New Treasury Beneficial Ownership Rule Defangs Transparency Law

A revised reporting rule by the Financial Crimes Enforcement Network renders almost useless the intended database of company ownership information that aimed to combat money laundering and other crimes, tax practitioners said.

FinCEN and the Treasury Department last week released an interim final rule that narrowed the companies responsible for reporting ownership information under the Corporate Transparency Act to only foreign-reporting entities. Treasury signaled plans to change the rules earlier this month.

That tapered scope means a little under 12,000 companies must comply on average per year, compared with about 32 million first estimated to be impacted by the reporting requirements, according to the rule.

And foreign companies could create US subsidiaries to do domestic business—a strategy most companies already do—which would exempt them from reporting under this rule. Foreign companies owned by US citizens also don’t have to report.

Without a federal database, states may create their own reporting systems.

“The interim final rule really does telegraph a way to avoid having to report altogether,” said Zack Taylor, an associate at Stinson LLP who specializes in Corporate Transparency Act compliance. “It’s almost like these changes have eliminated the CTA without actually eliminating it.”

Altering Intent

The major change to the beneficial ownership reporting requirements of the Corporate Transparency Act is contrary to Congress’ intent with the law, some tax practitioners said.

“It is a substantial change from the prior stated purpose,” said Caitlin Hartsell, a partner at Bryan Cave Leighton Paisner LLP.

The CTA, enacted as part of the broader Anti-Money Laundering Act of 2020 that was included in defense authorization legislation, was intended to combat money laundering, terrorism, and financial crimes by creating a database of ownership information that law enforcement could use. It aimed to put the US on par with other countries that had similar rules.

But Treasury has the authority to create more exemptions than Congress outlined with agreements from the attorney general and secretary of Homeland Security, according to the law. Treasury said in the rule that it was narrowing the scope to reduce burden on businesses.

Banks already are required to get ownership information from their clients, which the government asks for amid criminal investigations. With the new narrowing, that practice will continue, practitioners said. But the lack of a centralized source for beneficial ownership information makes it difficult for financial institutions to verify who owns what, said Brandi Reynolds, chief growth officer for consulting firm Bates Group LLC.

“For risk management teams, it actually makes things more complicated,” Reynolds said.

Millions of companies already filed their ownership information with FinCEN. The most recent reporting deadline was March 21, which had been extended multiple times amid lawsuits challenging the constitutionality of the act.

“As an adviser I was feeling like the boy who cried wolf,” Stephen Liss, partner at Dungey Dougherty PLLC, said of all the changes to the implementation of the law in the past few years.

The interim rule caused a pause in a Fifth Circuit suit surrounding the law.

States Take Up Action

Legal action challenging the narrowed rule may come from members of Congress, pro-transparency groups, states, or law enforcement, but it’s difficult to show standing for a lawsuit since the rule makes it less work for companies, practitioners said.

Companies and people subject to the reporting rules had complained the law has too big of an administrative burden. Most clients are relieved by the new streamlined rule, practitioners said.

Some states may pick up the baton and create their own ownership reporting rules. For example, New York has already passed one that takes effect next year. That could mean companies operating in different states would have to file multiple reports, all with slightly different deadlines, information requests, and fees.

“They’re going to have a far less effective system because each state would be different,” said Jonathan Wilson, a partner at Taylor English Duma LLP and co-founder of FinCEN Report. “And it’s going to be more expensive for small businesses in the long run.”

Because the law is still on the books, another administration could withdraw the recent rule and make the reporting requirements more strict again.

FinCEN is accepting comments on the rule. It plans to issue a final rule later this year.