The Writing on the Wall: New Corporate Transparency Act Makes Beneficial Ownership Due Diligence a Must-Have for Effective Risk Management

Early last year, the U.S. Treasury Department made it clear that 2020 would be spent “increasing transparency and closing gaps” in financial crime regulation. Chief among the priorities are expanding regulatory obligations beyond traditional financial institutions and introducing legislation to address beneficial ownership visibility. Now, the guidance published last year has the legal teeth needed with the passage of the Corporate Transparency Act (CTA) on January 1, 2021. Noting that the CTA is the “first significant update” to the reigning financial crime law—the Bank Secrecy Act—in 20 years, the National Law Review explains, “The CTA requires all U.S. businesses to file “beneficial ownership” information with the Financial Crimes Enforcement Network (FinCEN). In sum, the CTA is designed to ban the anonymous shell companies that criminals and certain foreign officials use to hide and move corrupt proceeds and other illicit financing.”  What does the law and FinCEN’s current guidance mean for your organization and how can you gain better visibility into the ultimate beneficial owners of customers, suppliers and other business-critical third parties?

Clarifying enforcement: Who is subject to financial crime laws AND how can the FinCEN respond?

The digital economy has most certainly changed the playing field—and the players—when it comes to tackling financial crime. If the 2020 guidance from FinCEN was a warning shot across the bow, then the CTA has beneficial ownership—and the corruption actions that beneficial ownership often enables—firmly in its crosshairs.. Here’s a quick breakdown of the CTA.

• Full disclosure of the company’s beneficial owners, updated annually, to the FinCEN.
• The reporting requirement applies to new and existing corporations, LLCs, and other entities. Financial services organizations are largely exempt due to existing regulations and reporting requirements. Currently, churches, charities and other non-profit organizations are also exempt.
• Beneficial ownership is defined as an individual or entity that directly or indirectly exercises substantial control over an entity or owns/controls at least 25% interest in an entity.

While newly formed entities are immediately subject to beneficial ownership filing at the time of registration, existing organizations must comply within two years of the effective date.

The data collected is not made public or available under the Freedom of Information Act, however, it can be released to any federal, state, local, or tribal law enforcement agency involved in an active investigation, as well as any federal agency making the request on behalf of regulatory bodies outside the U.S. to support collaborative enforcement to curtail bribery, corruption, and other financial crimes.

Last year, the FinCEN clarified possible enforcement actions when an actual or possible violation takes place, noting that it has the authority to take any of six different actions:

1. No Action—Upon investigation, the FinCEN may choose to close a matter with no additional action. However, if new information comes to light—either in the closed matter or in new suspected violations—the case may be reopened.
2. Warning Letter—If warranted, the FinCEN may issue a warning “through a supervisory letter or similar communication.”
3. Equitable Remedies—If the FinCEN believes an organization or individual has violated, is violating, or will violate applicable regulations, it may seek an order to enforce compliance.
4. Settlements—As with other corruption enforcement regulations, like the Foreign Corrupt Practices Act (FCPA), enforcement actions may include corrective financial penalties.
5. Civil Money Penalties—On top of remedial penalties, the FinCEN may also assess a civil money penalty.
6. Criminal Referral—Depending on the circumstances of the violations, the matter may also be referred to the relevant law enforcement agencies for investigation and criminal prosecution.

Passage of the CTA brings more clarity to the possible penalties for violations. Specifically, the CTA allows regulators to impose civil and criminal penalties if an organization is found to have violated the terms of the CTA.

• Civil penalties of up to $500 a day for the entirety of the violation
• Criminal fines up to $10,000 and/or up to two years of imprisonment

Unauthorized disclosure of information collected also carries the threat of penalties and fines, perhaps in response to the FinCEN leak that took place last year.

Establishing a solid risk management process to address regulatory expectations

As we’ve seen with FCPA enforcement actions in recent years, organizations that establish strong due diligence and third-party monitoring programs to mitigate regulatory risk tend to fare better in the event of a compliance failure. The same holds true with the FinCEN. The 2020 guidance emphasized that the FinCEN considers the adequacy of an organization’s risk management program, particularly regarding “pillar requirements”—from establishing a system of internal controls and having it tested independently to designating a person responsible for day-to-day compliance and providing appropriate training to other personnel. Just last year, the FinCEN added another pillar that requires organizations to conduct risk-aligned, customer due diligence and ongoing monitoring of transactions.

No program is infallible, however the FinCEN does consider mitigating circumstances:

• The quality of the program
• Prompt, effective action if a violation is discovered
• Voluntarily disclosure of the suspect issue, sue
• Full cooperation with any subsequent investigation

A key component of risk-aligned due diligence centers on identifying Ultimate Beneficial Ownership (UBO).While not inherently illegal, beneficial ownership can be used by bad actors to hide a wide range of financial crimes, from bribery to terrorist financing. In the absence of a global beneficial ownership registry, organizations must rely on due diligence to uncover these hard-to-spot connections. What gaps do you need to fill in your due diligence resources?

We’re here to help.

Arrange a personalized demo of Nexis Diligence™ to see how our world-leading source universe —including Dun & Bradstreet® Ultimate Beneficial Ownership data—can help you mitigate regulatory risk more efficiently.