. anti-money laundering efforts in a generation.

“Nearly two years after Treasury Secretary Janet Yellen acknowledged the U.S. as perhaps the best place to hide dirty money, we now have the regulations in place to begin to shine a light into the darkest corners of our financial system,” said Ian Gary, executive director of the FACT Coalition. “Uncovering the true owners of anonymous shell entities is the first, and maybe the most consequential, step toward ensuring that corrupt oligarchs, international and domestic criminals, and other bad actors can no longer hide their funds in the U.S. with impunity.”

Financial regulators including the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, Fincen, the National Credit Union Administration, and state bank and credit union regulators Thursday issued an interagency statement directed at community banks regarding the final rule.

The agencies noted that Thursday’s final rule does not impose any new regulatory requirements or supervisory expectations for banks, does not require banks to change their risk-based compliance programs designed to comply with the existing version of the Customer Due Diligence Rule published in 2016 and does not change banks’ customer due diligence and Bank Secrecy Act requirements. Banks that decide to utilize the forthcoming BOI for their CDD compliance are not currently required to integrate BOI from the database into their risk-based BSA compliance programs, the agencies wrote.

The Bank Policy Institute, an industry group, also positively received Thursday’s final rule. Gregg Rozansky, BPI’s senior vice president, said BPI strongly approved of the final rule containing bank industry requested tweaks.

“Today’s rule recognizes the importance of protecting the privacy of business owners while giving banks and law enforcement access to helpful data to fight money laundering, sex trafficking and other financial crimes,” he said.

Fincen will next undertake a third rulemaking to revise its existing Customer Due Diligence Rule to align with the new reporting regime, the agency said.

While Fincen continues to indicate its database system should be able to begin accepting beneficial ownership reports by the first day of 2024, mounting political pressure to delay its launch introduces some uncertainty as to when firms will bear the brunt of the new rules, said Nikhil Gore, a partner who handles bank regulatory law at Covington & Burling. He also noted that access to the beneficial ownership information database in 2024 will be initially limited to certain federal government entities as part of a pilot program, meaning banks will need to wait and see how their customer due diligence requirements are ultimately altered long term.

“Financial institutions would not have access until around the time that new customer due diligence requirements — which have yet to be proposed — come into effect,” he noted. “Fincen has not provided any specific timeline for when it might release a customer due diligence proposal, although we expect it sometime in 2024 [so] overall, there is still a lot of uncertainty about when and how all of these rulemakings will impact financial institutions’ compliance obligations and practices.”