New Proposal to Crack Down on Money Laundering – What It Means For Israeli Companies with U.S. Operations
Introduction
On December 8, 2021, the U.S. Financial Crimes Enforcement Network (“FinCEN”), a division of the U.S. Department of the Treasury, published a proposed rule that would require U.S. and non-U.S. companies to report information on their beneficial owners. The proposal would implement the requirements of the Anti-Money Laundering Act of 2020, and is intended to combat money laundering, terrorist financing and other illicit activity. This proposed rule is part of a broader enforcement effort by the U.S. Treasury Department and federal government to crack down on corruption and shell companies.
A “reporting company” would be obligated to submit to FinCEN certain information regarding its beneficial owners and those who file the documents registering the company to do business in the United States. The requirements would apply to most Israeli companies registered to do business in the United States, unless they satisfy all of the following requirements: (i) more than 20 full-time U.S. employees, (ii) more than $5 million in annual revenues and (iii) a physical office within the U.S.
What Foreign Companies Would Have to Report?
A foreign reporting company would include a corporation, limited liability company, or other entity formed under the law of a foreign country that is “registered to do business in the United States.” This refers to companies that pay a fee and file registration documents with the Secretary of State in the U.S. state(s) where they conduct business.
The proposed rule targets entities that are generally smaller and more lightly regulated that tend not be subject to other beneficial ownership reporting requirements. Various regulated entities are exempted from reporting in order to avoid imposing duplicative requirements. The exemptions apply to, among others:
- large operating companies, which are defined as companies that (i) have more than 20 full-time employees in the U.S., (ii) filed a U.S. tax return in the previous year demonstrating more than $5 million in gross receipts or sales, and (iii) have an operating presence at a physical office within the U.S.
- entities registered with or reporting to the SEC
- banks and bank holding companies
- brokers or dealers in securities
- investment companies or investment advisers
- venture capital fund advisers
- pooled investment vehicles
- tax-exempt entities
- subsidiaries of certain exempt entities
What Would Have to Be Reported?
A reporting company would have to submit its name, a U.S. tax identification number (TIN) and employer identification number (EIN). A company that has not yet been issued a TIN would have to submit a Dun & Bradstreet Data Universal Numbering System (DUNS) number or a Legal Entity Identifier (LEI).
A reporting company would also have to submit the following information about each of its “beneficial owners” (as defined below) and those who file the documents registering the company to do business in the United States:
- full legal name
- date of birth
- current address (for a business, the business address; for an individual; the residential address used for tax purposes)
- a unique identifying number from a nonexpired government-issued identification document
- a scan of the document from which the unique identifying number was obtained
A “beneficial owner” is defined as an individual who (i) exercises substantial control over the entity or (ii) owns or controls not less than 25% of the ownership interests of the entity.”
The proposed rule provides three specific indicators of “substantial control,” each of which is focused on identifying the individuals who stand behind the reporting company and direct its actions:
- service as a senior officer of a reporting company
- authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company
- direction, determination, or decision of, or substantial influence over, important matters of a reporting company.
The proposed rule clarifies that “ownership interests” would include both equity, partnership interests, convertible instruments, warrants or rights, and other options or privileges to acquire equity, capital, or other interests in a reporting company.
When Would Reports Have to be Filed and Who Would Have Access?
Foreign companies registering to do business in the U.S. for the first time, on or after the effective date of the final regulations, would be required to file an initial report with FinCEN within 14 calendar days.
If there is a change in information previously reported to FinCEN, reporting companies would have 30 calendar days to file an updated report, and 14 days to correct a prior report that it discovers (or should have discovered) contains inaccurate information
Reports submitted to FinCEN would be stored in a confidential, secure, and nonpublic database. FinCEN would be authorized to disclose reports to a statutorily defined group of authorities and institutions.
What Are Penalties?
The statute pursuant to which the proposed rule was promulgated provides that it is unlawful to willfully (i) provide, or attempt to provide, false or fraudulent information to FinCEN, or (ii) fail to report complete or updated information to FinCEN.
Noncompliance would be punishable with (ii) civil penalties of up to $500 for each day a violation continues or has not been remedied, and (ii) fines of up to $10,000 and up to two years in prison a criminal violation.
What Happens Next?
The proposal is open for public comment until early February 2022. FinCEN will take comments into account and propose a final rule at a time that is not yet determined. Gross & Co. will keep you apprised of any developments.
For additional information please contact Adv. Amir Raz, partner and member of Hi-Tech and Investment Funds Group (amir.raz@gkh-law.com) or Adv. Nathan Hyman (nathanh@gkh-law.com).
