Foreign Law Enforcement Agencies to Get U.S. Beneficial Ownership Information

The cause of financial transparency just recovered some of the ground recently lost when the European Court of Justice struck down the EU directive on public access to corporate ownership data. Last Friday the U.S. Financial Crimes Enforcement Network (FinCEN) published draft regulations prescribing how certain limited — but quite important – members of the public can obtain information on the actual, beneficial owners of U.S. corporations.

The privileged group consists of law enforcement personnel. And significantly for the global fight against corruption, they include those from non-American as well as American agencies.

The rules for domestic agencies are straightforward, those for non-U.S. authorities less so as they incorporate the conditions Congress put on foreign agencies’ access. The request must be for a law enforcement purpose or national security or intelligence activity; it must be transmitted through a U.S. law enforcement intermediary, and the requesting government must have either an “applicable treaty” with the U.S. or else be a “trusted foreign government.”

For corruption-related cases these conditions would appear to pose no real hurdle. Moreover, in fleshing them out, FinCEN was attentive to foreign authorities’ needs. FinCEN defines “law enforcement purpose,” for example, to include civil forfeiture actions.

Between the diversity of foreign laws and the many types of agreements foreign partners have with U.S. counterparts, however, the agency cautions the draft regulations might still interfere with current arrangements. Anticorruption agencies, prosecution services, and other non-U.S. authorities should therefore examine the draft carefully, ideally in consultation with the U.S. agency or agencies with which they work. Comments are due by February 23.

I see one potential issue and have one question about the proposed rules.

Potential issue. The issue is what one might call the “tainted agency” problem.  Not every law enforcement agency in U.S. partner countries is corruption-free. In some the police are compromised; in others it may be the financial intelligence unit (FIU), the ministry of justice, or the courts. Street-smart U.S. personnel work around the problem, helping “clean” counterparts advance both nations’ interest in building cases against the corrupt without alerting possible accomplices in compromised agencies to an investigation.

In corruption cases, beneficial ownership data requests will almost surely rely on article 46 of the U. N. Convention Against Corruption. It requires the U.S. to provide the requesting state “the widest measure of mutual legal assistance” in corruption cases and spells out detailed procedures for doing so. Furthermore, the proposed regulations provide that where a request relies on a treaty, less paperwork is required of the intermediary U.S. agency and the use the requesting agency makes of the beneficial ownership information is governed by the treaty not U.S. rules (proposed rule § 1010.955(b)(3)(ii)(A) and (c)(2)(viii)).

The concern I have is whether the regulations would require a request based on UNCAC to strictly follow the procedures set out in article 46.  Section 13 of that article requires all requests to be routed through the requesting country’s central authority, an entity the country designates when ratifying UNCAC. Many central authorities are in ministries headed by a political appointee, and some are tainted by corruption. In such cases, UNCAC requests are made informally, without passing through the central authority. Indeed, even when the central authority is not tainted, its procedures can be so bureaucratic and time-consuming that requests are many times handled informally, law enforcement agency to law enforcement agency.

Thanks to the way the underlying statute was drafted, FinCEN rules on foreign agency access are scattered in a series of subsections, paragraphs, sub-subsection, and sub-sub-subparagraphs that those who, like me, don’t make their living reading U.S. regulations may find difficult to parse. To this non-professional reader it seems at least possible that the regulations could be read to require the use of the entire, formal UNCAC mutual legal assistance procedure. Given the tainted agency problem, I would hope not. 

Question.  In the 51+ page (!) discussion and justification of the proposed rules, FinCEN says:

“Given its longstanding relationships and relevant experience as the financial intelligence unit of the United States, FinCEN proposes to directly receive, evaluate, and respond to requests for BOI [beneficial ownership information] from foreign financial intelligence units” (87 Fed. Reg. 77410, December 16, 2022).

A practice encountered in some nations is that all requests to FinCEN must go through the resident U.S. legal attaché.  Will this hold for beneficial ownership requests?  What if the FIU is not a member of the Egmont Group? Will FinCEN still accept a request?

FinCEN’s proposed rules may not undo all the damage the European Court’s decision did to the cause of greater financial transparency and thus to reducing corruption.  But they are a major advance in the U.S. effort. Anticorruption activists should welcome them

2 thoughts on “Foreign Law Enforcement Agencies to Get U.S. Beneficial Ownership Information

  1. I posted this note on the Anticorruption Professionals Group on LinkedIn, and a reader asked if the rules cover South Dakota trusts.

    South Dakota law permits the creation of many types of trusts and is the leading jurisdiction for those wanting to protect their money and property from creditors. While some (most? all?) believe this is a dodgy way for a someone to duck their obligations, it has been a boon to South Dakota lawyers and financial advisers as many non-South Dakotans have created such trusts. Searching the web for “South Dakota asset protection trust” will bring up investigative journalists reports of their abuses. Frontline had an especially good one: https://www.pbs.org/wgbh/frontline/article/pandora-papers-south-dakota-trusts-us-legislation-enablers-act/

    The answer to the reader’s question is (unfortunately) that the regulations do not reach South Dakota trusts, or trust created under the laws of many other states for that matter. The statute authorizing the regulations, the Corporate Transparency Act, requires “reporting companies” to disclose to FinCEN their beneficial owners. Section 5336(a)(11)(A)(i) of the statute defines a reporting company to be “a corporation, limited liability company, or other similar entity that is . . . created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe).”

    Like other U.S. states and indeed many nations whose law is based on common law, trusts need not be registered with the government. The South Dakota trust law explicitly states that trust documents need not be filed with the authorities, South Dakota Stat. tit. 55, sec.1-21.

    The good news is that some common law nations now require trust be registered. The U.K., whose law first accepted the idea of trust, now requires registration, and Canada has or is about to require registration.

    I suppose this means South Dakota lawyers and lawyers in other common law jurisdictions where trusts need not be registered will soon find themselves quite busy.

    An easy remedy would be laws requiring trusts be registered. In the U.S. an alternative would be to require American lawyers to file STRs.

    So long as there is a way in some jurisdiction somewhere to hide money, we can be sure it will be exploited.

  2. Thank you for this, Rick – very useful!

    Would be very keen to read your views on the outcome of the Mozambique hidden debt trial, following your excellent articles on the subject.

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