The Issue of Who Truly Runs and Owns Entities Contines to Gnaw at Congress and Law Enforcement

First Post in a Two-Post Series on the ILLICIT CASH Act

On June 10, a bipartisan group of lawmakers in the U.S. Senate released a discussion draft of legislation proposing to overhaul the nation’s anti-money laundering (“AML”) laws. The discussion draft, titled The Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act (“the Act”), is very detailed and sets forth many proposed changes to the Bank Secrecy Act (“BSA”) over the course of 102 pages.

In this post, we will focus on a key provision of the Act, which sets forth a version of the now-familiar requirement aimed directly at tracking the beneficial ownership (“BO”) of U.S. entities. In our next post on the Act, we will summarize its many other provisions.

As we have blogged repeatedly, the issue of beneficial ownership is critical to current AML efforts, both at home and abroad. Shell companies can play a key role in potential money laundering. A recent report by Global Financial Integrity, for instance, revealed that in all 50 U.S. states, more information is currently required to obtain a library card than to incorporate in the U.S. As we also have blogged, the global community – fairly or not – repeatedly has criticized the U.S. as a potential haven for money launderers and tax cheats. Accordingly, U.S. lawmakers have undertaken several initiatives to attempt to close this perceived compliance gap and impose broader and more centralized rules regarding the gathering and reporting of BO information to the federal government, rather than leave these issues within the discretion of the various States. During a hearing held on June 19, by the U.S. Senate Committee on the Judiciary, entitled Combatting Kleptocracy: Beneficial Ownership, Money Laundering, and Other Reforms, Senator Lindsay Graham (R. – S.C.), repeated the refrain that “[b]eneficial ownership is the most prominent vulnerability in the U.S. anti-money-laundering system[.]”

Under current U.S. law, the onus is on financial institutions to identify beneficial owners at the time a covered entity opens an account. The Act would require entities to file BO information at the time of incorporation (entities already incorporated will be required to file its BO information within two years of enactment) with the Financial Crimes Enforcement Network (“FinCEN”). This information would be accessible to local, Federal, State and Tribal agencies; international law enforcement agencies under certain approved procedures; and via a “request made by a finacial institution or any other entity or person subject to customer due diligence requirements, with the consent of the reporting company, to facilitate the compliance of the financial institution or other entity or person with customer due diligence requirements” under applicable law.

Although financial institutions might welcome the ability to access FinCEN’s database of BO information, in order to help satisfy their own AML obligations, the Act requires financial institutions subject to customer due diligence requirements to report to FinCEN any discrepancies between their information and FinCEN’s information (and also “inform the relevant customer of their obligations under this section.”). Interestingly, the Act also provides summons authority to the Secretary of the Treasury or FinCEN in order to obtain records or testimony to assess the accuracy of reported BO information.

The Act defines “beneficial owner” as a natural person who, directly or indirectly, “exercises substantial control” over the entity, or “owns 25 percent or more of the equity interests of such entity or receives substantial economic benefits from the assets of such entity.” This definition is slightly different and slightly more precise than the definition set forth in the House Corporate Transparency Act (“CTA”), which defines a “beneficial owner” as a natural person who “(i) exercises substantial control over a corporation or limited liability company; or (ii) has a substantial interest in or receives substantial economic benefits from the assets of a corporation or limited liability company.” These two definitions are similar in some respects to that in the BO Rule itself (about which we blog frequently and have provided practical tips for compliance here and here), but they lack the precision found in the Rule. Both the Act and the CTA fail to define the term “exercises substantial control;” the Act (but not the CTA) defines “substantial economic benefits” as “an entitlement to more than [X] percentage of the funds or assets of an entity that the Secretary by rule shall establish.”

The announcement of a bipartisan discussion draft circumlated in the Senate – in the same week the House Committee on Financial Services began markup of the CTA – potentially represents momentum on the part of lawmakers to improve and modernize existing AML laws. Members of Congress have tried unsuccessfully to pass similar reforms in the past. Last year and on the eve of a scheduled markup of the House bill titled the Counter Terrorism and Illicit Finance Act, a new draft was sent to Congress that removed BO provisions similar those now being advanced.