Congress passed the NDAA on December 11, 2020, with a “veto-proof” margin. Included in the NDAA are a number of AML provisions that regulators and AML professionals have been requesting for years. The new law includes beneficial-ownership disclosure requirements, a new criminal offense for concealing the source of assets in a monetary transaction, and newfound power for law enforcement to subpoena foreign banking records. Additionally, new whistleblower incentives have been added to the AML regime.¹ These new provisions may present additional money laundering risks for companies operating in the United States.

Required Disclosure of Beneficial Ownership Information

The Corporate Transparency Act (the “Transparency Act”), contained within the NDAA, requires most limited liability companies and non-public corporations to report to the U.S. government the names of their beneficial owners or face civil and criminal penalties. These requirements bring the United States in-line with recent changes in other developed nations requiring more transparency regarding the beneficial ownership of companies.²

Under the Transparency Act’s provisions, new and pre-existing “reporting companies” must report the identities of their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”) and update that information. “Reporting companies” are corporations, LLCs, and “other similar entities,” including those formed in the United States and foreign corporations registered to do business in the United States.³ Beneficial owners are individuals and entities that exercise “substantial control” over an entity or that own or control more than 25 percent of the entity.⁴

This information will not be publicly available. In contrast, other countries, including the United Kingdom, have made their beneficial ownership registry open to public scrutiny. The Transparency Act generally limits access to this information to the following groups: federal agencies engaged in national security, intelligence, or law enforcement; federal regulators; and state, local, and tribal law enforcement agencies.⁵ Additionally, with a reporting company’s consent, financial institutions will be permitted to access this information as part of “Know Your Customer” due diligence.⁶

Exemptions from Reporting Requirements

Under the Transparency Act, some companies are exempt from reporting information about their beneficial owners, including:⁷

• Public companies;
• Brokers, dealers;
• Investment companies and registered investment advisers (e.g., private equity firms);
• Banks, bank holding companies, and credit unions;
• Insurance companies;
• Exchange and clearing agencies;
• Charitable 501(c) organizations;
• Public accounting firms;
• Public utilities;
• Any corporation, LLC, or “other similar entity” controlled directly or indirectly by one of the entities described above.

In addition to the companies listed above, the Transparency Act also provides exemptions for certain pooled investment vehicles,⁸ dormant companies,⁹ and companies employing more than 20 people on a full-time basis that have more than $5 million in gross receipts in the previous year’s tax returns, and which maintain a physical office in the U.S.¹⁰

If a “reporting company” is owned by one or more of the exempt entities listed above, then it is only required to report the names of its exempt owners.¹¹

What Information Beneficial Owners Must Disclose

The Transparency Act requires that reporting companies disclose the following information about their beneficial owners to FinCEN:¹²

1. Full legal name;
2. Date of birth;
3. Current address; and
4. A unique identifying number from an acceptable identification document.

In lieu of reporting this information for each entity they own, individuals and entities can obtain a unique identifying number from FinCEN.¹³ Once available, these identifiers should reduce the reporting burden on companies.

Existing entities will have two years to report this information once the Treasury Department promulgates regulations implementing the Transparency Act. Entities formed after the effective date of those regulations will have one year to submit their reports to FinCEN.

Going forward, reporting companies are required to update FinCEN within one year of any changes to any of the reported information.¹⁴

Prohibitions on Concealing the Source of Assets in Monetary Transactions¹⁵

The Transparency Act also defines a new criminal offense for concealing or misrepresenting that certain individuals or entities are the source of funds in a transaction. Even where entities do not intend to conceal the source of funds involved in such transactions, this provision warrants careful consideration in a company’s AML compliance program to ensure that companies are adequately collecting and assessing the information necessary to comply with this requirement.

Specifically, the new offense prohibits knowingly concealing, falsifying, or misrepresenting, or attempting to conceal, falsify, or misrepresent, from or to a financial institution, a material fact concerning the ownership or control of assets owned or controlled by:

• Senior foreign political figures, if the aggregate value of the assets exceeds $1 million;¹⁶ or
• An entity designated as a “primary money laundering concern” if the prohibitions or conditions relating to those entities are not followed.¹⁷

The punishment for these offenses includes up to 10 years of imprisonment and/or a $1 million fine. Additionally, any property involved in the offense—including any property traceable to the transaction—may be subject to forfeiture to the federal government.¹⁸

New Subpoena Powers for Foreign Banks

The NDAA grants new, broad subpoena powers to the Treasury Secretary and the Attorney General, allowing them to obtain banking information from foreign banks to support criminal investigations, the new anti-money laundering rules, and civil forfeiture actions. The NDAA grants them the power to subpoena any foreign bank that maintains correspondent accounts in the U.S. to obtain “any records relating to the correspondent account or any account at the foreign bank, including records maintained outside of the United States.”¹⁹

The law explicitly provides that foreign secrecy or confidentiality laws shall not be a sole basis for quashing or modifying these subpoenas.²⁰ A foreign bank that fails to comply with a subpoena may face $50,000 in civil penalties per day.²¹ And upon notification that a foreign bank has failed to comply, U.S. financial institutions must terminate any correspondent account within 10 business days of notice or they themselves would face a $25,000 per day civil penalty.²²

New Whistleblower Incentives²³

Finally, the anti-money laundering provisions of the NDAA also include a section with new whistleblower incentives. These new incentives give the Treasury Secretary (in “consultation” with the Attorney General) the power to grant whistleblowers up to 30 percent of the total amount of monetary sanctions imposed as part of an enforcement action or successful court case.²⁴

Preparing for the Transparency Act’s Implementation

While only basic information about an entity’s beneficial ownership is required to be reported under these new provisions, collecting and reporting that information—and then keeping it updated in a timely manner—could prove burdensome for many companies. Additionally, the potential for new criminal liability for concealing the identity of the source of certain funds greatly increases a company’s AML compliance risk. As such, companies should use the time before implementation to review their AML compliance programs (or to put into place new programs) to ensure their ability to comply with these requirements once regulations are promulgated.

V&E will continue to provide insights into this issue and how companies can manage their risk as the Transparency Act nears implementation.

¹ H.R. 6395, 116th Cong. (2020) (“NDAA”) at § 6314 (2020) (amending 31 U.S.C. § 5323).

² Id. at § 6403 (adding an new Section 5336 to chapter 53 of title 31 of the United States Code (“§ 5336”)).

³ Id. § 5336(a)(11)(A).

⁴ Id.  § 5336(b)(2)(A).

⁵ Id. §§ 5336(c)(2)(B)(i)-(iv).

⁶ Id.

⁷ Id. §§ 5336(a)(11)(B)(i)-(xxiv).

⁸ Id. § 5336(a)(11)(B)(xviii).

⁹ Id. § 5336(a)(11)(B)(xxiii).

¹⁰ Id. § 5336(a)(11)(B)(xxi).

¹¹ Id. § 5336(b)(2)(B).

¹² Id. § 5336(b)(2)(A).

¹³ Id. §§ 5336(b)(3)(B)-(C).

¹⁴ Id. § 5336(b)(1)(D).

¹⁵ NDAA at § 6313 (adding an new Section 5335 to chapter 53 of title 31 of the United States Code (“§ 5335”)).

¹⁶ Id. § 5335(b)(1).

¹⁷ Id. § 5335(b)(2).

¹⁸ Id. §§ 5335(d-e): for criminal offenses, the property is automatically forfeit under the statute; for civil violations, it “may” be seized.

¹⁹ Supra, note 1 at § 6308(a)(2).

²⁰ Id.

²¹ Id.

²² Id.

²³ NDAA at § 6314 (amending 31 U.S.C. § 5323).

²⁴ Id. § 5323(b)(1) (as amended).