The Corporate Transparency Act — Will It Work?

The beneficial ownership reporting requirement under the Corporate Transparency Act goes into effect on January 1, 2024.  There is a lot being written by law firms, business publications, accounting firms and trade groups trying to explain what the rule requires, including Parallel Markets. But what isn’t being discussed is how this rule is actually going to work and whether it will meaningfully change the effectiveness of the anti-money laundering landscape. Notably, just this week 74 members of both the House and the Senate, Democrats and Republicans, sent a letter to the Department of Treasury and the Financial Crimes Enforcement Network (FinCEN) requesting that the beneficial ownership reporting requirement under the Corporate Transparency Act be postponed for a full year.

Is this all a lot of alarmist noise allowing the perfect to be the enemy of the good enough?  Or are there legitimate concerns that this rule is about to become a train wreck?

FinCEN has been remarkably uncommunicative in the leadup to this effective date and their implementation has been so opaque that no one actually knows what to expect. (Numerous organizations including trade groups, law firms and vendors have requested meetings with FinCEN to discuss the requirements and implementation details and FinCEN has refused those requests.)

Over the past several months, FinCEN has been feverishly adding more and more FAQs to its public website in an attempt to provide guidance.  There are now 74 questions and answers.  More than 60 of those have been issued since Labor Day on seven different days without any clear thematic approach to those releases.  In other words, all of the guidance is coming out piecemeal and very close to the implementation date without much time to digest that guidance, assess requirements and ask questions. And even with 74 FAQs, here are some critical questions that have not yet been answered:

1. Where is the form?

FinCEN has provided guidance explaining the type of beneficial ownership information that each reporting company will have to submit pursuant to the Corporate Transparency Act, but has yet to provide the actual form for submission.  In the absence of the form, data that needs to be provided can be collected, but there is no ability to prepare the filing in advance. Additionally, numerous companies, including Parallel Markets, stand at the ready wanting to help reporting companies fulfill their obligation and handle automated and secure reporting on their behalf. They have developed software to collect the necessary beneficial ownership information but they cannot complete their product without a reporting form and cannot reliably promise reporting companies that they can handle submission until the form is released and evaluated. Given that the rule goes into effect in less than 10 business days and there is still no transparency on how data will be submitted, it will be virtually impossible for automated reporting to work on Day 1. 

2. When will the API be released?

The most effective method for automated reporting will be through an API. In their Corporate Transparency Act FAQs, FinCEN has promised there will be an API but have yet to release it (not surprisingly since there can’t be an API without a form). Again, this means it is virtually impossible to conduct automated reporting for the first Corporate Transparency Act submissions.

3. What are financial institutions expected to do?

It is almost certain that at least one financial institution hosts one or more accounts for every reporting company.  In order for them to have fulfilled their regulatory obligations, they have collected Know Your Customer (KYC) data about these legal entities including beneficial ownership information pursuant to the Customer Due Diligence (CDD) Rule. Are these financial institutions expected to confirm that their customers have submitted their beneficial ownership data to FinCEN?  What if they haven’t?  Is this a red flag?  Do they have any obligation to push their customers to report?  Once their customers have reported, do financial institutions have any obligation to compare the data they have collected with their customers’ submissions to FinCEN? What if there is a discrepancy? 

Right now, the access rule - the rule that will explain who can access the FinCEN beneficial ownership registry - has not even been released.  Further, FinCEN has no intention of verifying or validating any of the beneficial ownership information submitted.  Assuming financial institutions can get access to the submissions, what value does that information have if it has not been verified?

4. How will reporting companies be made aware of their obligations?

According to the letter from Congressional representatives filed on December 18th, a survey of small businesses revealed that 90% of small business respondents are “entirely unfamiliar” with their reporting obligations under the Corporate Transparency Act. FinCEN’s efforts to educate the business community appear to be inadequate and ineffective.  Yet at the same time, the failure to comply with these requirements are punishable with fines and even jail time. 

5. Will this reporting requirement move the needle to curb money laundering activities?

The underlying purpose of the Corporate Transparency Act’s beneficial ownership reporting requirement is to help the U.S. government uncover the ultimate beneficial owners of shell companies that control criminal enterprises and are moving money through U.S. markets. Will this work? 

In the absence of any verification or validation process, does the US government expect that criminal enterprises will voluntarily provide the layers of ownership that they have carefully constructed in order to frustrate their identification? There will be civil and criminal penalties for failing to provide accurate information (or any information) but how will FinCEN enforce this?  We will likely create an accurate registry of our law-abiding businesses but it is not yet clear how FinCEN proposes to utilize this database to actually uncover complex shell company structures that are designed to mask criminal activity.

So where do we go from here?  With collaboration and communication between private industry and government, there can be much better answers to the questions above that would help satisfy the aims of the Corporate Transparency Act. In talking to leaders of financial institutions, software companies and governmental policy experts, there are many innovative ideas that should be discussed and considered. Of course, getting the reporting mechanism up and running is the first critical step and we look forward to more announcements from FinCEN in the coming days and weeks that will facilitate automated reporting.  

Next, digital reusable identity—Parallel’s specialty—is an extremely valuable tool to achieving true corporate transparency.  Imagine how much more effective the beneficial ownership registry becomes when there is certainty that the information provided by a corporate entity to each financial institution with whom it does business is identical and has been independently reviewed and validated by each of those financial institutions. And then those corporate entities can export that identical information to satisfy their FinCEN reporting obligation - a step that financial institutions can help facilitate. This significantly alleviates the burden on financial institutions who would otherwise have to reconcile that data, creates another mechanism for educating reporting companies on their obligations and at the same time ensures that the information provided to FinCEN has actually been validated, in most instances, by several different independent actors.

The creation of the registry is a critical step to enhancing our country’s anti-money laundering framework and if implemented effectively, it can add critical transparency to complex corporate structures.  Parallel looks forward to working with our industry partners to help bring this about.

If you would like more information on how Parallel can assist you with Corporate Transparency Act compliance, please contact us at info@parallelmarkets.com.