Although Congress enacted the Corporate Transparency Act as part of the 2020 National Defense Authorization Act more than a year ago, it’s back in the news because the Treasury Department’s Financial Crimes Enforcement Network has recently issued a proposed rule to implement part of the new law.
The centerpiece of the transparency act is a new national registry of companies that certain financial institutions, including banks, will be able to access (sort of) to determine beneficial ownership (kind of) of corporate customers (some of). In our view, the law is unworkable on a number of levels: so many that we will take the rest of this piece — and, if you have time, the rest of your day — to tell you about them.
Let’s start with our conclusion: The registry created by the transparency act is a nonpublic, restricted-use database of unverified and unverifiable information that will only befuddle the innocent and embolden the criminal and corrupt the world over.
Starting off, not all corporations will be included in the registry. That would be too easy: Congress carved out 24 exemptions, including money transmitters (which include crypto exchanges) and so-called 501(c)(4) “charitable” organizations that happen to lobby Congress. Big companies and public companies are exempt: Small businesses will bear the brunt of this regime.
And the act does not provide for open access to the registry. Again, that would also be too easy. Unlike in the United Kingdom, which has a registry open to the public, access to the U.S. registry is limited to law enforcement agencies and to banks and certain other financial institutions when conducting customer due diligence. Even then, those financial institutions will need the permission of their customers to query the database. Confused? So are we!
The level of complexity of a law ostensibly designed to further transparency in beneficial ownership of companies is beyond opaque. And the number of conditions and restrictions on who can use the registry, including restrictions on law enforcement, is too voluminous to cover here. Suffice it to say that a raft of other financial institutions such as insurance companies, money-services businesses, residential mortgage originators and lenders, investment advisors, hedge funds and private-equity funds will not be able to access the registry at all.
If you just arrived from Puck, one of the 27 moons of Uranus, or even from the United Kingdom, European Union or India, you might think that a registry of companies would be accessible to the public for any reason or no reason at all. And leaving aside Puck for the moment, many of the earthly locations have or will shortly have public registries. The U.K. Companies House registry, for example, not only lists officers of a company but also “persons with significant control”. Further, if you were to click on the name of an officer listed in the U.K. database, it would take you to other companies for which they are officers. And it’s free and unrestricted.
Turning back to the transparency act, a true oddity in the law that has the effect of rendering the Fincen registry even less attractive is that a whole category of businesses is excluded from registration to begin with — those companies with more than 20 employees, which have more than $5 million in sales and that operate at a physical location in the U.S. Other than bringing joy to the criminal, cartel and corruption lobby, it’s difficult to understand why these would be excluded. But one thing is for sure, this would be a perfect fit for miscreants to use as a front company to mix legal with illicit funds for purposes of money laundering.
This is not the only flaw that we’ve identified. Another major deficiency in the law is that the beneficial ownership information is unverified and unverifiable since the act imposes exactly no restrictions on Fincen or on the states that register companies to conduct any sort of due diligence to verify the identity or the bona fides of the declared beneficial owners. This leaves the door — and all the windows — open for nominees, in-laws (preferably with a different last name than the real owner) and even (horrors) lawyers to be named in place of the real owner, with little chance of discovery. And the chance of discovery is made even smaller since any financial institution wishing to access the registry must first get the consent of its customer. The penalty under the law for the failure to give such consent? None.
All of this would discourage any bank or eligible financial institution from deigning to use the registry before we even get to the penalties in the law — the phrase "Don’t even ask" takes on new meaning with this law: The penalties for wrongful disclosure or misuse of beneficial ownership information, i.e., names of beneficial owners, are no less than felonies. In fact, there are greater civil and criminal penalties for wrongful disclosure than there are for companies that don’t file their beneficial ownership information at all.
The real and abiding danger for banks and other financial institutions in using the mechanisms provided by the new law is that the combination of weighty penalties for misuse of beneficial ownership information, coupled with the restriction imposed by the law that the database only be accessed for purposes of customer due diligence, creates significant reputational and legal risk.
And it also means that banks will need to create a separate internal database to silo any beneficial ownership information obtained from the Fincen registry and to restrict access within the bank only to staff responsible for due diligence. Moreover, there would need to be stern warnings to staff not to respond to queries from other departments for names of beneficial owners along with staff training about the use and misuse of the database. Perhaps a special point of contact will need to be designated by the bank to centralize access to the Fincen registry.
So now you know why we are so skeptical that banks will find the Fincen registry helpful. Confusing? Definitely. Useful? No.
