iThe Corporate Transparency Act (“CTA”) took effect on Jan. 1, 2024. The CTA requires businesses organized or qualified to do business in the U.S. to report beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”) unless an exemption applies. The CTA imposes penalties for failure to comply with its reporting requirements. It also provides that financial institutions with “Customer Due Diligence” obligations under the Bank Secrecy Act (“BSA”) may, if they have already obtained written consent from a “reporting company” (as defined in the CTA), obtain access to the BOI of that company. A more difficult question is whether any “financial institution” as defined in the BSA may access BOI. Appendix D to the BSA lists 25 different types of entities (including any entity specially designated by the Secretary of the Treasury) as defined “financial institutions.”
While not defining the term “financial institution,” the CTA does specify that it must be an entity “subject to due diligence requirements.” FinCEN issued an Access Rule on Dec. 22, 2023, incorporating that provision. Clearly banks and trust companies are “financial institutions” with Customer Due Diligence obligations. But that leaves 23 other categories of entities, such as travel agencies and casinos, that are listed in Appendix D but do not necessarily have the same types of BSA obligations as banks and trust companies.
The potential for confusion arising out of the scope of the BSA definition is underscored by FinCEN’s Feb.13, 2024 notice of proposed rulemaking (“NPRM”). This is the 3rd time in 21 years that such a rule has been proposed. If adopted, the NPRM would subject investment advisers (including advisers to venture capital and to private equity funds) to the BSA reporting requirements enforced by FinCEN. The U.S. Securities and Exchange Commission (“SEC”) already requires investment advisers to report instances of possible money laundering, so the additional reporting to FinCEN should not pose unreasonable burdens on the advisers. The unanswered question is whether investment advisers, with the written consent of another entity, may access BOI filed with FinCEN. Consider an investment adviser to a private equity fund that requires its portfolio companies to consent to the adviser accessing BOI from FinCEN as a condition to receiving investment funds.
Even further afield is a recent decision in the United States Court of Appeals for the Second Circuit, which held that “financial institutions” include bank customers when a bank is acting as their agent (20-3257-cv(L) In re: Nine West LBO Sec. Litig.). Might this mean that if a bank is deemed to be an agent of a customer, the customer could be included under the umbrella of “financial institution” for purposes of the CTA?
It seems doubtful that Congress ever considered that coming within that definition would entitle bank customers to access the BOI of reporting companies. This definitional ambiguity will create challenges for potential “financial institutions” to determine whether they fall into this category or not, and if you fall within this category, you should consult with counsel for an analysis. However, without further guidance from FinCEN beyond those in the Access Rule, there may be a lack of clarity in this issue, and potential “financial institutions” will need to determine how to proceed.
