[House Hearing, 118 Congress]
[From the U.S. Government Publishing Office]
POTENTIAL CONSEQUENCES OF FINCEN'S
BENEFICIAL OWNERSHIP RULEMAKING
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON NATIONAL SECURITY,
ILLICIT FINANCE, AND
INTERNATIONAL FINANCIAL INSTITUTIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTEENTH CONGRESS
FIRST SESSION
__________
JULY 18, 2023
__________
Printed for the use of the Committee on Financial Services
Serial No. 118-43
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
53-871 PDF WASHINGTON : 2024
HOUSE COMMITTEE ON FINANCIAL SERVICES
PATRICK McHENRY, North Carolina, Chairman
FRANK D. LUCAS, Oklahoma MAXINE WATERS, California, Ranking
PETE SESSIONS, Texas Member
BILL POSEY, Florida NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri BRAD SHERMAN, California
BILL HUIZENGA, Michigan GREGORY W. MEEKS, New York
ANN WAGNER, Missouri DAVID SCOTT, Georgia
ANDY BARR, Kentucky STEPHEN F. LYNCH, Massachusetts
ROGER WILLIAMS, Texas AL GREEN, Texas
FRENCH HILL, Arkansas, Vice EMANUEL CLEAVER, Missouri
Chairman JIM A. HIMES, Connecticut
TOM EMMER, Minnesota BILL FOSTER, Illinois
BARRY LOUDERMILK, Georgia JOYCE BEATTY, Ohio
ALEXANDER X. MOONEY, West Virginia JUAN VARGAS, California
WARREN DAVIDSON, Ohio JOSH GOTTHEIMER, New Jersey
JOHN ROSE, Tennessee VICENTE GONZALEZ, Texas
BRYAN STEIL, Wisconsin SEAN CASTEN, Illinois
WILLIAM TIMMONS, South Carolina AYANNA PRESSLEY, Massachusetts
RALPH NORMAN, South Carolina STEVEN HORSFORD, Nevada
DAN MEUSER, Pennsylvania RASHIDA TLAIB, Michigan
SCOTT FITZGERALD, Wisconsin RITCHIE TORRES, New York
ANDREW GARBARINO, New York SYLVIA GARCIA, Texas
YOUNG KIM, California NIKEMA WILLIAMS, Georgia
BYRON DONALDS, Florida WILEY NICKEL, North Carolina
MIKE FLOOD, Nebraska BRITTANY PETTERSEN, Colorado
MIKE LAWLER, New York
ZACH NUNN, Iowa
MONICA DE LA CRUZ, Texas
ERIN HOUCHIN, Indiana
ANDY OGLES, Tennessee
Matt Hoffmann, Staff Director
Subcommittee on National Security, Illicit Finance,
and International Financial Institutions
BLAINE LUETKEMEYER, Missouri, Chairman
ANDY BARR, Kentucky JOYCE BEATTY, Ohio, Ranking Member
ROGER WILLIAMS, Texas VICENTE GONZALEZ, Texas
BARRY LOUDERMILK, Georgia WILEY NICKEL, North Carolina
DAN MEUSER, Pennsylvania BRITTANY PETTERSEN, Colorado
YOUNG KIM, California, Vice BILL FOSTER, Illinois
Chairwoman JUAN VARGAS, California
ZACH NUNN, Iowa JOSH GOTTHEIMER, New Jersey
MONICA DE LA CRUZ, Texas
ANDY OGLES, Tennessee
C O N T E N T S
----------
Page
Hearing held on:
July 18, 2023................................................ 1
Appendix:
July 18, 2023................................................ 35
WITNESSES
Tuesday, July 18, 2023
Kalman, Gary, Executive Director, Transparency International U.S. 9
Kuhlman, Kevin, Vice President, Federal Government Relations,
National Federation of Independent Business (NFIB)............. 5
Richards, James, Principal and Founder, RegTech Consulting LLC... 7
Selenke, Pete, Vice President and Anti-Money Laundering/Bank
Secrecy Act Officer, The Central Trust Bank, Jefferson City,
Missouri, on behalf of the American Bankers Association (ABA).. 8
APPENDIX
Prepared statements:
Kalman, Gary................................................. 36
Kuhlman, Kevin............................................... 50
Richards, James.............................................. 60
Selenke, Pete................................................ 101
Additional Material Submitted for the Record
Luetkemeyer, Hon. Blaine:
Written statement of the American Institute of CPAs (AICPA).. 112
AICPA & CIMA, Together as the Association of International
Certified Professional Accountants, ``Beneficial Ownership
Information (BOI) Report Summary of Data Fields,'' dated
January 1, 2023............................................ 121
American Institute of CPAs (AICPA) letter in support of H.R.
4035, the Protecting Small Business Information Act of 2023 123
Written statement of the Independent Community Bankers of
America (ICBA)............................................. 125
Written statement of the U.S. Chamber of Commerce............ 128
Beatty, Hon. Joyce:
Written statement of Citizens for Responsibility & Ethics in
Washington (CREW).......................................... 129
Written statement of the Financial Accountability and
Corporate Transparency (FACT) Coalition.................... 133
Written statement of the Foundation for Defense of
Democracies (FDD).......................................... 138
Loudermilk, Hon. Barry:
Written statement of the National Association of
Manufacturers (NAM)........................................ 142
Written responses to questions for the record submitted to
James Richards............................................. 150
Meuser, Hon. Dan:
Written responses to questions for the record submitted to
James Richards............................................. 154
Written responses to questions for the record submitted to
Pete Selenke............................................... 156
Nunn, Hon. Zach:
Letter to FinCEN from the Iowa Bankers Association re:
Beneficial Ownership Information Reporting Requirements
Proposal, dated February 3, 2022........................... 157
Letter from the Office of the Iowa Secretary of State to
various Members of Congress, dated July 3, 2023............ 164
IRS release warning of a new tax scam, dated July 3, 2023.... 173
Pettersen, Hon. Brittany:
Written responses to questions for the record submitted to
Pete Selenke............................................... 176
Waters, Hon. Maxine:
Written responses to questions for the record submitted to
Gary Kalman................................................ 178
Written responses to questions for the record submitted to
Kevin Kuhlman.............................................. 188
Written responses to questions for the record submitted to
James Richards............................................. 190
Written responses to questions for the record submitted to
Pete Selenke............................................... 194
POTENTIAL CONSEQUENCES OF FINCEN'S
BENEFICIAL OWNERSHIP RULEMAKING
----------
Tuesday, July 18, 2023
U.S. House of Representatives,
Subcommittee on National Security,
Illicit Finance, and
International Financial Institutions,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:03 p.m., in
room 2128, Rayburn House Office Building, Hon. Blaine
Luetkemeyer [chairman of the subcommittee] presiding.
Members present: Representatives Luetkemeyer, Barr,
Williams of Texas, Loudermilk, Meuser, Kim, Nunn, De La Cruz,
Ogles; Beatty, Nickel, Pettersen, Foster, Vargas, and
Gottheimer.
Ex officio present: Representatives McHenry and Waters.
Also present: Representative Himes.
Chairman Luetkemeyer. The Subcommittee on National
Security, Illicit Finance, and International Financial
Institutions will come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
Today's hearing is entitled, ``Potential Consequences of
FinCEN's Beneficial Ownership Rulemaking.''
I now recognize myself for 4 minutes to give an opening
statement.
Today's hearing focuses on beneficial ownership (BO) and
the Financial Crimes Enforcement Network's (FinCEN's)
rulemaking required by the Corporate Transparency Act (CTA).
Beneficial ownership information reporting has been touted as
one of the most important national security tools, yet no one
knows anything about it. It is my hope that today's hearing
will not only inform our constituents of this forthcoming rule,
but will shine light on the ways the Treasury Department and
FinCEN have distorted the purpose of this rulemaking.
Before we dive into the weeds, however, it is important to
set the stage. Some of my colleagues across the aisle today may
insinuate that Committee Republicans never supported beneficial
ownership, and that our actions since the passage of the CTA
were carried out to undermine the legitimacy of the final rule.
Nothing could be further from the truth. I personally worked
with former Congresswoman Carolyn Maloney on an earlier
iteration of the CTA. This bill, while not identical to the
final CTA, was founded on the same principles.
On one hand, Federal law enforcement and our local sheriffs
were banging down our doors, warning about the ways in which
bad actors were hiding illicit profits in shell companies. And
on the other hand, small, mid-sized, and large banks alike were
frustrated with the burdensome regulation without any feedback
from the government.
To fix this problem, Chair Maloney and I decided to shift
the burden from the banks and place it on the Federal
Government. If law enforcement and FinCEN wanted the
information seamlessly, they would need to be responsible for
its collection. Since that initial bipartisan attempt, the CTA
changed slightly, but never lost its foundational principle. If
the U.S. Government wants the information, the U.S. Government
should be responsible for it. Now, we find ourselves in a
precarious situation. We are less than 6 months away from the
CTA's effective date of January 1, 2024, and we are left with
more questions than answers.
In an effort to prepare for today's hearing, I joined a
letter in June with Chair McHenry, Chair Williams, and Chair
Womack expressing our concerns with FinCEN's rollout of the
Beneficial Ownership Plan. This letter asks some important
questions about how FinCEN plans to educate 32.6 million small
businesses about their new obligations. This should not have
been a difficult letter to respond to. With less than 6 months
to go, the education plans should be completed and ready to
roll out, well before the system goes live in January.
Disturbingly, despite the committee's request for information
on the education and rollout strategy, there has been no
response. The education issue, while it may seem trivial to
those not paying attention, is indicative of the larger issues
with the Beneficial Ownership Information (BOI) rulemaking
process.
FinCEN and Treasury have transformed a simple-to-follow
filing system into a complex maze, leaving many scratching
their heads. As I am sure we will hear from our witnesses,
FinCEN is asking for more money and more resources, but time
and time again they favor complexity over straightforwardness,
complexity that will result in small business owners needing to
hire lawyers to figure out simple things such as whether they
need to file. This rulemaking process must be corrected. Our
constituents deserve better than what FinCEN has put forward
thus far. I do not see how FinCEN can move forward with a
January 1st effective date without having a plan.
I ask all of my colleagues to remember that if this filing
system is not seamless, it is our small businesses picking up
the pieces from COVID that will suffer. We need FinCEN to do
better, and today's hearing shall be a start in outlining what
that could look like.
The Chair now recognizes the ranking member of the
subcommittee, the gentlewoman from Ohio, Mrs. Beatty, for 4
minutes for an opening statement.
Mrs. Beatty. Thank you so much, Mr. Chairman, and thank you
for holding this hearing. And thank you to our witnesses for
appearing today to discuss FinCEN's beneficial ownership
rulemaking.
As we speak, oligarchs, kleptocrats, and other criminals
are using anonymous shell companies to engage in money
laundering, terrorist financing, tax fraud, corruption,
bribery, and the list goes on with other illicit activity. That
is why, under Democrat leadership, this committee passed
landmark legislation to protect our national security and to
prevent the abuse of our financial system by bad actors, both
foreign and domestic. That was all led by then-Chairwoman
Maxine Waters.
Committee Democrats achieved the most-sweeping anti-money
laundering reforms in decades with the Anti-Money Laundering
Act of 2020 (AMLA). This major update to the Bank Secrecy Act
(BSA) contained the historic Corporate Transparency Act (CTA),
which aimed to prevent the use of shell companies to launder or
hide illicit funds by imposing, for the first time, a Federal
requirement to identify beneficial owners of certain companies.
The CTA was intended to streamline industry compliance,
increase transparency, and make it easier for small businesses
to access banking services, while also making critical
improvements to national security.
Given the significance of these reforms and their
considerable impact on banks, small businesses, and other
reporting companies, it is critical that we efficiently
implement these changes while minimizing the burden on affected
industry. That is why Democrats strongly support robust funding
for FinCEN to ensure it has the resources it needs to swiftly
and properly implement the CTA.
By contrast, my colleagues on the other side of the aisle
have proposed substantial budget cuts to FinCEN and other
offices at Treasury charged with protecting our national
security. I am going to say that again: protecting our national
security. The proposed cuts would reduce current funding levels
by approximately 22 percent and would require the office to lay
off 19 percent of the personnel. I cannot fathom the logic of
slashing funds from an office that is in the midst of
implementing a major policy overhaul pertaining to U.S.
national security.
I agree with you, Mr. Chairman, that today's hearing is an
important discussion about certain flaws in FinCEN's beneficial
ownership rulemaking that deviate from the intent of Congress.
But I am concerned about the loopholes in draft filing form
that undermine the effectiveness of the law, as well as
proposals to greatly restrict access to the BOI database, which
would render new rules practically useless. I also agree that
FinCEN must do better in providing outreach and education to
small businesses to ensure compliance with the law. These
drastic budget cuts will only slow implementation of the CTA,
weaken FinCEN's ability to pursue bad actors, and ultimately,
jeopardize our national security.
Mr. Chairman, I ask unanimous consent to enter into the
record two statements: one from the Financial Accountability
and Corporate Transparency (FACT) Coalition; and one from
Citizens for Responsibility & Ethics in Washington (CREW.)
Chairman Luetkemeyer. Without objection, it is so ordered.
Mrs. Beatty. Both of these articles will reinforce my
testimony. Thank you once again to our witnesses., and I
certainly look forward to your testimony. I yield back.
Chairman Luetkemeyer. The gentlelady's time has expired.
The Chair now recognizes the Chair of the full Financial
Services Committee, the gentleman from North Carolina, Mr.
McHenry, for 1 minute.
Chairman McHenry. Thank you, Mr. Chairman. I want to first
commend the Administration on the appointment of Andrea Gacki
as the new Director of FinCEN. This is welcome news, and I am
hopeful it marks a turning point for the agency.
Two Congresses ago, lawmakers came together to pass the
Financial Transparency Act. The intention was to safeguard our
financial system from bad actors while alleviating burdensome
and duplicative reporting requirements. Unfortunately, the
Biden Administration's proposed beneficial ownership regime is
not consistent with congressional intent. The Treasury
Department has made the final rule as complicated as possible
by altering timelines and definitions, and even failing to put
together a simple filing form. It is clear that if changes are
not made, Congress must act to delay the rulemaking's effective
date. I look forward to working with incoming Director Gacki to
address the concerns of members of this committee in
coordination with the Administration. This is a very important
item for businesses across America and for millions of
Americans who will have to comply with these new regulations.
Thank you, Mr. Chairman. Thanks for your leadership, and I
yield back.
Chairman Luetkemeyer. The gentleman yields back. We have a
minute for the ranking member of the Full Committee, but she
apparently is not here. With that, we will move on to the
introduction of our witnesses today, and we thank each of them
for coming.
First, we have Kevin Kuhlman, the vice president of Federal
Government relations at the National Federation of Independent
Business (NFIB). Mr. Kuhlman leads the NFIB Federal Government
Relations team, guiding policy priorities and directing the
organization's Federal advocacy efforts. Welcome.
Second, we have Jim Richards, the founder and principal of
RegTech Consulting LLC. Prior to forming RegTech Consulting in
2018, Mr. Richards was executive vice president, Bank Secrecy
Act (BSA) officer, and global director of financial crimes risk
management for Wells Fargo & Company for 13 years, and the
anti-money laundering operations executive at Bank of America.
Welcome, Mr. Richards.
Third, we have Pete Selenke, the vice president and Anti-
Money Laundering/Bank Secrecy Act officer for The Central Trust
Bank, a privately-held, $19-billion bank, headquartered in
Jefferson City, Missouri, in my district. Mr. Selenke has over
32 years of experience in Bank Secrecy Act compliance. Mr.
Selenke, welcome.
And finally, we have Gary Kalman, the executive director of
Transparency International U.S. He oversees the organization's
U.S. operations, focusing on illicit finance and the U.S. role
in global anti-corruption efforts. Welcome, Mr. Kalman.
We thank each of you for taking the time to be here. Mr.
Richards flew in from California, and Mr. Selenke from
Missouri, and we are excited to have them both here--actually,
all four of you. Each of you will be recognized for 5 minutes
to give an oral presentation of your testimony. And without
objection, each of your written statements will be made a part
of the record.
Those microphones in front of you move, so make sure that
you pull them as close to you as possible. We have somebody
trying to transcribe this, and if they can't hear it, it can't
be transcribed. The microphones are very sensitive, but you
have to get right on top of them, so if you would be willing to
pull those things forward to you, that would be great.
Mr. Kuhlman, you are now recognized for 5 minutes for your
remarks.
STATEMENT OF KEVIN KUHLMAN, VICE PRESIDENT, FEDERAL
GOVERNMENT RELATIONS, NATIONAL FEDERATION OF
INDEPENDENT BUSINESS (NFIB)
Mr. Kuhlman. Good afternoon. Thank you, Chairman
Luetkemeyer, Ranking Member Beatty, Chairman McHenry, and
members of the subcommittee. My name is Kevin Kuhlman, with the
National Federation of Independent Business (NFIB). NFIB has
long opposed beneficial ownership information (BOI) reporting
requirements because the regulations disproportionately impact
small businesses under the threat of severe penalties.
NFIB believes the Financial Crimes Enforcement Network
(FinCEN) has overreached in implementing the legislation,
failing both to minimize reporting burdens and provide clarity
to small businesses. Few small businesses are aware of their
requirements that begin in less than 6 months, and FinCEN is
lacking in education and outreach to the small business
community, and I appreciate everyone for recognizing that. The
Corporate Transparency Act was inserted as a House amendment
into an unrelated and must-pass bill, the National Defense
Authorization Act of 2021. It never received a standalone vote
in the Senate. Burying the provision in a large bill
contributed to the lack of awareness of the requirements.
The Corporate Transparency Act requires small businesses
with 20 or fewer employees and less than $5 million in revenue
to file periodic reports containing personally identifiable
information (PII) with FinCEN. Failure to file completed and
updated reports could result in civil penalties of up to
$10,000 and criminal penalties of up to 2 years in prison. It
is one of the most-expansive small business regulation in
history, affecting 32.6 million small businesses in the first
year, and 6 million small businesses every year thereafter,
according to FinCEN's estimates. The cost of this regulation is
a staggering $23 billion in the first year, and $6 billion per
year moving forward. It was the costliest final regulation
issued in 2022.
FinCEN failed to minimize burdens on reporting companies.
Congress instructed the Secretary of the Treasury, when
prescribing regulations, to adhere to three directives: first,
seek to minimize burdens on reporting companies; second,
provide clarity to reporting companies concerning
identification of their beneficial owners; and third, collect
information that is highly useful to national security. NFIB
believes FinCEN repeatedly failed to balance these statutory
directives, often disregarding the first two intended to
minimize burdens and provide clarity to small businesses. NFIB
believes strongly that FinCEN overreached on the first
rulemaking, which defines who must report, what information
they must report, and by when they must report that
information.
Regarding who must report, FinCEN should have adopted or
could have adopted a simpler definition of, ``beneficial
owner,'' such as the existing definitions in the customer due
diligence rule, which requires a maximum of five individuals to
report their BOI. Instead, FinCEN broadly expanded definitions,
which will result in employees with no ownership interest being
swept into reporting. These definitions go beyond congressional
intent and create compliance difficulty.
Regarding what information must be reported, the statute
only requires four pieces of information: full legal name; date
of birth; current residential or business address; and a unique
identifying number from an acceptable ID document or a FinCEN
identifier. The final rule mandates that small businesses
report personal information beyond this, which is not
explicitly required in the statute, including taxpayer
identification information, either an Employer Identification
Number (EIN), a Taxpayer Identification Number (TIN), or a
Social Security Number (SSN), and scanned copies of their
drivers' licenses or passports. As a result, the draft
application has 50 questions and spans 8 pages.
Timing of reports: NFIB is concerned that FinCEN ignored
congressional intent when dictating timelines. FinCEN failed to
minimize reporting burdens on small businesses by accelerating
these timelines. For initial reporting, they chose 1 year
instead of the allowable 2 years. For updated reporting, they
chose 30 days instead of the allowable 1 year, and for
corrected reporting, they chose 30 days instead of the
allowable 90 days. FinCEN consistently rejected lengthening
these timelines as permitted by the statute, citing national
security reasons.
Very few small businesses are aware of these requirements,
which begin in less than 6 months, on January 1, 2024. Most
small business owners are unfamiliar with FinCEN, and receiving
a notice in the mail a few weeks before they must file may be
disregarded as a potential scam. After all, as recently as July
3rd, the IRS issued a scam warning for taxpayers for an
official-looking envelope requesting very similar personal
information, including scanned photos of their driver's
license.
FinCEN is required to issue a small business compliance
guide under the Small Business Regulatory Enforcement Fairness
Act (SBREFA). NFIB urges FinCEN to make this guide available
and accessible as quickly as possible. In addition, FinCEN
should issue guidance to provide clarity on exactly what types
of entities must file BOI reports. There is still ambiguity as
to whether certain sole proprietorships and general
partnerships must file reports. I included some legislative
recommendations in my written testimony.
NFIB would welcome the opportunity to work with the members
of this committee to provide relief from the most-problematic
requirements of the BOI reporting. Thank you for the
opportunity to testify today.
[The prepared statement of Mr. Kuhlman can be found on page
50 of the appendix.]
Chairman Luetkemeyer. The gentleman's time has expired. Mr.
Richards, you are now recognized for 5 minutes.
STATEMENT OF JAMES RICHARDS, PRINCIPAL AND FOUNDER,
REGTECH CONSULTING LLC
Mr. Richards. Thank you, Chairman Luetkemeyer, Ranking
Member Beatty, and distinguished members of the subcommittee,
and thank you for the invitation to appear before you today to
discuss the potential consequences of FinCEN's beneficial
ownership rulemaking.
My perspective is that of someone who has been in the anti-
money laundering field since the 1990s. I welcomed the AML Act
as an opportunity to get back to what should be the singular
purpose of our anti-money laundering laws, and that is
protecting the financial system by providing timely, actionable
intelligence to law enforcement in an efficient, effective, and
secure way. And I welcomed the Corporate Transparency Act as an
opportunity to improve how we were collecting and using
beneficial ownership information.
The practical implications of FinCEN's beneficial ownership
rulemaking will be felt by 35 million small businesses, more
than 16,000 financial institutions, and more than 400 law
enforcement agencies. More than 60 million Americans will have
their personal information and copies of their driver's license
or passport in a centralized database run by FinCEN, an agency
few of those 60 million have ever heard of.
But FinCEN is struggling to promulgate the rules needed to
implement the Anti-Money Laundering Act (AMLA) and the
Corporate Transparency (CTA). FinCEN has published none of the
nine rules needed to implement the AML Act, and has only
published one of the three rules to implement the Corporate
Transparency Act. And those rules that are proposed and
finalized often go beyond congressional intent, and many are
stunningly complex. If the reason why FinCEN is struggling to
meet its mandate is, in fact, resource constraints, then FinCEN
would be doing the opposite of what it is currently doing. It
would be putting out simple rules, adhering to congressional
intent, and publicly acknowledging that it must keep things
simple since it doesn't have the resources to do anything else.
The potential positive consequences of FinCEN's beneficial
ownership rulemaking, done right, are far-reaching. If we get
this right, all this rulemaking, and guidance, and access, and
reporting will demonstrably and measurably reduce money
laundering and financial crime--if we get it right. But with
continuing resource constraints and required rulemakings
remaining incomplete and no practical guidance to 35 million
small businesses, we are not going to get it right on January
1, 2024.
America needs the Corporate Transparency Act to succeed,
but success cannot be achieved by a rushed deployment of
complex rules that go well beyond congressional intent. Too
many of FinCEN's rules and proposed rules are aspirational,
without being practical. We are deputizing 35 million small
businesses and asking 60 million Americans to step up to
contribute their most prized information.
FinCEN cannot rush in half-cocked. We need to start simple,
start strong, whether that is January 1, 2024, 2025, or 2026.
We can adapt as needed over time, but we need to get it right
out of the gate. Thank you.
[The prepared statement of Mr. Richards can be found on
page 60 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Richards. I now
recognize Mr. Selenke for 5 minutes.
STATEMENT OF PETE SELENKE, VICE PRESIDENT AND ANTI-
MONEY LAUNDERING/BANK SECRECY ACT OFFICER, THE
CENTRAL TRUST BANK, JEFFERSON CITY, MISSOURI, ON BE-
HALF OF THE AMERICAN BANKERS ASSOCIATION (ABA)
Mr. Selenke. Thank you, Chairman Luetkemeyer, Ranking
Member Beatty, and members of the subcommittee. Thank you for
the opportunity to testify today regarding potential
consequences of FinCEN's beneficial ownership rulemaking. My
name is Pete Selenke, and I serve as vice president and Anti-
Money Laundering/Bank Secrecy Act officer for The Central Trust
Bank, a mid-sized bank established in 1902 and headquartered in
Jefferson City, Missouri. We directly serve customers in 9
States and at more than 150 locations. Today, I am pleased to
speak on behalf of Central Bank and our nearly 3,000 employees,
as well as the American Bankers Association, whose members
include small, mid-sized, regional, and large banks, which
together employ more than 2 million people.
As a banker with more than 32 years' experience in Bank
Secrecy Act compliance, I am personally and deeply committed to
protecting the U.S. financial system, our bank, and our bank
customers from threats posed by bad actors, and I have seen
firsthand the successes and challenges of operationalizing BSA
regulations. Thanks to the hard work of my team of 20 BSA
compliance professionals at The Central Bank, I am proud to
report that we have received two awards from FinCEN in
recognition for our work in assisting law enforcement in the
past 5 years.
The banking industry has changed dramatically over the past
50 years, and so have threats posed by bad actors. To combat
these evolving threats, the ABA strongly supported the
enactment of both the Anti-Money Laundering Act and the
Corporate Transparency Act, which together reflect a consensus
among bankers, lawmakers, and regulators on the need to
modernize our nation's Bank Secrecy Act rules so that the
resources dedicated by banks can even more effectively and
efficiently support law enforcement's work to prevent 21st
Century financial crime and terrorism.
The reforms embodied in these laws carefully balance a
number of important priorities, including that banks must know,
who are our customers? Law enforcement needs tools to identify
criminals who use and exploit shell companies to commit their
crimes. The burden to the public must be minimalized, including
the cost borne by financial institutions eager to support law
enforcement, and Americans' privacy rights must be protected.
As BSA/AML professionals, my colleagues and I have
dedicated our careers to defending the integrity of the U.S.
financial system from bad actors and protecting our customers.
We want nothing more than for AMLA and CTA to achieve Congress'
goals, and that is why it is so important that FinCEN
promulgates regulations to implement these reforms in a manner
that is consistent with congressional intent. To that end,
there are three areas where FinCEN must focus when creating a
meaningful beneficial ownership regime: use, accuracy, and
education.
First, use. Banks need to be able to use the information in
the beneficial ownership registry to support broader Bank
Secrecy Act/Anti-Money Laundering (BSA/AML) program
requirements. FinCEN's proposed limitations on a bank's ability
to use this information to only support customer due diligence
program compliance, not broader BSA/AML compliance, are
inconsistent with congressional intent, and these restrictions
will increase banks' burdens instead of reducing them.
Second, accuracy. The beneficial ownership registry must be
a reliable and authoritative source of information. The Federal
Government must make sure the information in the registry is
accurate. This responsibility should not be imposed on those
seeking to access the database. If the accuracy of the
registry's information is in doubt, banks may not be able to
use the database at all.
And third, education. We will help where we can, but
Congress did not delegate the responsibility of informing the
public of beneficial ownership reporting requirements to banks.
The Federal Government needs to educate the public about the
new legal obligations to report beneficial ownership
information, especially when there are serious penalties for
noncompliance.
My colleagues and I have dedicated our careers to defending
the integrity of the U.S. financial system from bad actors and
protecting our customers. We look forward to working with the
dedicated professionals at FinCEN to make these rules work for
law enforcement, for banks, and for our customers. I look
forward to answering your questions.
[The prepared statement of Mr. Selenke can be found on page
101 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Selenke. Mr. Kalman,
you are recognized for 5 minutes. Welcome.
STATEMENT OF GARY KALMAN, EXECUTIVE DIRECTOR,
TRANSPARENCY INTERNATIONAL U.S.
Mr. Kalman. Thank you, Mr. Chairman. Chairman Luetkemeyer,
Ranking Member Beatty, and distinguished members of the
subcommittee, on behalf of Transparency International U.S., I
appreciate the opportunity to discuss progress towards the
implementation of the Corporate Transparency Act, a
foundational reform to combat transnational crime and
corruption. We are part of the world's largest and oldest
coalition dedicated to fighting corruption. We want to thank
the leadership of the Financial Services Committee for working
in a bipartisan fashion to enact the CTA. Today, more than 100
countries have followed suit, and have adopted or have pledged
to adopt similar reforms to help protect the integrity of our
global financial system.
In the lead-up to the passage of the CTA, the committee
heard a litany of examples of how anonymous corporate
structures were used to facilitate the flow of illicit finance.
For example, a Global Witness report called, ``Hidden Menace,''
found that in one case, a U.S. company that was contracted to
supply services to troops in Afghanistan was secretly owned by
interests associated with the Taliban. The United States
Government was literally supplying funds that could be used to
purchase guns and other weapons aimed at our troops.
These reports are why nearly 100 civilian and former
military national security experts signed a letter to Congress
in support of the collection of beneficial ownership
information. Alarmingly, these stories are part of a larger
collection of threats that go beyond anecdotes. According to a
2011 study by the Stolen Asset Recovery Initiative, anonymous
companies were used to hide the proceeds of corruption in 70
percent of grand corruption cases reviewed, with U.S. entities
being the most common.
To address these harms and many others, Congress
appropriately included the CTA in the 2021 National Defense
Authorization Act. There are several parts of the rulemakings
to date that FinCEN produced in a way that captures both the
plain text of the law and the purpose for which it was
intended. We believe the definitions are true to the statute
and consistent with emerging global norms. The exemptions were
tailored to avoid unintended gaps or loopholes that bad actors
might exploit. However, I will highlight at least five
provisions in the proposed rules that raised substantial
concerns.
First, the proposed rule invents significant new barriers
to access by State, local, and Tribal law enforcement that have
no basis in the CTA. Such requirements were considered and
rejected by congressional drafters, as the requirements would
create new obstacles to investigations without any clear
benefits.
Second, FinCEN's additional requirements for foreign access
also have no basis in the text of the CTA. It would create an
unnecessary double standard and will result in significant
practical barriers for trusted allies.
Third, restrictions on the use of the information by
financial institutions exclude them from using the information
for the entire range of AML checks. Without fixing this, the
database as a whole may prove simply nonfunctional to the
thousands of financial institutions across the United States.
Fourth, while thankfully withdrawn, a proposed reporting
format included a checkbox for filers to include the
information was unknown. Such a box would, at best, confuse
reporting companies as to their obligations under the law, and
at worst, provide opportunities for evasion.
Fifth, the database will only be as useful as it is
accurate. Automated, real-time verification of beneficial
ownership information would provide a minimum level of
assurance that the information is accurate and reliable. FinCEN
must better communicate what it needs to adequately verify the
information.
We join in some of the frustration felt by many in this
committee regarding the delays in the finalizing of CTA rules.
However, myriad threats to national security and global
security demand a strong, well-resourced U.S. financial
intelligence unit. In a 2022 report, my organization found that
FinCEN's budget and staffing levels were similar to that of its
counterpart in Australia, a country with an economy one-
fifteenth the size of the United States. There is a powerful
argument that additional funds are needed for FinCEN to fully
and effectively do what we asked the bureau. If an increase in
general funding for FinCEN is not possible at this time,
perhaps agreement on targeted funding is achievable to address
the mutually-agreed-upon frustrations discussed at this
hearing. The importance of setting up the database,
establishing proper verification systems, and education and
outreach to key stakeholders are areas where members have found
common ground.
Thank you for the opportunity to share my views at this
hearing, and I look forward to working with this committee to
address these important issues.
[The prepared statement of Mr. Kalman can be found on page
36 of the appendix.]
Chairman Luetkemeyer. Thank you, Mr. Kalman, and I thank
all of the witnesses for their testimony. Excellent job. All of
you finished within 5 minutes, so thank you for that.
We will now turn to Member questions, and the Chair now
recognizes himself for 5 minutes for questions.
Mr. Selenke, welcome. I know you are the banker of the
group, and you are the one who is going to have to implement
these new rules from the FinCEN folks. How does it feel being
an employee of FinCEN?
Mr. Selenke. Mr. Chairman, I do appreciate this statement.
As a bank representative, we want to do what we can to support,
and it is a challenge right now. As you said, it is a challenge
right now.
Chairman Luetkemeyer. I know it is frustrating. You are
basically deputized here to collect information for law
enforcement purposes, and you are not a law enforcement
officer. You are a banker. You are hoping to help people grow
their personal finance or their businesses, in this situation
businesses, and yet you are in the middle of this law
enforcement situation, so it has to be frustrating. Has FinCEN
talked to you at all with regards to how they are going to roll
this out, what kind of rules and regulations, or are you still
in the dark?
Mr. Selenke. Chairman Luetkemeyer, we currently have not
seen any information on how to roll it out and what information
will be needed.
Chairman Luetkemeyer. Less than 6 months to go, and we are
still in the dark. Is that what you are saying?
Mr. Selenke. That is correct.
Chairman Luetkemeyer. Okay.
Mr. Richards, you talked a lot about the goings on of
FinCEN. Why are we less than 6 months from rolling this out and
still not there? Is it that they want to minimize our ability
to have oversight? Are they trying to delay it? Are they just
incompetent? Are they just not capable of rolling these rules
out, or what is the problem?
Mr. Richards. Mr. Chairman, I don't know what the problem
might be, and I said in my testimony that if it was a funding
issue, they would be doing the opposite of what they are
currently doing: simple rules, getting them out, communicating
properly. It remains a black box and a mystery as to what they
are doing and what they are not doing, and they are simply not
communicating.
Chairman Luetkemeyer. So, everybody is in the dark here in
more ways than one. I'm very concerned about the compliance on
this.
Mr. Kuhlman, I think in your verbal testimony you made
mention of the fact that we have over 32.6 million small
businesses. The result of this regulation is staggering: $22.7
billion the first year, $5.6 billion moving forward for
compliance. That is staggering. Did FinCEN, or our
Congressional Budget Office (CBO), or anybody do a cost-benefit
analysis on this rule before it was issued, to your knowledge?
Mr. Kevin. It is a whole new universe, right? We are using
State definitions for Federal law, limited liability companies,
corporations, or similar entities, which is pretty vague, and
CBO estimated 25 to 30. FinCEN's estimates have increased every
time they have put out an estimate. And it is just because it
is a new world, nobody really knows, and until we either
eliminate certain businesses, sole proprietors, or
partnerships, or say that they are in, we are still in
ambiguity at this point in time and uncertainty. There have
been some estimates. They have been kind of all over the place,
but they have only increased over time.
Chairman Luetkemeyer. Okay. You are an advocate for small
businesses. What is a better way to do this? If you were
designing a program, how would you do it? Rather than have the
banks be the collector of information, would it be simpler for
FinCEN to come to the bank and say, we have a problem with a
certain business, and right now, the process is we will get a
warrant, go to the bank, and get the information? What is wrong
with that process?
Mr. Kevin. Right. Historically, it has been targeted at
banks or real estate transactions, and it has had some sort of
protection with a subpoena for an investigation, so there has
been kind of this. The criticism, as I understand it from
financial institutions, is you have a big haystack, and you are
looking for needles, and it may not be impactful. My criticism
of this regulation is you are just making that haystack even
bigger and trying to find those same needles, so I have a more
targeted approach. I think it would be better if you do
something--I thought Congressman French Hill's idea of updating
the employer identification number form, the Form SS-4, would
have been better, a little bit more protected at the IRS, but
we have what we have now.
Chairman Luetkemeyer. To me, this is like, for instance, if
FinCEN is going after somebody who is making bombs, and they
use fertilizer to make the bombs, you go to the hardware store,
and every time somebody buys fertilizer, you have to send the
information to FinCEN. This is how over-the-top this situation
is. People's private information, businesses' private
information is going to be on a government server, and the
government has proven over and over again that it cannot be a
good steward of that information. This is nuts.
I will yield back the balance of my time. The ranking
member of the full Financial Services Committee, the gentlelady
from California, Ms. Waters, is recognized for 5 minutes.
Ms. Waters. Thank you very much, Mr. Chairman. I am
directing this question to Mr. Kalman and Mr. Selenke. You have
both described a number of serious deficiencies in the notices
of proposed rulemakings related to the Corporate Transparency
Act. Would these problems with the draft rulemaking text be
solved by reducing FinCEN's budget from the $229 million
requested by the Biden Administration for Fiscal Year 2024, to
only $166 million, the astonishingly-low amount provided by
House Republicans in their recently-marked-up Financial
Services and General Government Appropriations bill, Mr.
Kalman?
Mr. Kalman. Thank you, Ranking Member Waters, for the
question. I think we have seen that FinCEN--from the report
that my organization did and some other places--is, in our
mind, underfunded. I do think that the rulemaking process would
certainly not be helped by a budget cut. I am not convinced
that the rule writing's problems are necessarily funding-
related, although to the extent that they are also trying to
build the database at the same time and make sure that the
rules in the database and the filing systems are all working in
sync, then that would be a funding issue, and to make sure that
they are able to have the resources to build the database and
make sure that it all matches and it will be a seamless
implementation. I do believe that for the database and for very
specific pieces of this rulemaking process, the funding is
necessary.
Ms. Waters. Mr. Selenke, the question is, what do you think
about the fact that the Biden budget was $229 million
requested, and the Republicans have marked up legislation that
would only provide $166 million? That is an astonishingly-low
amount that is provided by House Republicans in the recently-
marked-up Financial Services and Central Government
Appropriations bill. What do you think about that cut?
Mr. Selenke. Congresswoman Waters----
Ms. Waters. I can't hear you.
Mr. Selenke. I apologize. There we go. Congresswoman
Waters, I apologize. From a banking perspective and my
perspective as a BSA officer, I really don't have an opinion on
that one because our experience with FinCEN has been very
helpful for us, and I don't think I am in a position to really
speak to that.
Ms. Waters. I would not expect you to know about the exact
amounts that would be needed, but the question becomes, do they
need substantial, credible resources in order to take care of
the problem of the deficiencies in the notices of proposed
rulemaking related to the Corporate Transparency Act? Do they
need personnel to do that? Do they need staff to do that? Do
they need money to do that, and does it seem curious to you
that the Administration would ask for $229 million, only to be
responded to with $166 million? Do you have any thoughts about
that?
Mr. Selenke. Yes. Congresswoman Waters, I will say in
concurring with Mr. Kalman, as he said earlier, I think there
is room for discussion in where efficiencies can be found. As
you said, the resources are needed, and that determination is
to be made.
Ms. Waters. Could I conclude this by saying that resources
are important, and they are needed in order to do the job? Does
that make good sense?
Mr. Selenke. Congressman Waters, that would be an accurate
statement.
Ms. Waters. Would you agree with that, Mr. Kalman?
Mr. Kalman. I certainly would.
Ms. Waters. Thank you. I yield back.
Chairman Luetkemeyer. The gentlelady yields back. The
gentleman from the great State of Texas, Mr. Williams, who is
also the Chair of the House Small Business Committee, is
recognized for 5 minutes.
Mr. Williams of Texas. Thank you, Mr. Chairman, and welcome
to all of you. My main concern with FinCEN's additional
beneficial ownership reporting requirements is the immense
burden these increased requirements will have on small
businesses, many small businesses, of which I am one in Texas.
Owners are facing higher costs and possible penalties for this
rule coming out of FinCEN, which is a bureau not all businesses
are familiar with. There are over 32 million small businesses
in the United States, yet FinCEN has not laid out a strategic
plan to inform business owners of how they can be sure they are
reporting all the correct information.
I want to thank the chairman for attaching my bill to
today's hearing, the Small Business Working Group Act, which
will provide an opportunity for small businesses to learn about
beneficial ownership and promote coordination between FinCEN
and Main Street America. We need to give small businesses the
opportunity to learn the rules of the road, and let them comply
with what exactly all this information means and entails.
Mr. Kuhlman, what conversations have you had with FinCEN
regarding beneficial ownership reporting requirements, and do
you feel as if their outreach to small business regarding this
rule has been sufficient?
Mr. Kuhlman. We had one conversation with FinCEN in the
summer of 2021. I believe it was after they put out their
advance notice of proposed rulemaking, but before they put out
any of the first two proposed rules. We have filed comments at
every opportunity we have had, but we have had no subsequent
conversations. And I am afraid you are right, that many of the
impacted businesses are unprepared or unaware of the
requirements that are forthcoming.
Mr. Williams of Texas. Yes, we need the rules to play by
the rules.
Mr. Kuhlman. Absolutely.
Mr. Williams of Texas. Secondly, throughout 2022, more than
2,000 people died from fentanyl in Texas alone, which is more
than 5 people per day. Trafficking of fentanyl and its
ingredients is conducted by a wide range of Chinese criminal
actors. Organized crime networks, like those used by the
Chinese, can operate outside of local jurisdictions through the
establishment of shell companies, and these shell companies
serve as a front for drug trafficking operations. The
congressional intent for the CTA was to strengthen national
security by providing tools to identify all shell companies
used for money laundering, drug trafficking, and terrorist
financing. I have some concerns about the direction the BOI
rulemaking is taking and the impacts it will have on national
security if it is not implemented correctly.
Mr. Richards, given your impressive career in combating
financial crimes, how can an effective BOI rulemaking help law
enforcement stop money laundering, and how has FinCEN
misinterpreted congressional intent in their current BOI
rulemaking?
Mr. Richards. To your first question, Congressman, nothing
in the beneficial ownership rule is going to stop money
laundering or fight financial crime unless the information gets
into the hands of law enforcement, and then law enforcement can
take action on it. That is the most critical thing. Again,
there is nothing in the rulemaking that compels that
information to be used. Now, there are provisions in the AML
Act which require the Department of Justice and the Government
Accountability Office (GAO) to do some studies on the
effectiveness of the BSA reporting, but without that, we are
not going to succeed.
Your second question was around how far FinCEN strayed from
congressional intent. I believe they did it in at least four
ways. First, they created a regime where there are three rules
instead of two. I think the plain reading of the AML Act and
the Corporate Transparency Act calls for two rules, and three
rules might be like, what is the difference at the end of the
day? The difference is that three rules adds a level of
complexity and time because of the rulemaking process that we
don't really have. That is one of the resources FinCEN hasn't
talked about is time, and they are running out of time.
The three other areas where I believe FinCEN went beyond
congressional intent is having multiple control persons. There
is not a law enforcement officer in the world who has ever
burst into a room and said, how many of you are in charge? They
walk in and they say, who is in charge, and yet, that is what
the CTA impliedly called for, and yet FinCEN has said, no, we
can have multiple control persons. That is beyond congressional
intent and adds a level of complexity that is not needed out of
the gate.
Third, is having the images of the identification
documents. I think that is a stretch. It might be valuable 2
years down the road once FinCEN has sort of tested and piloted
this process. But doing it out of the gate, I think goes beyond
congressional intent and adds a level of complexity that is not
needed.
And finally, and Mr. Selenke talked about it, is the
limited use of the beneficial ownership information. I
apologize for the long answer.
Mr. Williams of Texas. Thank you. I yield back.
Chairman Luetkemeyer. The gentleman yields back. I now
recognize the ranking member of the subcommittee, the
gentlelady from Ohio, Mrs. Beatty, for 5 minutes.
Mrs. Beatty. Thank you, Mr. Chairman. Let me start with
you, Mr. Kalman. We have been talking a lot about rulemaking,
and I believe you were part of the bipartisan Corporate
Transparency Act, which took over 10 years to pass. It is my
understanding that you met with Members and staff frequently in
support of that process to talk about the practicalities about
how the law was ultimately shaped. Can you talk a little bit
more about how important this legislation was, and the
prevalence of the use of shell companies to laundering money,
and how pivotal this legislation was to protect our national
security?
Mr. Kalman. Thank you for the question. It did take over 10
years. I believe it was 12 years since Senator Carl Levin first
introduced the bill. It was negotiated with numerous amendments
and different versions of the bill through several
Administrations. During those years, I think there was more and
more evidence that came to light, that I think helped move the
process forward, and that showed it was really, truly, a
national security issue.
Let me just give one example, and I don't want to take too
much time, but I think one of the early examples that was
pretty shocking to this committee and to others was when we
discovered that the Iranian Government had bought an office
tower on Fifth Avenue in Manhattan to evade our sanctions. And
just think about that: The easiest way for Iran to evade our
economic sanctions was to buy property in New York. I think
that says a lot about the use of anonymous companies and how
they can help to circumvent our efforts at national and global
security.
Mrs. Beatty. And even with that, Mr. Kalman, I think what
is important for me, because we are in a new era of time with
FinCEN, and we all have some questions about what is the intent
of the Congress, but I think the operative thing for me, in
addition to that case, was the bipartisanship and the broad
coalition of stakeholders. Here we are again talking about
FinCEN. Can you talk about that bipartisanship?
Mr. Kalman. I think that was one of the things that helped
move the legislation forward.
Mrs. Beatty. Can you say that part again?
Mr. Kalman. I think that the bipartisan, across-the-
political-spectrum support for the bill was what helped move it
forward and helped Members to understand the value. We had
think tanks on both the right and the left. We had, at the end,
the Chamber of Commerce come aboard, as well as having a number
of environmental groups. The banks were a good partner with
consumer groups. We had law enforcement and civil rights
organizations, a number of organizations that you don't
normally see on legislation at the same time. I think that was
a critical and, I hope, a good reminder to the committee about
how this moved forward.
Mrs. Beatty. Thank you. Our strength is certainly within
our unity. Let me shift with the few minutes I have left. We
have heard a lot about small businesses. I, too, for more than
2 decades served as a small business in my district, and there
are a lot of concerns about these reporting requirements. And I
am sensitive to regulatory changes that will impose burdens and
compliance costs on small businesses. Can you give us a sense
of projected compliance costs for small businesses, or do you
have any data on estimates for this, or does anyone else?
Mr. Kalman. I will just offer, and then if others have--the
only practical experience, I think, that was looked at, that we
saw was in the United Kingdom after they passed their law, and
they looked at various businesses and how much it costs. And I
think the initial cost for average small businesses--they
define those as businesses with less than 50 employees, and
ours is less than 20 employees--was about, I believe, $150 the
first year, and then the annual sort of upkeep cost self-
reported by businesses came out to be 2 pounds, which would be
about $2.50 a year.
While we do appreciate that this is something that
businesses have to pay attention to, and it is another
regulation in a lot of regulations, we don't think this
particular regulation is actually going to cost a significant
amount of money.
Mrs. Beatty. Okay. I probably don't have enough time for
you to answer, but my last question is going to be to everyone,
if there is anything concrete that Congress can do to help
FinCEN further ease business compliance, but you can send your
responses in writing. Thank you.
Chairman Luetkemeyer. The gentlelady's time has expired.
With that, we go to the gentleman from Kentucky, Mr. Barr, who
is also the Chair of our Subcommittee on Financial
Institutions, for 5 minutes.
Mr. Barr. Thank you very much, Mr. Chairman. This is an
important hearing, and I really appreciate the witnesses'
testimony about FinCEN's overreach here. I am worried about
FinCEN's significant deviation from congressional intent. I
just spoke to the Kentucky Bankers Association, and they are
concerned that their customers don't understand what is coming.
They don't understand Section 1071 on that data collection, and
they don't understand what is about to hit the small businesses
with this CTA, and, again, definite deviation from
congressional intent when finalizing and implementing the BOI
reporting rule, and that will mean trouble for small
businesses' ability to comply.
The CTA states that reporting from existing companies needs
to be conducted no later than 2 years after enactment, yet the
FinCEN final rule requires reporting 1 year from finalization
of the rule. It is one thing that they have 50 questions and 8
pages; it is another thing that when no small business knows
this is coming, they have expedited the timeline.
Mr. Kuhlman, what does this expedited timeline mean for
small businesses, and will your members have time to comply?
Mr. Kuhlman. For existing businesses that only have the one
year to comply, most obviously, just half the time that they
were permitted to do it. But it is also that those businesses
don't know that it exists, so it is going to take them time to
do it. When are they going to be able to meet with their tax
professional or whatever is probably in the spring, right?
There goes 3 months, and then to maybe go back and try to find
out who are their beneficial owners if it is a multi-generation
business or something like that.
Fortunately, existing businesses don't have to go back and
find the applicant, who may be long gone by that point in time,
but that is a problem. I am even more concerned about the
businesses formed after the effective date, because they only
have 30 days to get all this information, and they are
basically overwhelmed with starting up this business and being
stressed at that point in time, and they are going to have to
track this information down. They are going to have to get an
employer identification number and taxpayer identified. They
might not even have that information in time, but this is
certainly the last thing on their mind.
Mr. Barr. Yes, certainly, requirements to disclose things
they don't have to in the statute, and I am worried that FinCEN
will fail to roll out a final rule rescinding the CDD rule
forcing a duplicative reporting regime upon the backs of small
businesses.
Mr. Richards, when Congress passed the Corporate
Transparency Act, were there three separate bills or did we
enact just one?
Mr. Richards. It was the one bill but three separate rules,
I think is what you are referring to.
Mr. Barr. Yes. And I'm sorry about the queued question, but
you anticipated my next question, which is, how did we end up
with three separate rulemakings with only one statute?
Mr. Richards. It was a surprise. The section that rolled
out the Corporate Transparency Act was entitled, ``Beneficial
Ownership Information Reporting Requirements.'' It included
both reporting and access.
Mr. Barr. Yes.
Mr. Richards. Another section has GAO and Treasury doing
studies on the beneficial ownership information reporting
requirements. FinCEN's advance notice of proposed rulemaking
was on beneficial ownership information reporting requirements,
and it included both reporting and access. So when they came
out with the three-rule approach instead of the two-rule
approach, I think it took everybody by surprise
Mr. Barr. And do three separate rules lend themselves to
creating a simple, straightforward reporting regime?
Mr. Richards. No, they add complexity and add time.
Mr. Barr. I share our chairman's sentiment that Ms. Gacki
will be a good addition to FinCEN, and we look forward to
working with FinCEN and appreciate FinCEN's offer to come to
our districts and help educate our small business community
about these new requirements. But we look forward to working
with FinCEN's new leadership and retooling what they have done
here.
Mr. Richards, final question in my remaining time. Fraud
and other forms of criminal behavior are on the rise. Your bank
customers have been educated, in part to be careful with whom
they share their sensitive personal information, and in part to
protect them against fraud and exploitation. Do you anticipate
that the customers are going to require education from FinCEN
to feel comfortable sharing the sensitive personally-
identifying information with FinCEN, in addition to giving your
bank written consent in order to access the beneficial
ownership registry?
Mr. Richards. Absolutely, and that is the one thing that
the businesses don't know is how to do this. They don't know
how to do it. I am a small business. I know a little bit about
this stuff. I know I am not going to be registering until about
November because I want to make sure that this database is
secure.
Mr. Barr. Yes, and, Mr. Richards, excellent point about
none of this is going to advance the cause of law enforcement,
anti-money laundering, countering terror finance or national
security. None of it is going to advance any of those things if
it doesn't get into the hands of law enforcement. This is the
frustration, frankly, with a lot of my small community banks
related to Currency Transaction Reports (CTRs) and Suspicious
Activity Reports (SARs) is that they never get any feedback. Is
this helping or not? With that, I yield back.
Chairman Luetkemeyer. The gentleman's time has expired. We
will now go to the gentleman from North Carolina, Mr. Nickel,
for 5 minutes.
Mr. Nickel. Thank you, Chairman Luetkemeyer and Ranking
Member Beatty, and thanks to our witnesses for being here. The
Financial Crimes Enforcement Network, or FinCEN, is our
country's financial intelligence unit, meaning it is providing
intelligence that helps the U.S. to achieve its national
security objectives. This includes intelligence used to track,
seize, and freeze Russian oligarch funds that are fueling the
war in Ukraine and funds used to traffic Chinese fentanyl.
My colleagues across the aisle have proposed cutting
FinCEN's budget, rolling back the Fiscal Year 2024
appropriation to $166 million, which is $63 million below the
Administration's budget request. With fewer resources, FinCEN
will have a harder time supporting such national security and
law enforcement inquiries while moving forward on structural
reform to strengthen the U.S. financial system against illicit
funds.
Mr. Kalman, if we cut funding for FinCEN, what are the
potential negative consequences to our ability to fight
financial crime?
Mr. Kalman. Thank you for the question. There are many
impacts. Let me just say this one, which I think we all agree
on this panel, is that one of the key things, one of the most
important things about getting this right and making sure that
it is effective, is if the data is verified, if we know that
the information that is in the database is accurate. We have
heard from Mr. Selenke that if it is not accurate, they won't
find it useful and won't use it. Verification costs money. They
need licenses to access other databases. They need to be able
to make sure that their systems are compatible. That takes a
lot of money, and that is not currently in FinCEN's budget. So,
we think that in general, they need more money, but
specifically, if this rule is going to work, they need to have
that targeted funding.
Mr. Nickel. Mr. Kalman, how would the Republicans' proposed
budget cuts impact FinCEN's ability to engage with stakeholders
of the Corporate Transparency Act to ensure that the small
business community can more easily and accurately comply with
these new rules?
Mr. Kalman. FinCEN does need to be able to reach out to a
number stakeholders. The small businesses have been mentioned
before. That is critical, making sure that they can pick up the
phone and answer questions from the banks once the financial
institutions have to engage in this rule. They also have to
deal with the Secretaries of State and others that have
corporate formation at the State level to make sure that it is
as seamless as possible when businesses do go to register a
business. And that outreach is going to cost money and take
additional personnel.
Mr. Nickel. I have some more questions, but Ranking Member
Beatty was on to something that I wanted to hear from everyone
on the panel on; I thought it was a great question, so I want
to just take her question and pose the question to all four of
you. Is there anything concrete that Congress can do to help
FinCEN to further ease business compliance?
Mr. Selenke. Congressman Nickel and Congresswoman Betty, I
think the original intent of this rule was to create something
that was simple, accurate, and accessible, especially to law
enforcement as well as to financial institutions. And I think
ensuring that request or that expectation is completed is what
Congress can assist in.
Mr. Nickel. Mr. Richards?
Mr. Richards. I will repeat that. Congress can help FinCEN
help itself by keeping things simple, by easing the burden on
financial institutions, particularly expanding their ability to
use this information for all purposes, including investigating
and reporting suspicious activity and encouraging law
enforcement to use it. I think you just have to work with them,
and under the new Director, I think that is very, very
possible.
Mr. Nickel. Mr. Kuhlman?
Mr. Kuhlman. Yes. I think revisiting some of the
definitions, as Mr. Richards mentioned, that substantial
control was supposed to be one person. FinCEN, as an example,
listed up to 8 people. So, looking at definitions, ``beneficial
owner,'' ``substantial control''--perhaps limiting those,
perhaps limiting or eliminating the, ``or similar entities,''
from LLC and corporation because that has kind of been wide
open and expansive as well. And then, taking a look at the
timeline--I believe Congressman Nunn has a bill that goes back
to the original timeline.
On the comment on the bipartisanship earlier, I tend to
agree that the bipartisanship did give kind of those expanded
timelines, and a lot of that bipartisanship was just
eliminating the regulation when they were just limited to more
restrictive than anything that was suggested in earlier pieces
of legislation.
Mr. Nickel. Thank you, and I yield back.
Chairman Luetkemeyer. The gentleman's time has expired. The
gentleman from Georgia, Mr. Loudermilk, is recognized for 5
minutes.
Mr. Loudermilk. Thank you, Mr. Chairman, and thank you all
for being here today for this very important hearing. And
before I start with my questions, I want to touch on something
that Representative Barr actually touched on, with the current
regulations dealing with the Bank Secrecy Act. Before I get
into that, I think the big issue that most of us are looking at
is that Congress was very intentional when we drafted
legislation for FinCEN, and it seems like FinCEN has ignored
most of those guidelines in the final product.
Mr. Chairman, without objection, I would like to insert a
letter from the National Association of Manufacturers, which
highlights multiple areas where FinCEN has subverted or
exceeded congressional intent and rulemaking, and has put
thousands of small businesses at risk of incompliance.
Chairman Luetkemeyer. Without objection, it is so ordered.
Mr. Loudermilk. And with that--I wanted to make sure to get
that out of the way--I want to go back to what Mr. Barr talked
about with SARs and CTRs. Even though this is about beneficial
ownership, I am working on legislation to modernize the
Currency Transaction Reports and Suspicious Activity Reports.
Mr. Selenke, I heard that you have a unique perspective on
the issue, and I was hoping that you would maybe briefly share
your thoughts on raising or simplifying the thresholds for
those reports.
I come from an intelligence background in the military, and
there are a couple of issues I see with CTRs and SARs. One, the
threshold is so low on CTRs that if we were to adjust it for
inflation, we would go from the 1970s $10,000, to over $80,000
today. But because we are overwhelming the system with
information because of the CTR threshold being so low, and the
lack of clear definition on what is a suspicious activity, we
find that banks, to avoid making mistake or having someone come
after them, will just report most anything. So, what happens to
law enforcement is like looking for a needle in the haystack. I
want to reduce the haystack so we get to the information.
The second is the Federal Government becomes the biggest
data risk of anybody in the United States. So, you have all of
this financial data that is sitting in a database that most
people are not using but becomes subject to disclosure, and so,
again, if you could enlighten us with your ideas and thoughts
on this?
Mr. Selenke. I appreciate the question, Congressman
Loudermilk. Two things. First, we will address CTRs. The dollar
amount, I think, is a good question. I think when it first came
out in the early 1970s--I remember my parents' first house was
$13,000, so it gets a feel for the size and scope of that. But
from a bank's perspective, the thing on the CTRs that would
help most is to simplify the process.
As a bank, we really do use exemption. If a customer
regularly comes in, we will get it so that they are able to not
have to fill out the paperwork. The challenge with that is, by
regulation, for a number of those businesses, I cannot exempt
them, so it is a very complex form. The CTR form has a lot of
information. I have four people on my staff whose entire job is
to take care of CTRs. If there was a way to simplify that
process to get the information that they need for law
enforcement, it would make a big difference to our banking
institution and banks in general.
The second part you asked about is SARs, and the challenge
with SARs is if I was able to create the rules, I would somehow
bifurcate those SAR filings. Some SAR filings may be for, I am
getting ready to buy a boat. I heard somewhere in the
background, my uncle said I can't take out more than $10,000,
so I will take out $9,000 today, and $9,000 tomorrow. I look at
it. I see the money came from a Fidelity account or an
investment account, and they are taking the cash out, and they
told the teller they are buying a boat. I have to fill a SAR
out on that. It takes the same number of boxes, et cetera, and
it piles onto that pile of SARs, whereas if there is something
that is more serious, that same boat dealer who was structuring
the conversations, that is information that I would want to put
on a SAR.
If there was a way to simplify the SAR so that information
going to law enforcement wouldn't be, like you say, more
haystacks and less needles to be able to have more needles and
less of a haystack.
Mr. Loudermilk. Thank you. And even though this is about
beneficial ownership, I see that there is some connection
there, and that was very beneficial to me in where we are
going. I am running out of time, so I will submit the rest of
my questions for the record regarding beneficial ownership.
But I will close with this one thing that always strikes me
with all the information that we are getting from CTRs and
SARs. If my local sheriff wanted to get that information from a
financial institution, he would have to have a search warrant.
If the FBI wants to get it, they just go to FinCEN, and it is
there. With that, I yield back.
Chairman Luetkemeyer. The gentleman's time has expired.
With that, we go to the gentlelady from Colorado, Ms.
Pettersen, for 5 minutes.
Ms. Pettersen. Thank you, Mr. Chairman. Mr. Kalman, in this
committee and across Congress, we are very interested in the
issue of fentanyl trafficking and how we can detect and deter
these bad actors. Your organization, Transparency International
U.S., developed a fact sheet that includes 10 examples of how
traffickers of synthetic drugs have used shell companies to
facilitate their operations and launder or hide their illicit
proceeds.
I would like to submit this document for the record.
And 10 examples among probably hundreds or even thousands
were given here. We can add to that the human traffickers using
shell companies to harm men, women, and children, arms
traffickers, sanctions evaders, and many others who abuse our
financial system through these anonymous shell companies.
So, Mr. Kalman, how would law enforcement use this database
to better pursue these bad actors, and can you tell me how
FinCEN can revise their proposed CTA access rule to better
support such efforts?
Mr. Kalman. Thank you for the question. There are two parts
to the question. First, how does law enforcement use this
information? Let me give you one specific example. There was a
study done by the anti-human trafficking organization, the
Polaris Project, a few years ago. They looked at 6,000 illicit
massage businesses across the United States where they
suspected women were being trafficked. They found in only 21
percent of the cases was anyone listed on the form, which meant
that you had almost 80 percent of these businesses having no
ownership, so they could not arrest the people who were behind
the trafficking. They could only arrest the women who were
being trafficked, which seems backwards to us and imperfect
justice, if you will.
If there was beneficial ownership information and people
were required to file, they could look at that information, and
they could actually go back to the people who are behind the
trafficking operations. We believe that the way in which FinCEN
has created the access rules for State and local law
enforcement creates unnecessary hurdles, is not in the text of
the law and, in fact, goes beyond what was a very carefully-
negotiated compromise in making sure that there were security
protections of the data but also allowing access to the data by
law enforcement. So, we think that they need to update that
rule. That is probably, for us, the most important piece of the
problem.
Ms. Pettersen. Great. Thank you so much. Another concern
that we have heard is the cost to our businesses, the barriers
and the burdens on businesses; 82 percent are nonemployer
businesses, so this would really just be registering the
information that they have readily available. For the remaining
ones that are not just nonemployer, they have to collect the
information. On average, we have seen in Britain that it costs,
on average, $250 for companies like that, but for many, it is
zero dollars, and for the next year, it is only around $2. It
seems like this is a very important investment up front to make
sure that we are going after these bad actors that are not
utilizing our financial system.
Is there anything, since Britain has gone years ahead of us
on this, that you can point to on their success and why it is
important to continue to move forward, making sure that it
works for law enforcement?
Mr. Kalman. My apologies. As you noted, the vast majority
of businesses are small, single-owner, nonemployer firms. When
we were talking to our U.K. colleagues, they noted that it is
sort of an interesting statement to say that those who can
create the complex structures, that can afford the lawyers and
the service providers that can create a web of companies that
makes it difficult to know who owns it, then don't have the
same money to be able to hire those same lawyers to figure out
who is on the top of the corporate food chain.
We don't think that is actually true and we would challenge
that, and during the entire debate, we have never actually
heard anybody come up with an actual real-life example of that.
We do think, again, it is a requirement for businesses, but we
think that for the vast majority, it is a very simple thing,
and for those that are more complex, they have proven that they
can afford it.
Ms. Pettersen. Thank you so much for being with us today. I
yield back.
Chairman Luetkemeyer. The gentlelady yields back. The
gentleman from Pennsylvania, Mr. Meuser, is recognized for 5
minutes.
Mr. Meuser. Thank you very much, Mr. Chairman. And thank
you to our witnesses as well. It does seem as if we, on this
committee, are a broken record. We are meeting with those where
rules from the Biden Administration agencies continue to go
beyond congressional intent, are out of scope, and overburden
businesses, particularly small businesses and the banks that
serve them. Beneficial ownership rule from FinCEN is no
exception.
We expressed similar concerns with the Consumer Financial
Protection Bureau's (CFPB's) Section 1071 small business data
collection rule whereby they had to contract out reporting
requirements, which required some very odd data at great cost
to them. So, FinCEN should have considered ways to minimize
reporting requirements for small businesses that are already
strapped with so many other unfavorable factors. FinCEN also
needs to take a step back, delay implementation of their rule,
and think critically about ways to move forward with Anti-Money
Laundering/Bank Secrecy Act compliance in a way that is truly
beneficial to stakeholders.
My line of question is going to focus initially on small
businesses, which are often caught in the crossfire of such
rulemakings, so, Mr. Kuhlman, I would like to just start with
you. To your knowledge, did FinCEN reach out to small
businesses regarding how beneficial ownership rulemaking should
be done in a reasonable manner for small businesses?
Mr. Kuhlman. There has been very little outreach thus far.
I think this year, there has been a FAQ document that has been
put on the website, and that is the only update that I have
heard.
Mr. Meuser. And how many members in NFIB exist that would
fall under this mandate of rulemaking?
Mr. Kuhlman. Eighty percent of our members, so about
240,000 of the 300,000.
Mr. Meuser. 240,000.
Mr. Kuhlman. Our reach is only that far, and maybe not even
that far, right? We got 32.6 million reports.
Mr. Meuser. I think that maybe there would be a
conversation to get a little bit of input, right?
Mr. Kuhlman. Yes.
Mr. Meuser. Does the information requested by the FinCEN
reporting form, in your view, go beyond the original intent of
Congress and the Corporate Transparency Act?
Mr. Kuhlman. Yes, I think that the definitions are too
broad. The fields are more expansive than whatever. As I said,
if you copied and paste it from Regulations.gov, it is 8 pages,
but I think AICPA or someone put together this form, which is
on legal for columns. This is going to cost you more than $40
or $250 to update every time. If a business owner sees this
form, they are going to go to a CPA or an attorney to seek
their advice.
Mr. Meuser. And I imagine this is not your opinion. You are
actually getting feedback from your members, and they are
stating that this can be problematic for them?
Mr. Kuhlman. Correct. The members as well as their advisors
or tax professionals, and they all agree.
Mr. Meuser. Okay. About how many of your members feel
comfortable filing beneficial ownership paperwork before
January 1, 2024?
Mr. Kuhlman. I don't know. I don't know of any. But I guess
my analogy is when the customer due diligence rule became
effective on May 11, 2018, I did get an influx of members who
said, what is this form? I am not comfortable filling this out.
And that had a protection it had to stay on file at the
financial institution and subpoena protection. This does not.
It just goes into a giant database.
Mr. Meuser. As we move forward, give us feedback, not just
at this hearing, about what you are hearing as well from your
members, if you can do that.
Mr. Kuhlman. Yes, sir.
Mr. Meuser. Mr. Selenke, I would like to move on to you,
please, on how this ruling will affect banking. Why don't you
just go ahead and give me some of your thoughts on what
community banks, regional banks, super regionals, what their
thoughts are on this rule?
Mr. Selenke. Yes. Congressman Meuser, I appreciate the
question. For the mid-sized banks like myself and larger, the
rule, as it is currently put out there, will be additive to our
process. As many regulations tend to be, it could be a
distraction, and focusing on this particular form, we may lose
focus otherwise. Where I am more concerned for the banks and
for the small business customers is smaller community banks in
the State of Missouri--according to the Missouri Bankers
Association, many of those banks have 2 branches, 20 employees,
and $200 million on deposit. Their ability for their BSA
officer, who is also their compliance officer, worrying about,
as you said, 1071 and other rules, is going to be very
difficult. For us as a bank, I am worried that it is going to
be additive and subtract from our ability to properly support
FinCEN and BSA rules.
Mr. Meuser. My guess is that you are contacting FinCEN
saying, we need a delay, we need clarity, we need some input
here.
Mr. Selenke. I think the primary thing would be we need
clarity and simplicity for our customers and for our banks.
Mr. Meuser. Thank you very much. Mr. Chairman, I yield
back.
Chairman Luetkemeyer. The gentleman yields back. The
gentleman from Illinois, Mr. Foster, who is also the ranking
member of our Financial Institutions Subcommittee, is
recognized for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman, and thank you to our
witnesses. I will try again on something that I think could
make all this stuff work a lot better, get better quality data
into the database, and that is mobile ID or digital drivers'
licenses. Are you all familiar with this? This is the ability
to present a REAL ID-compliant driver's license, a document
that already exists, that is issued by all the States, and
present that in a pretty fraud-resistant way using your
cellphone, and to take advantage of the fact that a modern
cellphone can be used basically as a biometric security dongle.
Mr. Selenke, when someone wants to come in and open a bank
account, you have to do your Know Your Customer (KYC) on him.
The customer gets out the cellphone, does the biometric login,
then verifies that is the cellphone that was associated with
the digital driver's license, which is a document that is
pretty hard to fake. It is hard. A REAL ID-compliant driver's
license is something where it is hard to get multiple licenses
in multiple States, which is the root of a lot of identity
fraud. So, if you can simply present that document that already
exists in State databases with the biometrics, and if you can
present that online or in person, it simplifies the heck out of
this process.
In countries that have this, when you want to register a
company, one of those steps is to get out your cellphone and
prove that you are who you say you are online. This is also
something that is going to be absolutely crucial when you are
looking at artificial intelligence deep fakes that we are going
to have. Just there is going to be a wave of identity fraud
coming at us, so this will be an essential tool for that.
In the last session of Congress, we got within one Member
of Congress in finally getting the government at least to
accept this. But then, because our system allows one Member of
Congress to throw a crowbar in the works, we were unable to get
it in the omnibus at the end, but it is close, and the people
of the United States, I think, are ready for this.
The American Civil Liberties Union (ACLU) issued a report
that, as you would expect, was full of real worries about
privacy, but in the end, it concluded, if you read the last
paragraph of the report on mobile ID, that if this is done
right, it will be good for privacy and good for equity in our
country. We made a major step forward in breaking the digital
divide and within as part of the Infrastructure bill. Now, even
someone with no assets has the right to a subsidized internet
contract, which is the barrier for this. And I would venture to
say that of the 35 million companies that you talk about, every
one of them has a cellphone to a very good approximation.
The technology for this was developed by the National
Institute of Standards and Technology (NIST)in the Obama
Administration, and it is deployed on every one of your
cellphones today. We have the ability to do this, and if we
actually simply allowed the Federal Government to set standards
for interoperability and for digital presentation of this and
issuing of these things, it would be a game-changer. Simply, if
we had allowed it for government operations, if it had been in
place at the start of COVID, we would have avoided more than
$60 billion of identity fraud and taxpayer losses. So, this is
huge. It is something that, frankly, almost the entire
civilized world is ahead of us on--name a country, starting
with Estonia and Korea, which I think lead the world, but in
the European Union, almost every country is doing this.
And when you want to open a company, you just simply say,
okay, I want to open my company. You get out your cellphone,
prove that everyone involved is who they say they are because
that is a huge issue in getting high-quality data into this. I
was wondering if any of you have reactions about that, how much
simpler that could make things if there was a realistic
expectation that U.S. citizens who wanted one could have access
to a secure digital ID? Does anyone want to comment on that?
Mr. Richards. That would be a leap forward because I think
the biggest sticking point we are going to see practically are
beneficial owners that are reluctant to provide copies, PDFs of
their driver's license or, on the rare occasion, a passport. So
if that replaces ID.me.gov or whatever it might be, that would
be a step forward because, again, that is probably the biggest
sand-in-the-gears aspect of the overreach in the rulemaking.
Mr. Foster. Mr. Selenke?
Mr. Selenke. Yes, Congressman. From a banking perspective,
as they say, the devil is in the details, but from a banking
perspective, if there is an ID that is acceptable and
understandable and difficult to manipulate, it is something we
would be interested in taking advantage of.
Mr. Foster. Yes. No, it is a mobile ID. It is being
deployed by lots of States. And we should just adopt it
federally, and life would get easier for law enforcement, and
for businesses, and for the average American. Thank you, and my
time is up. I yield back.
Chairman Luetkemeyer. The gentleman's time has expired. The
gentleman from Iowa, Mr. Nunn, is recognized for 5 minutes.
Mr. Nunn. Thank you very much, Mr. Chairman, and Ranking
Member Beatty, for holding this hearing, and thank you very
much to the panel for being here to discuss this. I want to
begin, first of all, by thanking FinCEN for the wide range that
it does. At the same time, I am going to speak to my small
businesses today.
[chart]
Mr. Nunn. I am going to share with the committee this test
delete page that was screen-captured. It is the exact page
where our small businesses are supposed to be trusting their
Federal Government is going to be protecting, preserving, and
providing for the protection of the information that they are
offering to FinCEN. But this was left live for 5 days, leading
us to believe that the technology problems at the institution
have been addressed, when clearly, they have not.
I would like to submit the screenshot and the IRS news
release for the record.
Chairman Luetkemeyer. Without objection, it is so ordered.
Mr. Nunn. The beneficial ownership database was crafted not
to be public-facing. Unlike U.K. companies, for a reason, this
information is highly-sensitive. A misstep could be disastrous
for millions of Americans and slip-ups like the one I just
showcased in here could hemorrhage this information, and the
lack of a final access rule makes me extremely worried about
FinCEN's ability to secure data properly, and I think millions
of Americans feel the same way.
Secondly, the IRS released a newsletter to warn taxpayers
to be on the lookout for a new scam in mailings that tries to
mislead people into believing that they are owed a refund. Much
of the same data the scam letter asked for is what FinCEN will
be requiring through their BOI rulemaking. FinCEN's lack of
clarity around this proposal deeply worries me that they will
not be able to ensure that similar gimmicks do not stand the
test of time.
That is one of the reasons why we are introducing a bill
called the Protect Small Businesses and Prevent Illicit
Financial Activity Act, which does two things I would like to
share with the panel. First, it would force FinCEN to remove
its escape hatch that allows companies to check if they are
unable to identify or unable to attain determinations. This
opt-out that FinCEN is creating will allow the very same
foreign entities and terrorist organizations that we are trying
to eliminate to go unchecked, the very reason a bipartisan
Congress passed the Corporate Transparency Act in the first
place.
Second, it would force FinCEN to revert its beneficial
ownership filing deadline to the agreed-upon deadline by the
four corners of Congress. For existing small businesses, this
would be a statutorily-mandated 2 years from the 1-year
extension FinCEN established, and for newly-registered small
businesses, this would be 90 days, which was shortened by
FinCEN to only 30 days. I agree with Mrs. Beatty that there are
a number of loopholes that need to be addressed. This is
something that a bipartisan group on this committee believes is
important.
My bill came as I reached out to my Iowa State Small
Business Development Center (SBDC), and the State director
talked to me about the beneficial ownership rules, to which she
responded that she had not heard anything from several
businesses or FinCEN regarding the implementation of the
rulemaking. Her response, ``SBDC being an outreach arm of the
Small Business Administration, thus a partner with the
government to assist businesses, one would think that we would
have a great resource to assist them with such outreach
efforts. If you have concerns with them, please encourage them
to reach out to our nationwide assets so we can begin helping
our business clients.'' That takes us to the task at hand.
Mr. Richards, can you discuss the escape hatch that FinCEN
would include for entities that may be unable to identify their
Taxpayer Identification Number (TIN)?
Mr. Richards. I cannot explain the escape hatch. It was an
absolute surprise to everybody. I think Elise Bean, who used to
be a, I think, general counsel on the Permanent Subcommittee on
Investigations, called it the worst form she had seen in 40
years of government service. But FinCEN has heard the feedback
and has said, yes, we have pulled that form back. We are going
to look at it again. I would expect that if clear heads
prevail, there will be no ability for a reporting company to
choose, ``I don't know,'' as an option on the form.
Mr. Nunn. Or even a reporting company, a foreign entity
having a shell company that doesn't want to disclose. Luckily,
at this point, we are able to protect. Unfortunately, we have
seen what has happened in the past here, and people have taken
advantage of it.
Mr. Kuhlman, what percentage of small businesses would be
able to comply with this, in your estimation?
Mr. Kuhlman. At this point in time, I don't know of any,
because they don't know what the form is. There are still some
unclear definitions and there is no guidance, but hopefully, by
the end of the 6 months, there will be some guidance.
Mr. Nunn. And hopefully, with some clarifying legislation,
we will be able to do that. How many companies in America right
now would be able to provide their TIN to the FinCEN team?
Would you say that the overwhelming majority have a Taxpayer
Identification Number?
Mr. Kuhlman. Yes, but I would also caution that the
Taxpayer Identification Number was not required as part of the
law. I would recommend just sticking to the four required
fields.
Mr. Nunn. I understand.
With that, very quickly, Mr. Selenke, what does CTA
implementation look like for rural banks in places like Iowa
and Missouri?
Mr. Selenke. It will be very difficult. It is another
additive requirement, and with the resources, it would be----
Mr. Nunn. Thank you, Mr. Chairman. My time has expired, so
I yield back.
Chairman Luetkemeyer. The gentleman's time has expired. The
gentleman from New Jersey, Mr. Gottheimer, is recognized for 5
minutes.
Mr. Gottheimer. Thank you, Mr. Chairman, and Madam Ranking
Member. Mr. Kalman, while I am happy to see FinCEN make
progress on rules to implement the Corporate Transparency Act,
I am concerned by the barriers law enforcement could face,
including a requirement to obtain a court order before
accessing the beneficial ownership directory and reporting
requirements after the fact. Can you describe how these
additional barriers will affect law enforcement's
investigations, please?
Mr. Kalman. Thank you for the question. During the
negotiations for the rule, this committee and others around
Congress that were involved went through very, very specific
negotiations, creating a series of protocols to ensure that
there is security of the data. Obviously, nothing is perfect,
but people felt, at the end of the day, that we had gotten to a
place where there was some level of security.
The problem with the additional hurdles for State and local
law enforcement, which don't exist, by the way, for Federal law
enforcement, is quite significant. The information we are
talking about is often at the beginning of an investigation for
law enforcement, and if they can't have access to this initial
data, it is very difficult to move forward with an
investigation. And these investigations can be complicated and
costly, and they could just get dropped.
Mr. Gottheimer. Thank you. In March 2022, I joined then-
Committee Chairwoman Waters and Representative Sherrod Brown in
calling for GAO to conduct a review of the tools used by
domestic violent extremists to finance their activities here in
the United States. I am looking forward to seeing the results
of GAO's review in the coming months, which I hope will shed
light on the ways these groups fund themselves.
Mr. Kalman, can you describe the ways in which domestic
violent extremists, like the Oath Keepers and Proud Boys, could
conceal their fundraising activities through the use of shell
companies or other anonymous organizations? Would a strong
beneficial ownership directory help law enforcement monitor the
activities of these groups?
Mr. Kalman. We have seen shell companies or anonymous
companies, I should say, being used by any number of bad
actors, whether it is terrorist organizations, human
trafficking operations, drug cartels, or other organizations. I
believe the Stolen Asset Recovery (StAR) Initiative said that
it is--no, it was Global Witness that coined the phrase that
the anonymous companies are the getaway car for criminals and
the corrupt. So yes, I think that the idea behind the Corporate
Transparency Act is, in fact, to require companies, shell
companies, or those that would hide behind corporate
structures, to come clean or not be able to register.
Mr. Gottheimer. Yes, so you have seen evidence of anonymous
companies flooding markets with counterfeit products at the
expense of U.S. small businesses?
Mr. Kalman. Yes. And in my written testimony, we submitted
a report by David Luna, who is a former national security
official. He did look at the impact on businesses and the use
of anonymous companies both for counterfeited and pirated
goods, but also companies that were scam artists for larger
companies, so subcontractors of companies ripping off larger
companies. It was used to defraud the business sector.
Mr. Gottheimer. Thank you. Small business advocates,
including NFIB, in their letter of comment, have raised
concerns that some of FinCEN's BOI rules were not explicitly
outlined in statute and create costly and complicated
requirements for our nation's smallest businesses.
Mr. Kuhlman, what revisions could be made to reduce the
compliance burden for small businesses while still allowing law
enforcement to identify bad actors?
Mr. Kuhlman. I think fewer beneficial owners, less people
having to be listed under substantial control, they expanded
that definition. A little bit broader timelines for initial
reports and updates, that would be where I would start, but I
would be happy to follow up with other ideas. Thank you.
Mr. Gottheimer. Thank you. And despite Congress' intent to
keep the requirements for reporting companies limited to the
most useful and important information, many small businesses
still have questions about when and how to file. Just asking a
further question, do you believe FinCEN should do more to help
small businesses understand the rules and requirements of the
CTA, and if so what should a FinCEN engagement plan look like?
Mr. Kuhlman. Yes, Congressman Gottheimer, I think just
getting some guidance out quickly, as kind of required by the
Small Business Regulatory Flexibility Act, would be great. And
then once that guidance is issued, making sure it is
distributed broadly, whether it is through SBDCs, as Mr. Nunn
suggested, or just basically using every tool in government,
anyone who does interact with small businesses, would be a good
start.
Mr. Gottheimer. Thank you. Mr. Chairman, I yield back.
Chairman Luetkemeyer. The gentleman yields back. The
gentleman from Tennessee, Mr. Ogles, is recognized for 5
minutes.
Mr. Ogles. Thank you, Mr. Chairman, and to our panelists,
we are getting close to the end, guys, but we thank you for
being here, and we certainly appreciate you.
I think we are concerned about the small businesses and the
compliance costs and inadvertently kind of getting trapped in
this rulemaking process.
Mr. Selenke, kind of echoing Mr. Kuhlman's comments, and I
understand this might require some guessing, but what
percentage of the clients of your bank or similar institutions,
who were newly designated as reporting companies, do you think
actually know about the designation? We won't hold you to this
number, by the way; we are having some fun here.
Mr. Selenke. Yes, Congressman, the number would be zero or
close to zero.
Mr. Ogles. Okay, sir. How many would you guess are familiar
with FinCEN at all?
Mr. Selenke. For our customers, the only ones who would be
aware of it are those who have interacted with it already, so
many service businesses and individuals have to deal with large
currency reporting.
Mr. Ogles. Yes, sir. Thank you.
Mr. Kuhlman, do the businesses you represent typically wake
up in the morning with bated breath and excitement to follow
the news of FinCEN?
Mr. Kuhlman. No. No, sir, but we are asking our members in
our recent banking service and would be able to follow up if
they are familiar with this. It is just not ready yet, but it
should be soon, so we will get you that.
Mr. Ogles. Yes, sir. And again, I think that is the head
right, is that we have an agency that is imposing on small
businesses, many of whom are struggling to turn on the lights.
They are busy running their businesses, and suddenly now you
have this rulemaking authority that is essentially legislating
authority. And it is time that we have clear communications
with our businesses by letting Congress do its job, not some
sort of alphabet agency. But we have already discussed the
burden this rule places on small businesses, and on community
banks, so we should consider whether it is worth it.
Mr. Selenke, you have a wealth of experience in keeping
crime out of financial systems. Do you believe this rule is the
silver bullet that will finally stop the flow of cash to the
drug cartels?
Mr. Selenke. Congressman, no. There will be movement of
funds to financial institutions, and it is very difficult to
identify. I think this can help identify players, but it won't
stop the flow of funds.
Mr. Ogles. And do you think it has been refined to the
point that it will help banks avoid exposure to criminal
enterprises?
Mr. Selenke. Currently, no. As it is written, it is focused
only on the customer due diligence portion of the discussion.
As a bank, to understand our customers and what is happening,
we have the whole Know Your Customer (KYC) process from
onboarding, to their ongoing activity, to sanction screening.
And the way it is currently written, it only focuses on a very
narrow point of that review, so it would not have much value to
us at this point.
Mr. Ogles. We have a rule that many of the reporting
companies don't know exists, and, therefore, can't carry out,
that could, therefore cause well-intentioned business owners
legal trouble, that is designed in a way that makes compliance
unnecessarily difficult in their own form, was criticized for
being, let's face it, observed. I think it would be obvious at
this point that FinCEN should pull back, that it is time to go
back to the drawing board and perhaps talk to someone like you,
Mr. Kuhlman, who represents businesses, who, businesses, I
think, by and large, I would say 99.9 percent want to comply,
want to have no contact with illicit businesses. And you all
are perfect conduits for, how do we do this and do it in a
responsible manner?
Really quickly, China has engaged in unfair trade practices
such as currency manipulation, along with the campaign of
intellectual property theft and economic espionage targeting
U.S. companies, in addition to human rights violations and
facilitating the fentanyl crisis across our Southern border and
to every small town in America. Considering the real threat
that China poses to the United States of America on, quite
frankly, many fronts, I would kind of posit that the real focus
here should be China, the illicit actors that are using our
Southern border and the cartels to move money in and out and,
quite frankly, cargo in and out of this country, versus
targeting hardworking Americans who are trying to run
businesses and are trying to do the right thing.
Mr. Chairman, I want to thank you for holding this hearing.
I am out of time, so I yield back.
Chairman Luetkemeyer. The gentleman yields back. With that,
the gentlewoman from California, Mrs. Kim, who is also the Vice
Chair of the subcommittee, is recognized for 5 minutes.
Mrs. Kim. Thank you. Thank you, Mr. Chairman. I want to
thank you and Ranking Member Beatty for holding this hearing.
FinCEN finalized the first rule under the Corporate
Transparency Act, the beneficial ownership information
reporting requirements which we have been talking about all
day, that was released on September 30, 2022, about 10 months
ago, but the rules will be effective on January 1, 2024, in
less than 6 months.
Mr. Kuhlman, you represent an organization that advocates
for the interests of small businesses, so I wanted to get your
assessment of how well-informed your small businesses that you
represent are about the BOI, and do you believe that beneficial
ownership rules should be delayed, giving small businesses more
time to learn about the law and get ready to comply?
Mr. Kuhlman. I don't think there is much familiarity right
now, and there is not clear guidance, and there is still some
ambiguity on who must report. So, I would definitely support a
delay, Congress allows for a delay, or for 2-year
implementation, excuse me. That is consistent with how long the
implementation of that customer due diligence rule is, so I
think it makes a whole lot of sense. At a minimum, Chairman
McHenry has a bill that says it should not become effective
until all of these rules are finalized, and you should be able
to comment concurrently on all three rules, I believe.
Mrs. Kim. Thank you. Congress intended for the CTA to be
very simple for most small business owners, and it was supposed
to be a postcard-like form that would take a seamless amount of
time to complete, but it seems that FinCEN has turned that into
something else. I want to ask you, how much time do you
anticipate it will take for small businesses to fill that out,
and can you tell us and those who are watching, how long is the
form, and how many questions are included in BOI?
Mr. Kuhlman. The draft form had 50 questions. When you just
copied and pasted from Regulations.gov, it is 8 pages. Now, I
am sure the government form will be smaller print, wider
margins, so it will look different, but still, it is a pretty
intimidating form with a lot of dropdowns and sub-questions
based on it.
Mrs. Kim. Do you anticipate that small businesses will need
to hire external vendors or outside third parties to submit the
form appropriately, because we are hearing very low numbers
from the U.K. database, but we are expecting the cost to be
much higher than the U.K. numbers. Can you dig into that a
little more?
Mr. Kuhlman. Yes. An analogy is that for tax compliance,
you have your CPA; 90 percent of NFIB members utilize a CPA. I
do anticipate they will at least go to them to ask, is this
legitimate, and can you help me do it, and I think it is going
to depend on State to State, whether the State Bar Associations
might view those experts as unauthorized practicers of law. I
know for some of the larger firms, they have already said we
are not going to help with this compliance. It is my
understanding that might be because the liability is too much
for them, but I am afraid that trickles down to some of the
smaller ones and there might not be an avenue to go, or you
might have to go find an attorney who may be even higher cost.
So, I believe there will be a substantial cost to comply.
Mrs. Kim. We have to make it easier for small businesses to
comply, and this is making it very difficult for sure. FinCEN
has yet to finalize rule number two that will lay out how
highly-sensitive beneficial ownership is maintained, protected,
and accessed by law enforcement and financial institutions.
Given this lack of clarity, how will the ineffective access
rule impact your ability to carry out your ongoing CDD
obligations?
Mr. Kuhlman. I would be interested in----
Mrs. Kim. Mr. Selenke, can you answer that?
Mr. Selenke. Yes, thanks. Thank you, Congresswoman Kim.
Without clear access, we need to understand that. At this
point, we have no idea how we would access it, what that access
would look like, and who would be authorized to access it. And
for a larger company, that is going to be difficult, because we
will have a large number of needs to occasionally reference
that information.
Mrs. Kim. So every time a new one comes out, we expect the
businesses to comply. I am asking these further follow-up
questions in general. Mr. Kuhlman, you can probably answer
this: Do you believe that FinCEN has done its due diligence,
educating, informing, and going through their active outreach
program to inform the small businesses about this new BOI
coming down? You probably had this conversation before, but I
wanted to ask.
Mr. Kuhlman. At this point, I do not believe it has been
sufficient. I will just say that.
Mrs. Kim. With that, I yield back. Thank you.
Chairman Luetkemeyer. The gentlelady's time has expired.
All questioners are out of time. I would like to thank our
witnesses for being with us today. You all did a great job.
Thank you so much.
I just have one thought--I have several thoughts jotted
down here but I will just expound on one. Throughout this
hearing, it has been mentioned many times that FinCEN is going
beyond the intent of the law in their rulemaking and their
proposals. The Supreme Court had just, within the last 13
months, struck down three different major decisions by the
Administration and its agencies that went beyond the law, and
it is what they were doing, what they were opposing.
A number of you represent associations, and I hope that you
are looking at the possibility of taking FinCEN to court. When
they go beyond the letter of the law, they have to be reined
in. And this, to me, when you are talking about a $32 billion
original cost, Mr. Kuhlman's figures are, and $5.6 billion per
year to comply, that is a huge issue, a huge burden on our
small businesses that had better be done right and better be
done according to the way Congress intended. If not, I think
you have a legitimate reason to go after them. I am hopeful
that FinCEN will hear what we are talking about here today,
stop the nonsense, and get back in its lane with this
rulemaking, and hopefully, we can get this done in a better
way.
Mrs. Beatty, would you like to ask a few questions or make
a comment?
Mrs. Beatty. Thank you. Thank you so much for that. Again,
let me just thank the witnesses for being here and certainly
shedding light on this. Also, thank you for the financial
information, that was helpful, from another country, the U.K.,
to see that small amount. And lastly, Mr. Chairman, I want to
thank Congressman Nunn, who referenced the bipartisanship.
Taking a look at what we can do, and hopefully we can take
some of the information from here because I think the objective
is, as we move into this new era of finance that we are going
to be into, it is going to be very much like it was decades ago
when we worked on CTA. So it is here, and I think we have an
obligation on both ends to figure out why or how it doesn't go
beyond the intent of Congress, but also, how we figure out what
is best for small businesses, bankers and FinCEN. Thank you,
Mr. Chairman.
Chairman Luetkemeyer. The Chair notes that some Members may
have additional questions for this panel, which they may wish
to submit in writing. Without objection, the hearing record
will remain open for 5 legislative days for Members to submit
written questions to these witnesses and to place their
responses in the record. Also, without objection, Members will
have 5 legislative days to submit extraneous materials to the
Chair for inclusion in the record.
With that, this hearing is adjourned.
[Whereupon, at 3:49 p.m., the hearing was adjourned.]
A P P E N D I X
July 18, 2023
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