Corporate Transparency Update. The focus of this website has been on the legal cannabis industry in California. However, many of our clients and regular readers are aware that our practice also focuses on:
- Taxation and Transactional Consulting for pass-thru entities, [limited liability companies [“LLC’s], partnerships and S Corporations
- Alternative Asset and Debt Hedge Funds and Private Equity
- US Title 31 – anti-money laundering [“AML”] provisions and virtual currency
- US Title 26 [“IRC”] – IRS practices and procedures relating to civil and criminal tax controversies
We have written about FinCEN’s Cannabis Industry Policy, AML anti-structuring policy, and the FDIC’s initial efforts at beneficial ownership, transparency for LLC’s acquiring residential property in major markets and the application to the California cannabis industry.
HR 2513 – Corporate Transparency Act
On October 23, 2019, the House passed H.R. 2513. H.R. 2513 is a two-part Bill. Division A is the Corporate Transparency Act, or CTA. If enacted, the CTA would require certain, defined U.S. companies to report identifying information regarding their beneficial owners to the Treasury Department – so that such information would be available to both the government and financial institutions carrying out their own AML duties.
- Requires certain, defined corporations and limited liability companies (see below) to disclose their Beneficial Owners [“BOs”] to FinCEN at the time the company is formed.
- Establishes minimum BO disclosure requirements, including the BOs’ name, date of birth, current address, and driver’s license or non-expired passport number.
- Requires covered companies to file annually with FinCEN a list of its current BOs, and a list of any changes in BOs that occurred during the previous year.
- Imposes civil and criminal penalties for persons who willfully submit false or fraudulent BO information, or who knowingly fail to provide complete or updated BO information.
- The key provision of the CTA is its definition of a “BO.” With certain exceptions, noted below, the CTA broadly defines a “beneficial owner” as a “natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise –”
- exercises substantial control over a corporation or limited liability company;
- owns 25 percent or more of the equity interests of a corporation or limited liability company; or
- receives substantial economic benefits from the assets of a corporation or limited liability company.
At this point our regular readers should ask why we are writing about federal legislation that is perhaps indirectly related to individuals and entities involved in California’s cannabis industry. The CTA provides for a number of exemptions from the BO disclosure requirements which will be discussed in a separate article.
The CTA will have little direct impact on the owners of “plant touching” cannabis businesses. However, it will have significant application to the owners and purchasers of residential and commercial real estate that may be acquired as investment of the earning of cannabis industry businesses, which will certainly be exacerbated if the proceeds of cannabis activity originate in the “black market”.
It is also quite possible that the “cash out” of certain cannabis investments could wind up being invested in real estate or operating businesses which are subject to the CTA.
H.R. 2513 contains another section – “Division B” – entitled the “Counter Act of 2019.” The acronym “COUNTER” stands for “Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform.” Division B stretches for 63 pages. It is almost twice as long as the CTA. The COUNTER Act of 2019 represents a grab-bag of detailed provisions relating to BSA/AML reforms which previously had been set forth in a proposed and inelegantly-named bill, “To make reforms to the Federal Bank Secrecy Act and anti-money laundering laws, and for other purposes” (on which we previously blogged, here). The COUNTER Act of 2019 has 35 different sections, including a whistleblower provision; a provision including “dealers in antiquities” in the definition of a “financial institution” covered by the BSA; and many other provisions pertaining to information sharing, resource sharing, and technological innovation.
FATF – Best Practices for Beneficial Ownership
The Financial Action Task Force (“FATF”), an international and intergovernmental AML watchdog group, has issued a document entitled “Best Practices on Beneficial Ownership for Legal Persons,” (“Best Practices Guidance”) on November 5, 2019 which urges countries to use multiple methods to identify accurately and timely the beneficial owners of legal entities. This document also describes some thoughtful recommendations.
The FAFT Best Practices Guidance represents an evaluation of the approaches of the member countries to the collection and maintenance of beneficial ownership information, including specific recommendations. The FATF Guidance identifies six challenges to tracking beneficial ownership
 Much of the initiative in this area was inspired by a series of articles in the New York Times – Anonymous Owner, L.L.C.: Why It Has Become So Easy to Hide in the Housing Market. The issue was discussed extensively in an article in the June 20, 2019 edition of Ballard Spahr LLP’s Money Laundering Watch newsletter – Lawmakers Renew Effort to Overhaul AML Laws, Including Greater Beneficial Ownership Transparency and in Congressional discussion draft of The Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings [“Illicit Cash”] Act.
 Transactions Involving Changes in Ownership, Financial Interests and Entities
 The purpose of the CTA is described as,“To ensure that persons who form corporations or limited liability companies in the United States disclose the beneficial owners of those corporations or limited liability companies, in order to prevent wrongdoers from exploiting United States corporations and limited liability companies for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations and limited liability companies, and for other purposes”.
 The “substantial economic benefits” prong under the CTA’s definition of a “beneficial owner” represents an expansion of the definition of “beneficial owner” imposed by FinCEN’s existing BO regulation, which contains only the two “control” and “ownership” provisions. How these competing definitions of the same key term can be reconciled is not clear. It is also not clear is how financial institutions will address checking the beneficial ownership information that they have collected from their customers under the BO regulation against a database that presumably will include different and more expansive information.
 FATF previously released its Guidance on Transparency and Beneficial Ownership in October 2014. The earlier FATF Guidance described steps countries should take to prevent the misuse of legal persons for ML/TF. The FATF did not specify the mechanisms that countries should utilize for the collection of beneficial ownership information. Rather FATF described three options for facilitating the cooperation of companies with the competent authorities and ensuring the availability of beneficial ownership information on companies. The three options are:
“Registry Approach – this approach requires company registries to obtain and hold up-to-date information on the companies’ beneficial ownership. This information is made publicly available and would facilitate access by financial institutions, designated non-financial businesses and professions (DNFBPs) and other competent authorities.
Company Approach – under this approach, companies are required to obtain and hold up-to-date information on the companies’ beneficial ownership or companies to take reasonable measures to obtain and hold up-to-date information on the companies’ beneficial ownership.
Existing Information Approach – under this approach, existing BO information is gathered from existing sources, including: (i) information obtained by FIs and/or DNFBPs; (ii) information held by other competent authorities on the legal and BO of companies; (iii) information held by the company as required; and (iv) available information on companies listed on a stock exchange, where disclosure requirements ensure adequate transparency of beneficial ownership.”
 The challenges identified were
“Lack of adequate risk assessment concerning the possible misuse of legal persons. Specifically, the mutual evaluation revealed that not all types of legal persons were covered in the risk assessment, relevant risk assessment was not consistent with the results of national risk assessments, and only domestic threats and vulnerabilities associated with legal persons were considered. Finally, FATF concluded that registries, companies, FIs and DNFBPs and competent authorities did not demonstrate a good understanding of the risks involved in using legal persons.
Adequacy, accuracy and timelines of information on beneficial ownership. The evaluation revealed that beneficial ownership information collected was not accurate and there were no systems in place to actively verify, test or monitor the information. Nor were there requirements of legal persons to update their beneficial ownership information or inform the registry that there were changes to beneficial ownership. Countries did not coordinate among different sources of information to cross-check information for accuracy. Moreover, the parties responsible for updating the information lacked rigorous customer due diligence (“CDD”) measures and were unable to identify beneficial ownership information when complex structures or foreign ownership was involved. Finally, there were no record retention requirements.
Access by competent authorities. The evaluation found that there was inadequate mechanism to ensure that competent authorities had timely access to beneficial ownership information. This was so because of the obstacles to information sharing caused by data protection and privacy laws. Moreover, FATF found that competent authorities did not share information and had no procedures to seek information from parties obligated to provide information. The lack of registration and licenses mechanisms caused competent authorities’ difficulty in identifying the source of information. Finally, competent authorities lacked sufficient resources to carry out investigations
Bearer share and nominee shareholder arrangements. The evaluation determined that countries did not place risk mitigating measures in place to address money laundering concerns, particularly because ownership of the bearer shares and share warrants were not sufficiently accessible or transparent. FATF found that the use of nominee shareholders obscured the ultimate control and ownership of the companies.
Fine and sanctions. The evaluation found that there was generally a lack of effective, proportionate, and dissuasive sanctions directed at companies that failed to provide accurate and up-to-date information on beneficial ownership and reporting entities which failed to apply specific CDD measures required for legal persons. As we previously blogged, many countries in the EU have failed to prosecute people for money laundering offenses and has in general lagged behind the US on enforcement actions against money launderers.
International Cooperation. The evaluation found that there were inadequate mechanisms for monitoring the quality of assistance received from other countries. Specifically requests for information often took a long time to fulfill when they involved multiple international agents and complex legal issues. This concern was amplified by the fact that not all countries keep beneficial ownership information.”