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Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules
trustees.112 The ownership prong of the CDD Rule is well known, easily understood, and easy to comply with.
Many commenters urged FinCEN to adopt the CDD Rule approach to trusts.
However, FinCEN has declined to follow the CDD Rule approach for a combination of reasons.
First, as discussed above, the CTA
does not require following the CDD Rule by default. The same statutory interpretation arguments that led FinCEN to believe that the CDD Rule is not an appropriate standard in connection with substantial control apply equally to the subject of ownership interests.
Second, the CDD Rule does not provide transparency with respect to complex ownership structures, extensive use of trusts, voting arrangements among owners, golden shares entitling their owners to voting rights disproportionate to their equity stake, and other mechanisms that can obscure the connection between an individual owner and a reporting company. Therefore, it is not at all clear that the CDD Rule results in the identification of all individuals who should be identified as 25 percent owners. Instead, the CDD Rule standard could permit obfuscatory behavior. In connection with trusts, for example, FinCEN believes that requiring the reporting only of the trustee under the ownership interests component would promote the misuse of trusts to hide beneficial ownership interests and complicate the ability of reporting companies to comply with the CTA and the proposed rule. As with the definition of substantial control, FinCEN believes its proposed approach would provide law enforcement with a more accurate and complete picture of an entitys true ownership, regardless of formalities.
Finally, FinCEN considered the burden this proposed approach would have on reporting companies. FinCEN is mindful of the effect of new regulations on small businesses, given their critical role in the U.S. economy and the special consideration that Congress and successive administrations have mandated that federal agencies should give to small business concerns. FinCEN
expects that most reporting companies that are small businesses will have simple ownership structures with easily
identifiable beneficial owners, thereby minimizing the potential burden on such entities. FinCENs expectation is supported by a recent empirical analysis on the compliance burden that resulted from the creation of a beneficial ownership registry in the UK. In its post-implementation review of the PSC
Register, the UK Government found that only 13% of companies had three or more beneficial owners.113 It also found that the mean overall cost of compliance for small and micro businesses defined as businesses with less than 50
employees to file an initial report and provide required updates was 265
approximately $358 at current exchange rates.114 Notably, the UKs beneficial owner database is public and the UK requires businesses to provide considerably more information about each beneficial owner. This suggests that the reporting burden of FinCENs approach may be materially less than the burden of compliance borne by small businesses and other reporting companies in the UK since the establishment of the PSC Register.
FinCEN seeks comments on these considerations, particularly regarding its assessment of the effect on small businesses based on the assessment of the UKs implementation of its register.
FinCEN further welcomes specific data on this topic.
Entities for which relative burden may be higher are likely very small entities with complex structures. As noted above, FinCEN believes that most reporting companies will not have complex ownership structures, and that the few that do previously chose their structures recognizing that costs associated with legal and tax advice and other filing and compliance obligations might be higher as a result. Moreover, in FinCENs experience administering the BSA and other AML efforts, small-butcomplex entities often are the highest risk for money laundering, terrorist financing, and other illicit financial activity. Indeed, both the CTAs statutory text and legislative history indicate that Congress was concerned with ensuring effective BOI reporting for these entities. Thus, in FinCENs experience, such a reporting burden is justified because these are the entities most at risk for abuse of the corporate form and, therefore, an additional compliance burden is necessary to make
112 See 31 CFR 1010.230d3 CDD Rule provision stating that if a trust owns directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, 25
percent or more of the equity interests of a legal entity customer, the beneficial owner for purposes of the definition of beneficial owner shall mean the trustee..

113 See United Kingdom Department for Business, Energy & Industrial Strategy, Review of the Implementation of the PSC Register, March 2019, p. 4, available at https assets.publishing.
service.gov.uk/government/uploads/system/
uploads/attachment_data/file/822823/reviewimplementation-psc-register.pdf.
114 Id., Table 3.9.

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the BOI database highly useful to law enforcement under the statute.
iii. Exceptions to Definition of Beneficial Owner Proposed 31 CFR 1010.380d4
describes five exceptions to the definition of beneficial owners that are included in the CTA. These exceptions relate to minor children, nominees or other intermediaries, employees, inheritors, and creditors. Proposed 31
CFR 1010.380d4 mirrors the statutory text with additional clarification to ensure that reporting companies identify real parties in interest, not only the nominal beneficial owners.
a. Minor Children In the case of minor children, consistent with the statute, proposed 31
CFR 1010.380d4i states that the term beneficial owner does not include a minor child, provided that the reporting company reports the required information for a parent or legal guardian of the minor child.115
Proposed 31 CFR 1010.380b3ii provides additional clarification regarding the manner in which a reporting company would need to provide information of a parent or legal guardian.
b. Nominees With respect to the exception for an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual, FinCEN
notes that the statute affirms that reporting companies must report real parties in interest who exercise control indirectly.116 In implementing this statutory exception, FinCEN emphasizes the obligation of a reporting company to report identifying information of the individual on whose behalf an apparent beneficial owner is acting, not the apparent beneficial owner.
c. Employees The CTA further exempts from the definition of a beneficial owner an employee of a reporting company, acting solely as an employee, whose control over or economic benefits from a reporting company are derived solely from the employment status of the person. Proposed 31 CFR
1010.380d4iii adopts the statutory language, with two clarifications. First, the word substantial is added to modify control to clarify that the control referenced in the exception is the same type of substantial control over the reporting company referenced 115 31
116 31

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