Congress is considering a new draft bill, the Counter Terrorism and Illicit Finance Act (“CTIFA”), currently in committee in the Senate.  The CTIFA proposes the most substantial overhaul to the Bank Secrecy Act (“BSA”) since the PATRIOT Act.

This post is the first entry in a two-post series discussing the CTIFA. Here, we summarize recent Senate hearings on the bill and AML reform, which suggest that the CTIFA enjoys political momentum. We also discuss what is arguably the most dramatic change proposed by the CTIFA: requiring legal entities to submit to FinCEN of a list their beneficial owners (“BOs”) – a requirement backed up by civil and criminal penalties for non-compliance — and the creation of a directory of these BOs, which would be accessible to local and international law enforcement and financial institutions. This proposal in part seeks to ease the burdens faced by financial institutions in complying with FinCEN’s Customer Due Diligence (“CDD”) regulation, which takes effect on May 11, 2018 and requires financial institutions to determine BO for legal entities.

In our next post, we will discuss CTIFA’s many other proposed revisions to the BSA. These include: expanding the scope of voluntary information sharing among financial institutions; raising the minimum monetary thresholds for filing Currency Transaction Reports (“CTRs”) and Suspicious Activity Reports (“SARs”); expanding the prohibition against disclosing SAR-related information to third parties, including in private litigation; codifying absolute immunity for SAR filing; allowing FinCEN to issue no-action letters; creating a safe harbor for AML-related technological innovation; requiring a review of whether FinCEN should assume a greater role in AML/BSA exams of financial institutions; and requiring an annual report regarding the usefulness of BSA reporting to law enforcement.

Senate Hearings and Bipartisan Support

The bill, still under discussion and in draft form, was penned by Rep. Steve Pearce(R-New Mexico) and Rep. Blaine Luetkemeyer (R-Missouri). The bill closely tracks reforms discussed in a recent report from The Clearing House, “The New Paradigm,” which analyzed the effectiveness of the current AML and anti-terrorism financing regime and proposed a series of reforms to remedy perceived problems with that regime. Greg Baer, President of The Clearing House, testified before the Senate on the CTIFA and guest blogged here in May 2017 on The New Paradigm.

Sen. Mike Crapo (R. Idaho) led two hearings before the Senate Committee on Banking, Housing, and Urban Affairs  (“the Committee”) on January 9 and 17, 2018, and heard testimony from the following five individuals: (statements are here, here,here, here, and here).

• Sigal Mandelker, Under Secretary for Terrorism and Financial Crimes of the U.S. Department of the Treasury

• M. Kendall Day, Acting Deputy Assistant Attorney General, Criminal Division of the U.S. Department of Justice

• Greg Baer, noted above

• Heather A. Lowe, Legal Counsel and Director of Government Affairs for Global Financial Integrity

• Dennis M. Lormel, President & CEO of DML Associates, LLC

In a statement on the hearing, Sen. Crapo focused on the threat money laundering poses, especially as it relates to terrorist financing.  He lauded the “industry of technical and financial professionals dedicated to managing the day-to-day BSA and other threat finance compliance requirements” and found that it was incumbent on Congress to “ensure that all of this work and the resources involved result in a ‘high degree of usefulness,’ in protecting this nation.”  Sen. Warren (D-Mass.) agreed, stating in the hearing that “[m]oney laundering is a massive problem . . . [b]ut it seems to me we need to rethink a lot of our money laundering laws some of which . . . were written back in the 1970s and are badly out of date.”

The BO Directory

Of the changes proposed by the CTIFA, the most substantial change is Section Nine, which creates the BO directory and establishes general guidelines by adding 31 U.S.C. § 5333. These rules are generally limited to (1) corporations and (2) limited liability companies.  Tracking FinCEN’s new CDD regulation,  the CTIFA defines a BO as a “natural person” who either (i) “exercises substantial control over a corporation” or (ii) “owns 25 percent or more of the equity interests . . . or receives substantial economic benefits from the assets.”  “Substantial economic benefits” means that a person “has an entitlement to the funds or assets of the [entity] . . . that, as a practical matter, enables the person, directly or indirectly, to control, manage, or direct the” entity.

For corporations or LLCs that form after passage, the bill requires submission of a list of BOs to FinCEN that includes name, address, and passport of driver’s license number. For corporations or LLCs already in existence, the bill requires (1) an update of BO information 60 days after any changes and (2) submission of an annual filing to FinCEN containing BOs and their name, address, and passport or driver’s license number.  For an existing company, these requirements will start two years after final regulations are issued.  Even if a BO is an exempt entity (discussed below), it must still provide the information described above and below, but need not provide information on its own BOs.  If a BO is foreign, the applicant must certify that (1) it has a verified photo ID, (2) verified the name, address, and identity of the foreign BO, and (3) will retain this information for five years after the entity has ceased to exist.

Even if an entity is a corporation or LLC, however, it may still be exempt from reporting requirements. The following types of entities need not report BO information and will not be included in the national directory:

• State or municipal entities

• Depositories, credit unions, and bank holding companies

• Registered issuers, investment companies, advisers, and brokers and dealers

• Registered exchanges or clearing houses

• Insurance companies

• Registered entities under the Commodity Exchange Act

• Public accounting firms

• Public utility companies

• Nonprofits

• Any business that: employs more than 20 people; files income tax returns in the US with over $5 million in gross receipts; and has “an operating presence at a physical office within the United States”

The BO information that FinCEN collects will create the first national directory. This directory will be accessible for three purposes:

• Upon criminal subpoena from a federal agency

• Upon request by a federal agency on behalf of law enforcement of a foreign country

• Upon request by financial institution, but only with customer consent, as part of compliance with the BSA, the PATRIOT Act, or other law

Failure to comply with these new regulations can lead to civil and criminal penalties. Punishable acts include:

• “[K]knowingly providing . . . false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph, to FinCEN”

• “Willfully failing to provide complete or updated beneficial ownership information to FinCEN”

• “Knowingly disclosing the existence of a subpoena, summons, or other request for beneficial ownership information”

The BO Directory: Closing Loopholes and Remaining Questions

Not only should the national directory of BO information make compliance with the new CDD regulation easier—especially for smaller institutions—but it also would provide a potential defense if regulators come knocking: “I relied on your database.”  Although the directory may take some time to get up and running, the provision requiring all new corporations and LLCs to file papers with FinCEN should make significant inroads in the fight against money laundering and improve proactive information-sharing (we have blogged about AML information sharing here, here, here, here, here, and here).  The biggest exemption to providing BO information applies to business with 20 or more employees, over $5 million in gross sales, and with a physical location in the United States.  This exemption might provide some potential loopholes for sophisticated launderers to subvert the BO rules — although clearly the greatest concern regarding lack of BO information has involved not operating businesses, but legal entities which arguably exist merely to receive, hold and send funds.  For companies falling into this exemption, financial institutions must still follow the new CDD rule and obtain BO information from them. This exemption also tracks a similar exemption contemplated by another proposed legislation involving AML/BSA reforms, The Corporate Transparency Act of 2017,and about which we have blogged. This other legislation is both less comprehensive and more convoluted than the BO provisions of the CTIFA; it seeks regulations requiring legal entities formed in States which do not require robust identification of BO to file reports to FinCEN that provide the same information about BO that the entities would have to provide, if they were in a State with a sufficiently robust BO reporting system.

Another significant provision is the new civil and criminal penalties for failing to provide accurate BO information. By penalizing the potential launderer instead of the financial institution, it places leverage on the parties who know the most.  Under the new CDD rule, only financial institutions, acting as intermediaries, are requesting BO information from legal entities.  This new scheme cuts them out and requires information to be reported to the government directly by the legal entity.

The bill is still unclear on when a new business must provide BO information to FinCEN and grants sixty days for an existing entity to provide a change in BO. This presents a potential dilemma for banks.  Should a bank provide services to an individual that is not yet on the FinCEN database if they show they have filed?  Logistically, how long will it take FinCEN to add BO information?  And, what confirmation process if any will FinCEN use to determine whether the BO information provided is accurate?

These questions may not be answered until regulations are finalized—if this bill survives the rigorous legislative process. Passage is far from certain, but there seems to be bipartisan support.  Although certain parts of the bill have provided some disagreement between financial institutions, industry watchdogs, and law enforcement, both Sen. Crapo and Sen. Warren agree that the BSA sorely needs an update.  The real battle on the questions posed above will come in the rulemaking process.  Treasury and interested stakeholders will need to find solutions to tough issues relating to process and fairness as well as more mundane questions, like what forms will be used.  For the moment, industry appears to be optimistic that this bill will become law.

In the next post, we will discuss the many other amendments to the BSA proposed by the CTIFA.