FinCEN pushed to close loophole on beneficial ownership reporting

FinCEN pushed to close loophole on beneficial ownership reporting

Author: The Carta Policy Team
Read time:  6 minutes
Published date:  7 April 2023
IRS signals it will extend e-signature relief, including for 83(b) elections.

The Topline

  • Congress pushes FinCEN to eliminate loophole for companies reporting beneficial owners 

  • CFPB director outlines how regulatory practices can lead to corporate recidivism

  • IRS will extend e-signature relief beyond October—working to ensure 83(b) is included

  • Treasury issues report outlining illicit finance risks around DeFi

  • CFPB pushes FSOC on whether big tech—and cloud storage—represents systemic risk

Lawmakers criticize beneficial ownership reporting form

A bipartisan, bicameral group of leading lawmakers are asking the Financial Crimes Enforcement Network (FinCEN) to eliminate an “escape hatch” that was built into implementation rules for the Corporate Transparency Act (CTA), which will require covered companies to provide FinCEN information about their beneficial owners. The scrutiny is focused on a proposed form that would be used to collect beneficial ownership information (BOI) as mandated by the statute, but allow filers to indicate they were “unable to obtain ” certain pieces of information. The lawmakers are concerned this would undermine the effectiveness of the database and render it unusable for financial institutions trying to meet their customer due diligence requirements more efficiently. 

Why it matters: FinCEN Acting Director Himamauli Das told reporters last month that the agency is already working to reissue a revised form in advance of the CTA taking effect on January 1, 2024. This is a complex rule to implement, and the scrutiny continues to come from all sides. Despite that, it is appropriate to assume the law goes into effect Jan. 1, and Carta is exploring how to support the implementation process and ease the reporting demands on growth-stage companies and their investors.

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CFPB signals stronger penalties for recidivists

This week, CFPB Director Rohit Chopra foreshadowed enhanced efforts to discourage recidivism—companies relapsing into violating regulatory or legal lines. Chopra claimed repeat offenders are too comfortable paying fines, essentially incorporating this into the cost of doing business. As a result, smaller companies with fewer resources available to risk the cost of  noncompliance are at a disadvantage when their larger competitors can afford to play outside the lines and pay the fines. To address this, Chopra signaled the agency may begin naming senior leadership and mandating “meaningful” changes to business practices in settlement agreements. 

The CFPB issued a new policy statement around what constitutes abusive acts or practices, including a focus on digital interference or dark patterns—design tricks or other tactics to confuse or manipulate individuals into making choices they otherwise would not have made such as pre-checked boxes on the least-desired option. The CFPB previously announced a partnership with FTC focused on “ dark patterns,” and the FTC has followed up with proposed rulemaking.

Why it matters: The policy positions outlined by the CFPB do not include any new legal requirements, but they provide insight into how the CFPB will look at potential violations and serve as an indication of where the agency will focus its enforcement and supervisory efforts. And as part of those enforcement efforts, Chopra is signaling a shift in how the agency pursues violations, with a focus toward those that cause the most harm. 

IRS seeks long-term solution for 83(b) election e-signature

The IRS has announced it plans to extend its temporary allowance of e-signatures for certain forms beyond October 2023 in anticipation of “long-term solutions” on the issue. The existing relief, which Carta and its coalition partners secured, covers 83(b) elections, a tax filing that moves up the tax liability to the grant date of equity issuance or when you early exercise shares. Our goal remains: take this highly manual and uncertain process and make it easier for founders and employee-owners to complete, helping them maximize the value of their ownership

The IRS also rolled out its broader modernization push in a long-awaited 10-year Strategic Operating Plan. The plan details how the agency will use the $80 billion it received under the Inflation Reduction Act. The report notes that the IRS is working towards making more submissions digital and recognizes the burdens imposed on taxpayers by the continued use of handwritten signatures in certain processes.

Why it matters: These developments are positive signals that the agency is working towards permanently allowing the use of electronic signatures in 83(b) elections and other forms, but it is important for industry and policymakers to keep the drumbeat on this issue. 

Treasury issues report outlining illicit finance risks around DeFi

In its first analysis of illicit finance risks associated with decentralized finance (DeFi), the Treasury Department found thieves, scammers, cyber criminals and North Korean actors are using DeFi to launder proceeds from crime. The report cited the primary vulnerability stems from DeFi not complying with anti-money laundering and countering the financing of terrorism (AML/CFT) obligations—obligations that exist whether financial institutions are centralized or decentralized—in addition to poor cyber controls, which enable theft. Treasury recommended a number of actions to address these risks, including strengthening AML/CFT compliance and enforcement efforts and closing any regulatory gaps where DeFi may fall outside of the scope of the rules.

Why it matters: Strengthening AML/CFT obligations for the crypto industry is an area of bipartisan support in Congress, and there is bipartisan legislation to that end. The report also called for continued engagement between the U.S. government and private sector, which signals that there will likely be opportunity for DeFi companies to comment on how potential regulatory changes could affect their business and customers. In this sense, the tone seems a bit more welcoming to engagement compared to the recent posture from the administration and financial regulators.

<<There is a shift underway in how policymakers are scrutinizing and regulating private markets. And problematic policy could impair investor access, increase burdens on capital formation, and stifle innovation. Carta’s Policy team walks through how the regulatory framework is shifting and what it means for the funds and companies operating in private markets. To watch the event, click here.>>

CFPB pushes FSOC on big tech data concerns

Director Chopra, who also sits on the Financial Stability Oversight Council (FSOC), is interested in probing the relationship between financial institutions and big tech platforms. In an interview, Chopra questioned the financial stability risks posed by the limited number of major cloud providers as institutions increasingly rely on the cloud for data storage and to operate payment systems. In October 2021, CFPB requested information from six large tech platforms on their data practices, access policies, and consumer protections. A public comment opportunity on the inquiry followed in November 2021 and again in 2022. 

Why it matters: Although other FSOC members have not shared their views, if FSOC were to designate certain cloud businesses as systemically important financial utilities, it could direct tech platforms to spin off their payment arms into subsidiaries that would be subject to various existing regulations. Even if FSOC does not consider and act on data and cloud storage, it is a clear signal CFPB will continue to pursue these tech companies. 

News to know

  • SEC’s annual OMWI report. The SEC Office of Minority and Women Inclusion’s annual report summarizes efforts to promote diversity, equity, inclusion, and accessibility (DEIA) in the SEC’s workforce and increase opportunities for minority-owned and women-owned businesses, among other focus points.

  • Sen. Brown’s asks FSOC to review banking sector. Sen. Brown, Chairman of the Senate Banking Committee, penned a letter requesting the Financial Stability Oversight Council (FSOC) review the full framework of regulations protecting depositors, consumers, and the U.S. financial system in light of the recent bank failures.

  • JPMorgan Chase annual shareholder letter. Chairman and CEO Jamie Dimon warns shareholders of lengthy banking woes and calls for better pay and workforce training opportunities in annual missive. 

Upcoming events

What we’re reading

Regulation by Enforcement

Chris Brummer, Yesha Yadav, and David T. Zaring

University of Southern California Law Review, forthcoming 2023. 

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The Carta Policy Team
Carta’s Policy Team aims to connect the policymaking community and venture ecosystem to build an ownership economy and advance policies that support private companies, their employees, and their investors.