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Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules
matters of a reporting company. The regulation also includes a catch-all provision to make clear that substantial control can take additional forms not specifically listed. Each of these indicators supports the basic goal of requiring a reporting company to identify the individuals who stand behind the reporting company and direct its actions. The first indicator identifies the individuals with nominal or de jure authority, the second and third indicators identify the individuals with functional or de facto authority, and the catch-all provision recognizes that control exercised in novel and unorthodox ways can still be substantial. This last approach is consistent with the common law tradition and the standards that FinCEN
examined, as well as the broader objective of preventing individuals from evading identification as beneficial owners by hiding behind formalisms such as job descriptions, job titles, and nominal lack of authority.
In developing the proposed definition of substantial control, FinCEN looked to the common law of agency and corporate law and the usage of that term in other federal statutes, which generally incorporate similar agencylaw concepts. FinCEN considered these statutes in framing functional tests for assessing whether an individual exercises substantial control over an entity. FinCEN also considered the FATF Recommendations, established beneficial-owner reporting standards such as that used with the United Kingdoms UKs People with Significant Control or PSC Register, U.S. Federal tax law, and the statutory law and administrative practice informing the activity of the Committee on Foreign Investment in the United States CFIUS. Drawing in part on these standards, and supported by many commenters suggestions that FinCEN
do so, proposed 31 CFR
1010.380d1iii provides specific examples of indicators of substantial control. This non-exhaustive list of examples is intended to clarify the types of matters FinCEN considers relevant to an analysis of whether an individual is directing, determining, or deciding . . . important matters affecting a reporting company and thus exercising substantial control. Reporting companies should be guided by the specific examples in the proposed rule, but they should also consider how individuals could exercise substantial control in other ways.
FinCEN acknowledges the concerns raised by commenters that too broad a definition of substantial control could engender confusion. One commenter
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pointed out that property managers make decisions that influence the operations of the property but are hired by and report to the owners of the property; the commenter did not think such individuals should necessarily be considered beneficial owners on these facts alone, and FinCEN agrees. The ordinary execution of day-to-day managerial decisions with respect to one part of a reporting companys assets or employees typically should not, in isolation, cause the decision-maker to be considered in substantial control of a reporting company, unless that person satisfies another element of the substantial control criteria.
Proposed 31 CFR 1010.380d2
provides a general reminder that an individual can exercise substantial control directly or indirectly. This incorporates statutory language from the CTA that applies to all beneficial ownership determinations and includes additional language applying the concept found in the CTA to the specific instances of substantial control found in proposed 31 CFR 1010.380d1.
FinCEN carefully considered the burden that this approach to defining substantial control might impose on reporting companies, small businesses in particular. Based on the comments to the ANPRM, FinCEN recognizes that the CTA may require certain entities to disclose BOI on more and different individuals than they are accustomed to under the control prong of the current CDD Rule. FinCEN also recognizes that reporting companies will likely incur some additional costs in complying with this obligation. That said, FinCEN
expects the amount of additional time and effort required to comply with the proposed rule to be minimal.
Specifically, under the proposed rule, a reporting company would not need to spend significant time assessing which of its beneficial owners would be the most appropriate to report as being in substantial control. Rather, entities would simply report all persons in substantial control as beneficial owners, with no need to distinguish among them. Additionally, FinCEN believes that entities are already aware of their own ownership structures, regardless of complexity, and should be able to readily identify their beneficial owners.
Therefore, FinCEN expects that compliance should not be particularly burdensome for most businesses. While FinCENs approach could be viewed to raise concerns about the disclosure of personal information about a broader range of individuals, the privacy impact of reporting BOI to FinCEN is relatively light, because, unlike beneficial ownership registries in many other
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countries, FinCENs database will not be public and will be subject to stringent access protocols.
FinCEN recognizes that its proposed definition of substantial control diverges from the approach that a number of commenters to the ANPRM stated they would prefer, i.e., the approach laid out in the current CDD Rule. Under the control prong of the current CDD
Rule, new legal entity customers of a financial institution must provide BOI
for the one individual who exercises a significant degree of control over the entity. FinCEN considered whether the proposed rule should adopt a comparable approach. As some ANPRM
commenters argued, limiting the number of persons identified under the substantial control component to one could minimize burden to reporting companies and help clarify when reporting companies had complied with the CTAs reporting requirements.
However, the CTA does not require the identification of only one person in substantial control.108 The CTA also mandates that FinCEN rescind and revise portions of the CDD Rule, including the paragraph on beneficial owners, to bring the pre-CTA CDD Rule into conformity with the CTA.109
FinCEN therefore need not adopt the framework established by the current CDD Rule, and incorporating the CDD
Rules numerical limitation would appear inconsistent with the CTAs objective of establishing a comprehensive BOI database for all beneficial owners of reporting companies. FinCEN believes that limiting reporting of individuals in substantial control to one person as in the CDD Ruleor indeed to impose any other numerical limitwould artificially limit the reporting of beneficial owners who may exercise substantial control over an entity, and could become a means of evasion.
Requiring reporting companies to identify all individuals who exercise 108 The proposed approach would also be consistent with the text of the CTA, whichunlike the CDD Rule that preceded itdoes not expressly limit the definition of beneficial owner to a single individual. Compare 31 U.S.C. 5336a3A The term beneficial owner means, with respect to an entity, an individual who . . . exercises substantial control over the entity. with 31 CFR
1010.230d2 defining beneficial owner as a single individual with significant responsibility to control, manage or direct a legal entity emphasis added. Under well-established principles of agency law, moreover, more than one individual can exercise substantial control over a single agent.
See, e.g., Restatement Third of Agency Sec. 3.14, Agents with Multiple Principals; id. Sec. 3.16, Agents for Coprincipals Two or more persons may as coprincipals appoint an agent to act for them in the same transaction or matter..
109 31 U.S.C. 5336d.

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