Thereby Highlighting Need for Future Changes to Banks’ CDD Rule Systems
The Financial Crimes Enforcement Network (“FinCEN”) has published a two-page reference guide (“Guide”) comparing the requirements for reporting beneficial ownership information (“BOI”) to FinCEN under the Corporate Transparency Act (“CTA”) with the current requirements for covered entity customers to report BOI to their financial institutions (“FIs”) under the Bank Secrecy Act’s Customer Due Diligence (“CDD”) Rule.
Entitled “Notice to Customers: Beneficial Ownership Information Reference Guide,” the Guide is styled as a reference tool for business customers of banks who also are covered by the CTA. It is predominated by a chart, which we set forth at the end of this blog post, setting forth the differences in what information needs to be reported under the different reporting regimes. But, as we discuss, the Guide also serves as a reminder to FIs — intentionally or not — that they soon will be required to revamp their long-standing CDD Rule compliance systems.
The Guide observes, very generally, that the CTA and the CDD Rule have different definitions of a “beneficial owner” subject to reporting. Although the Guide notes that the CDD Rule only requires the reporting of a single individual under the “control prong” of its “beneficial owner” definition (whereas there is no limit under the CTA regarding how many individuals may need to be reported under its “control prong”), the simplified Guide does not delve into just how much broader and more complicated the CTA is, vs. the CDD Rule, when defining “control.” The Guide also does not discuss the two reporting regimes’ differences in application, such as the fact that the CTA contains a major exemption to reporting (companies with more than 20 full-time employees in the U.S. which have filed a Federal income tax or information return in the U.S. in the previous year showing more than $5,000,000 in gross receipts or sales, and which have an operating presence at a physical office in the U.S.) that the CDD Rule lacks.
The Guide attempts to explain why these two similar reporting regimes exist simultaneously:
The CTA’s requirement that entities report information to FinCEN enables FinCEN to supply that information to law enforcement and other government agencies, as well as certain financial institutions. Agencies and institutions authorized to receive this information may then use it for a [sic] several specified purposes, most significantly combatting money laundering and other illicit activities that involve shell companies. Beneficial ownership collection requirements for financial institutions [under the CDD Rule], in contrast, are primarily intended to ensure that financial institutions know their customers and thus can prevent their institutions from being used to facilitate illicit activity.
FIs may obtain BOI from FinCEN’s CTA database in order to facilitate compliance with “customer due diligence requirements.” As FinCEN has explained in the Federal Register, “[t]he [final] regulation now specifies that the clause ‘customer due diligence requirements under applicable law’ includes ‘any legal requirement or prohibition designed to counter money laundering or the financing of terrorism, or to safeguard the national security of the United States, to comply with which it is reasonably necessary for a financial institution to obtain or verify beneficial ownership information of a legal entity customer.’” Thus, FIs are not confined to requesting and using CTA BOI only for “pure” CDD Rule compliance. Instead, FIs will be able to access CTA BOI more broadly, such as for the purposes of maintaining their BSA/AML compliance program; compliance with sanctions screening; potential filing of Suspicious Activity Reports; and conducting enhanced due diligence.
The Anti-Money Laundering Act requires FinCEN to issue regulations to attempt to align, i.e., revise, the CDD Rule with the CTA BOI reporting rules. FinCEN’s Spring 2024 Rulemaking Agenda indicates that the proposed regulations will be issued in October. The forthcoming proposed CDD Rule alignment regulations will need to address several important questions and potential challenges facing FIs, including the following:
- They should provide that FIs are not required to access the BOI database – particularly because FinCEN’s BOI reporting form will allow reporting companies to not provide key information. Even if the CDD Rule revision so states, however, it may become the case as a practical matter that regulators nonetheless expect FIs to access the CTA database as part of their overall BSA/AML compliance.
- They should provide a clear and practical mechanism for FIs to address situations in which BOI collected under the CDD Rule does not match BOI obtained through the CTA – particularly because FinCEN has indicated that it will not verify the accuracy of BOI collected under the CTA.
- Assuming that the proposed regulations change the current exceptions to CDD Rule reporting (because exceptions to reporting under the CTA and the CDD Rule are currently different), they should explain clearly how FIs can effectively adjust their current CDD Rule reporting systems, which have been in place for years, and provide sufficient time to do so.
- They should state that FIs may rely on BOI obtained from the CTA database, just like FIs may rely upon BOI obtained from customers under the current CDD Rule.
Here is the comparison chart provided in the Guide. As noted, it is styled as a reference for business owners. But it also serves as a dispiriting reminder to FIs of how they are likely going to be obligated to alter their long-standing systems for collecting and using CDD Rule BOI, once FinCEN issues final regulations changing the CDD Rule to match CTA reporting requirements.
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