Forensic Accounting / Financial Investigations — New Regulations Hope to Provide Effective Tools to Identify Beneficial Owners by Richard S. Fechter, JD, CFE, CAMS
Posted on November 10, 2023
Victims of crimes, law enforcement and other interested parties often retain forensic accountants to investigate financial crimes. These professionals have specialized multidisciplinary skills necessary to identify financial crimes, analyze the financial transactions constituting the overt acts of these crimes, and provide expert testimony on the methodologies criminals use and the damages victims incur.
The critical goals for all financial investigations are (1) to identify the individuals and/or entities responsible for committing the wrongdoing, and (2) to quantify victims’ financial losses and, hopefully, trace the proceeds of ill-gotten gains so that the victims can recover all or part of their losses. However, one of the common roadblocks forensic accountants/financial investigators often face is when evidence of a financial crime leads to the involvement of an entity whose beneficial owners’ identities are not readily available through public records searches or even a subpoena.
Each year millions of corporations and limited liability companies (LLCs) are formed under state laws, many of which do not require any identifying information about their beneficial owners. Fraudsters often take advantage of this anonymity by using these entities to facilitate illicit activity, such as money laundering, securities fraud and tax fraud. Other criminal actors use corporations and LLCs to finance terrorism and to facilitate human and drug trafficking, piracy and acts of foreign corruption.
Fortunately, Congress passed the Corporate Transparency Act (CTA) in 2021, requiring certain foreign and domestic entities formed or registered to conduct business in the United States (each defined as a “reporting company”) to file beneficial ownership information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury beginning on Jan. 1, 2024. The law defines beneficial owners as individuals who 1) directly or indirectly exercise substantial control over a reporting company, or 2) own or control at least 25 percent of the ownership interests of a reporting company.
According to FinCEN, the CTA’s reporting requirement will create a database of beneficial ownership information “as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other opaque ownership structures.” However, the law provides an exception from the reporting requirement for 23 types of entities, including the following:
- “Large operating companies” defined as entities that (1) have more than 20 full-time U.S. employees (not counting employees of affiliated entities), (2) reported to the IRS more than $5 million of revenue from U.S. sources on a consolidated basis for the previous year and (3) have an operating presence at a physical location in the United States
- Nonprofit entities, political organizations and certain tax-exempt trusts
- Public companies, insurance companies, banks, registered investment companies, registered investment advisors and certain other entities already subject to regulatory oversight
- Subsidiaries that are wholly owned, directly or indirectly, by the foregoing exempt entities
While FinCEN will not make BOI reports publicly available, it is authorized to disclose beneficial ownership information to the following organizations:
- S. federal, state, local and tribal law enforcement agencies;
- certain other enforcement agencies, with court approval;
- non-U.S. law enforcement agencies, prosecutors or judges that submit a request through a U.S. federal law enforcement agency; and
- financial institutions and their regulators with the consent of the reporting company.
When fully implemented, the CTA will create a database of beneficial ownership information within FinCEN, which former New York Congresswoman Carolyn Maloney, explained will provide authorities with the resources to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists and criminals.” While the names of beneficial owners behind anonymous entities are not currently available to the general public, FinCEN is developing rules to potentially improve access to this information.
About the Authors: Richard S. Fechter, JD, CFE, CAMS, is an associate director with Berkowitz Pollack Brant’s Forensic and Advisory Services practice, where he conducts forensic accounting investigations and provides expert analysis on the economic, finance, and accounting issues pertaining to economic damages and other business matters in complex commercial disputes. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or firstname.lastname@example.org.
 The Corporate Transparency Act consists of §§ 6401-6403 of the NDAA. Section 6402 of the NDAA sets forth Congress’ findings and objectives in passing the Corporate Transparency Act, and § 6403 contains its substantive provisions, primarily adding § 5336 to Title 31 of the United States Code.