The Uniform
Beneficial Ownership Rule- Big Changes Coming
A Three-part
Series- Part Two-The Changes to the Rule
Introduction
In our first blog in this series, we noted that there are
several reasons that the Uniform Beneficial
Ownership rule was expanded. The
attempt to put sanctions on Russian persons and organizations has proven to be
difficult based on some weaknesses in our overall regulatory scheme. We noted that one of the biggest holes in the system is
that shell corporations have the ability to be able to traffic in money laundering. The changes to the rule are designed to address
the current “holes” in our AML/CFT system
While the Uniform Beneficial Ownership (“UBO”) rule changes
can help with the effort to reduce illicit transfers of money and wealth, the overall
effectiveness of any regulation is limited by the overall participation of the
stakeholders. For the changes to work,
there are many players that must be engaged in the overall process. Making sure
that you understand the requirements of the regulation and what it is intended
to do is a critical component of the overall process
Changes to the UBO Rule
The CTA, which is part of the Anti-Money Laundering Act of
2020 and enacted into law as a part of the National Defense Authorization Act
for Fiscal Year 2021, establishes ultimate beneficial ownership (UBO)
information reporting requirements for the vast majority of privately held
corporations, limited liability companies and other similar entities created
in, or registered to do business in, any of the states of the United States. Under this rule, the number of companies
that must report their beneficial ownership has been greatly expanded. The rule requires:
The Final UBO Rule applies to Reporting Companies. Reporting
Companies are U.S. domestic companies and certain non-U.S. foreign companies:
- Domestic
Reporting Companies: Any corporation, limited liability company or
other similar entity created by the filing of a document with a secretary
of state or any similar office under the law of a State (including U.S.
territories and possessions) or Indian tribe (unless exempt).
- Foreign
Reporting Companies: Any entity that is formed under the laws of a
non-U.S. jurisdiction but is registered with a secretary of state or
similar office to do business in that State or tribal jurisdiction in the
United States (unless exempt).
Despite the broad definition of Reporting Companies under
the CTA, the Final UBO Rule exempts 23 types of entities from the reporting
requirements, including:
- Entities
already required to disclose beneficial ownership information publicly
or to federal regulators (g., U.S. banks and credit unions, U.S. branches
and agencies of non-U.S. banks, securities broker-dealers, investment
advisers registered with the U.S. Securities and Exchange Commission, and
money services businesses registered with FinCEN);
- Large
operating companies that (1) have 21 or more full-time employees,
(2) filed federal income tax returns with the United States in the
previous year that demonstrated more than $5,000,000 in gross receipts or
sales in the aggregate, and (3) have an operating
presence at a physical office within the United States.
- Inactive
entities that existed on or before January 1, 2020, but, among
other requirements, are not engaged in active business and have not
received or sent funds in an amount greater than $1,000; and
- Subject
to exceptions, subsidiaries whose ownership interests are
controlled or wholly owned, directly or indirectly, by one or more exempt
entities.
By looking at who is required to report and who is exempted,
we can note that the exempt companies tend to be publicly held, and as a
result, they have significant public reporting requirements. These companies are also large and have
strong internal control requirements that make them much less likely to be used
by potential terrorists and money launderers.
If the rule applies to a company, there are specific reporting
requirements:
Reporting Company Information
- Full legal name and fictitious names (e., “doing
business as” names).
- Address of the reporting company’s principal place of
business.
- Jurisdiction of incorporation or formation (for both
domestic and foreign reporting companies) and initial registration in the
United States (for foreign reporting companies); and
- Taxpayer Identification Number (TIN).
Beneficial Owners & Company Applicant Information
- Full legal name.
- Date of birth.
- Current residential address; and
- Unique identifying number from an acceptable
identification document (or, if information has already been provided to FinCEN,
by a FinCEN identifier).
This list of
information is fairly well known and has been established since the passage of the
original UBO rule. There are some
changes in the definitions that change the overall approach that an institution
should use:
Beneficial Owner: Under the CTA, a “beneficial
owner” of a reporting company is “any individual, who, directly or
indirectly, either exercises substantial control over such reporting
company or owns or controls at least 25 percent of the
ownership interests of such reporting company.[1]
It is really the “control” prong of the regulation that has
changed. In the past, the rule called
for inclusion of a single person with control, but the final rule calls for any
and all persons who have control to be listed.
Substantial Control: The Final UBO Rule’s broad definition of
“substantial control” states that an individual exercises substantial control
over a reporting company if the individual:
(A) Serves as a senior officer of
the reporting company.
(B) Has authority over the
appointment or removal of any senior officer or a majority of the board of
directors (or similar body);
(C) Directs, determines, or has
substantial influence over important decisions made by the reporting company,
including decisions regarding:
1. The
nature, scope, and attributes of the business of the reporting company,
including the sale, lease, mortgage, or other transfer of any principal assets
of the reporting company.
2. The
reorganization, dissolution, or merger of the reporting company.
3. Major
expenditures or investments, issuances of any equity, incurrence of any
significant debt, or approval of the operating budget of the reporting company.
4. The
selection or termination of business lines or ventures, or geographic focus, of
the reporting company.
5. Compensation
schemes and incentive programs for senior officers.
6. The
entry into or termination, or the fulfillment or non-fulfillment, of
significant contracts; or
7. Amendments
of any substantial governance documents of the reporting company, including the
articles of incorporation or similar formation documents, bylaws, and
significant policies or procedures.
These rules will
take effect in January 2024, but reporting will first be due January 1,
2025. There is a second part of the rule that is current
out for public comment[2]
There are
several practical considerations for compliance when it comes to covered
institutions. For example:
·
Onboarding procedures should still require UBO information.
Covered institutions must ensure
customers are in compliance with their own reporting requirements, perhaps
adding a questions to onboarding that ask the customer to verify that they have
been registered.
·
Consider enhancing written policies and
procedures – remember the reason for the regulation is to help consider what
the ownership of a company means when making a risk assessment
·
When ownership changes, the risk profile of the
company may be impacted
We will discuss these more in detail in our
third installment of this series.
***James DeFrantz is Principal at Virtual Compliance
Management. For More information please
visit our website at www.vcm4you.com
***
No comments:
Post a Comment