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28 • 2022

Corporate Anonymity After FinCen Regulations Implementing the CTA

Full implementation of the Corporate Transparency Act’s (“CTA”) requirement for reporting information, including a photo ID, about the beneficial owners of all U.S. business entities is moving closer to reality now that the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury has issued proposed regulations to implement the CTA.[1] That has obviously raised privacy concerns among those owners of U.S. businesses who have sought to shield their identities from prying eyes, for legitimate reasons (e.g., celebrities using a business entity to purchase residential real estate). We have written before about how to use a business entity to protect identity,[2] but will that still be possible once the CTA disclosure requirements are fully implemented through the adoption of final FinCEN regulations? We think so, though there will be no way to know for sure until FinCEN issues another set of rules regarding “who may access [the beneficial ownership information that FinCEN will be collecting], for what purposes, and what safeguards will be required to ensure that the information is secured and protected.”[3]

Having said that, the FinCEN access and disclosure regulations will have to comply with the CTA, which specifically provides for the protection of beneficial ownership information submitted to FinCEN in various ways. For example, the CTA requires that FinCEN “shall maintain information security protections, including encryption, for information reported to FinCEN … and ensure that the protections … incorporate Federal information system security controls for high-impact systems, excluding national security systems, consistent with applicable law to prevent the loss of confidentiality, integrity, or availability of information that may have a severe or catastrophic adverse effect.”[4] Within the Department of the Treasury, access to beneficial ownership information is limited (only somewhat helpfully) to officers and employees “whose official duties require” them to inspect the information, as well as for “tax administration purposes.”[5]

Except as authorized by the CTA and protocols to be promulgated by FinCEN under the CTA, beneficial ownership information reported to FinCEN “shall be confidential and may not be disclosed by” an officer or employee of: the U.S. Government; any State, local, or Tribal agency; or any financial institution or regulatory agency receiving the information as provided in the CTA.[6] Exceptions to the general rule of confidentiality are quite limited, so that FinCEN can make the information available only upon receipt of a request, through “appropriate protocols,” primarily from various authorized government authorities, including a federal agency engaged in national security, intelligence, or law enforcement activity, or, if a court of competent jurisdiction has authorized the request, a State, local, or Tribal law enforcement agency.[7] FinCEN may also disclose information upon receiving “a request made by a financial institution subject to customer due diligence requirements,” but only “with the consent of the reporting company, to facilitate the compliance of the financial institution with customer due diligence requirements under applicable law.”[8] Such disclosures will be subject to appropriate protocols, to be developed by FinCEN in additional implementing regulations, that protect the security and confidentiality of the beneficial ownership information throughout the disclosure process.[9] Notably, a violation of the protocols adopted by FinCEN, or an unauthorized disclosure or use of beneficial ownership information reported to FinCEN, may result in significant criminal and/or civil penalties: (1) a civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and (2) a fine of not more than $250,000, or imprisonment for not more than 5 years, or both.[10]

In sum, the CTA specifically provides protections for beneficial ownership information reported to FinCEN. Given the substantial criminal and civil penalties that may be imposed for a violation, there is good reason to be optimistic that such information will be kept safe and secure. Because FinCEN’s access and disclosure regulations and protocols will have to be in line with the CTA’s requirements, we believe that individuals will likely still be able to preserve their anonymity using a business entity (especially a Delaware LLC), despite the new reporting regime.

[1] For a summary of the relevant provisions of FinCEN’s proposed regulations, see eMinutes, “Our FinCen Game Plan” (Feb. 12, 2022).

[2] See eMinutes, “Delaware LLC Remains Best Way for Celebrities to Preserve Anonymity Even After the Corporate Transparency Act” (Jan. 20, 2021); eMinutes, “Trump’s Payment to Porn Star — How to Properly Use an LLC for Anonymity” (Jan. 19, 2018); eMinutes, “Using a Delaware LLC to Safeguard Identity for Legitimate Reasons: The Impact of FinCEN’s Reporting Requirements” (July 29, 2016); eMinutes, “How To Use a Delaware LLC to Safeguard Identity” (July 20, 2016).

[3] See FinCEN, Fact Sheet: Beneficial Ownership Information Reporting Notice of Proposed Rulemaking (NPRM) (Dec. 7, 2021)

[4] 31 U.S.C. § 5336(c)(8)(B).

[5] Id. § 5336(c)(5).

[6] Id. § 5336(c)(2)(A).

[7] Id. § 5336(c)(2)(B).

[8] Id. § 5336(c)(2)(B)(iii).

[9] Id. § 5336(c)(3).

[10] Id. § 5336(c)(4), (h)(2), (h)(3)(B).