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The US Financial Crimes Enforcement Network (FinCEN) has set out its second set of rules governing beneficial ownership information, enabling agencies to directly access the database and use it for more general purposes.
In mid-December, FinCEN released a proposed rule that governs access to the agency’s upcoming beneficial ownership register and protections of that data.
The rule lays down the circumstances under which beneficial ownership information may be disclosed to federal, state and local agencies, foreign governments and financial institutions.
Under the proposal, federal intelligence, national security and law enforcement agencies have direct access to the register, can run queries and review multiple results. However, they will need to submit a justification for the search, which will be checked by FinCEN.
State and local law enforcement agencies can also use the same search tool as federal agencies, providing they obtain court authorisation, which needs to be submitted to and approved by FinCEN before accessing the register.
A more restrictive approach applies to financial institutions, which will not be allowed to run open-ended queries or receive multiple search results. Instead, they would need to submit identifying information specific to a reporting company to receive information on the entity’s beneficial owners in a digital form.
Financial institutions can access the information only when they are carrying out customer due diligence and only with the consent of the company whose information they seek to access.
Meanwhile, the law provides the Treasury with a “unique degree” of access, whereby certain officials will be able to see the ownership information when they are working on tax administration and enforcement actions. The Treasury will be able to use the information in sanctions designation investigations or for intelligence and analytical purposes.
Foreign agencies and federal anti-money laundering (AML) supervisors may also have limited access to ownership information under certain circumstances.
Commenting on the proposal, Jamal El-Hindi, counsel at Clifford Chance and former FinCEN deputy director, told VIXIO that the rulemaking is “pretty straightforward and repeats quite a bit of the statute”.
“While many will read this and not see any surprises, some privacy advocates on the Hill might take issue with some of the aspects in the proposed rulemaking,” E-Hindi said, adding that they might argue for a more restrictive reading of the statute in terms of access and use of the database.
One of the outspoken critics of the proposed rule is Patrick McHenry (R-NC), the new chairman of the House Financial Services Committee.
According to McHenry, the rule “does not prioritise Americans’ financial privacy in the way Congress intended”.
Privacy is one of McHenry’s main priorities. The House committee chair is working on legislation that would modernise financial data privacy laws.
“Until we see a real effort to protect this confidential information, Republicans remain concerned about FinCEN’s commitment to privacy and civil liberties,” the lawmaker stressed.
As proposed in the rule, certain federal and state agencies would have direct access to the database.
Although this is “not surprising, it was not always a given”, according to El-Hindi.
“Because of some ambiguities in the way the statute was drafted FinCEN had leeway to be more restrictive, and some in Congress may have wanted FinCEN to have much tighter control on the direct use of this dataset, even with respect to federal agency use,” the ex-FinCEN official explained.
In addition, law enforcement will be able to use the database to support its efforts with respect to general law enforcement activity, rather than only for a specific investigation into a specific reporting company.
This means that the rule indicates that database access will enable appropriate users to identify trends, patterns and networks using legal entities for bad purposes, El-Hindi pointed out.
“While this is a responsible way of getting the most value out of the data, the statute did not make this a given,” he added.
Meanwhile, although the rule does not directly state this, El-Hindi notes that the preamble discussion shows that financial institutions only need to obtain the consent of a reporting company that is their customer once and then track whether that consent has been revoked.
Firms that collect beneficial owner information as part of customer due diligence may likely respond by adjusting practices to obtain such consent at the time of onboarding, El-Hindi said.
Pressing funding constraints
The “access” rulemaking follows the publication of the “reporting” rule in September, which set out which firms are required to report their beneficial owners to FinCEN.
Both rulemakings are part of a trio that FinCEN must carry out in accordance with the Corporate Transparency Act (CTA), part of the US Anti-Money Laundering Act 2020.
Although many experts agree that the agency is doing a well-thought and considerate job in carrying out its new tasks, there have been significant delays during the rulemaking process.
In the proposed rule, FinCEN states that it is already facing significant resource issues and, once the register is up and running, it expects an exponential increase in the number of inquiries it needs to handle.
FinCEN currently fields around 83,000 inquiries a year. Provided that only 10 percent of the estimated 32m companies that will report their owners have queries to the agency, it is expected that the number of inquiries will grow by 3m, according to FinCEN.
FinCEN stresses that, in the absence of additional funds, it may need to identify trade-offs in relation to guidance and outreach activities and provide staged access by different users to the database.
It is unusual in rulemaking for an agency to get a green light to state how under-resourced it is when it is being asked to implement something, according to El-Hindi.
Nonetheless, the agency’s plea was heard on Capitol Hill. The administration’s omnibus spending bill, published a week later, included $190.2m for the agency, an 18 percent increase from the previous year.
