Davis Polk partner Dan Stipano was quoted in Law360 Tax Authority discussing the U.S. Treasury Department’s Financial Crimes Enforcement Network’s (FinCEN) new reporting requirements for small businesses that are set to go into effect in five months. However, several members of Congress and attorneys have expressed concern that many small businesses affected by the disclosure rules may not know what their obligations are under the new regulations.

Dan noted that given FinCEN’s limited resources, it may look for some egregious outliers to make a point for enforcing penalties for noncompliance, rather than attempting to put out every fire. However, he does not agree with “consciousness raised by enforcement actions,” he said. “There really should be a major effort aimed at public education so that nobody inadvertently stumbles into a trap.”

Part of the revised regulations include rules on beneficial ownership under the Corporate Transparency Act (CTA). Banks are currently subject to a customer due diligence rule that requires them to identify and verify the beneficial owners of companies. Under the CTA, FinCEN may require banks to confirm that their customers have submitted to the database of beneficial ownership information. Dan said, “[The process is] totally circular, and you can’t use the information for anything else.” He added that there’s no mechanism in place to verify the accuracy of the information in the FinCEN database.

Dan shared that the regulations are both under- and overinclusive due to the exemption of large operating companies. “The rules are overinclusive because they’re going to sweep in lots of businesses that present basically zero risk of money laundering or terrorist financing,” he said. “At the same time, the guidance’s definition of a large operating company isn’t really such a large company.”

He added, “If you are a sophisticated money launderer, that is a loophole you can drive a truck through.”

“Small Businesses May Be In The Dark About FinCEN Rules,” Law360 Tax Authority (August 8, 2023) (subscription required)

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