Requirements for “effective ownership” reporting are outlined in a final rule issued by the US Department of the Treasury

A final rule designating what types of legal entities will be required to report information about their beneficial ownership was recently issued by the US Treasury Department’s anti-money laundering unit.

This government initiative is an attempt to uncover corrupt companies that are enjoying the benefit of anonymity. It is worth mentioning that the final rule will not define who will have access to the beneficial ownership data. This point is especially interesting for financial institutions that already mandatorily collect this type of information from their customers as part of their due diligence obligations.

The rule, issued by the Treasury’s Financial Crimes Suppression Network (FinCEN), “will make it more difficult for criminals, organized crime gangs and other illicit actors to hide their identities and launder their money through the financial system,” said the  secretary of the Treasure, Janet Yellen.

The rule is not expected to take effect until January 1, 2024. “FinCEN continues to develop the infrastructure to administer these conditions in accordance with the CTA’s strict security and confidentiality requirements, including the information technology system that will be used to store beneficial owner information” the Treasury department said in its summary on regulation.

Entities that will be affected by the rule

As determined by FinCEN, they will be required to report beneficial ownership information in accordance with the final rule (subject to the applicability of specific exemptions):

  • Limited liability companies
  • Commercial funds
  • The vast majority of limited liability companies
  • Corporations and limited liability companies (LLCs)

Also according to FinCEN, other types of legal entities, including certain trusts, “are excluded from the definitions to the extent that they are not created by filing a document with a secretary of state or similar office. FinCEN recognizes that, in many states, the creation of most funds does not normally involve filing such a charter”.

The final rule also informs that a beneficial owner is someone who, directly or indirectly, exercises substantial control over a reporting company or has control of at least 25% of the equity interests of a reporting company.

Access to reported information

FinCEN will still issue a second rule to establish who can access the beneficial ownership information that the agency collects in its database, for what purpose it can be used and what exceptions will be allowed.

Following the issuance of these reporting and access rules, CTA requires FinCEN to issue a third rule: this new regulation will change the  rule  Customer Due Diligence (CDD) – under which financial institutions are required to collect beneficial owner information – to take the new rules into consideration.

It is important to remember that it will be some time before financial institutions and their anti-money laundering and compliance professionals are aware of how FinCEN’s regulatory activity under the CTA will affect their CDD requirements. Before that, there will be several opportunities for institutions and trade associations to comment as FinCEN develops the remaining two rules.