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Centers for Better Insurance, LLC
www.betterins.org
December 11, 2021
Financial Crimes Enforcement Network (FinCEN), Treasury
Submitted via regulations.gov
Re: NPRM – Beneficial Ownership Information Reporting Requirements
Docket Number FINCEN-2021-0005 and RIN 1506-AB49
The Centers for Better Insurance, LLC (CBI) is an independent organization focused on optimizing the value
the insurance industry delivers to all stakeholders (including policyholders, employees, and society at
large). CBI does so by making available unbiased analysis and insights about key regulatory issues facing
the industry for use by insurance professionals, regulators, and policymakers. CBI receives no outside
funding.
In response to the earlier ANPR,1
CBI drew FinCEN’s attention to how U.S. domiciled captive insurance
companies may interact with the provisions and intent of the Corporate Transparency Act (CTA). Treasury
has defined a captive insurance company as an “[i]nsurer formed to insure the risk exposures of its
policyholder owner(s) and regulated by the captive insurance laws of a particular state jurisdiction.”2
30
U.S. states, territories and possessions currently maintain captive insurance laws under which more than
3000 captive insurance companies hold active licenses – half the world’s total.3
A “reporting company” is defined by the CTA as “a corporation, limited liability company, or similar other
entity that is created by the filing of a document with a secretary of state or a similar office under the law
of a State or Indian Tribe.” However, the definition of reporting company exempts “an insurance company
(as defined in section 2 of the Investment Company Act of 1940).” The Investment Company Act defines
an insurance company as follows:
“Insurance company” means a company which is organized as an insurance company,
whose primary and predominant business activity is the writing of insurance or the
reinsuring of risks underwritten by insurance companies, and which is subject to
supervision by the insurance commissioner or a similar official or agency of a State; or any
receiver or similar official or any liquidating agent for such a company, in his capacity as
such.
1
86 FR 17557 (Apr. 5, 2021).
2
Report on the Effectiveness of the Terrorism Risk Insurance Program (June 2020), Federal Insurance Office at
page iii.
3
Background on: Captives and other risk-financing options, Insurance Information Institute (Mar, 2021).](https://image.slidesharecdn.com/responsetonprmonbeneficialownership-211212191409/85/CBI-Comments-on-FATF-Implementation-of-Corporate-Transparency-Act-1-320.jpg)
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The NPRM Exempts High-Risk Entities from CTA
Despite the IRS designation of certain captive arrangements in its “Dirty Dozen” of tax fraudsters and an
increasingly intense IRS campaign scrutinizing alleged financial abuses by these entities,4
the NPRM does
nothing to close or otherwise control the massive loophole in U.S. financial crime defenses created by an
exemption of captive insurance companies from the Corporate Transparency Act.
The financial crime risks associated with captive insurers go well beyond tax fraud. Through independent
research, CBI has identified two captive insurance companies (regulated by the Vermont and District of
Columbia departments of insurance) whose ultimate beneficial owner is Aviation Industry Corporation of
China (AVIC).5
AVIC is on U.S. Treasury’s list of sanctioned Communist Chinese Military Companies because
it is “directly supporting the efforts of the [People’s Republic of China’s] military, intelligence, and other
security apparatuses [and] constitutes an unusual and extraordinary threat . . . to the national security,
foreign policy, and economy of the United States.”
Other state-licensed captive arrangements exclusively and expressly serve the (federally) illegal marijuana
trade.6
For example, the National Cannabis Risk Management Association provides its members with
access to a specialized cannabis captive:7
TRICHOME™ was established in 2020 and is the first risk-bearing captive insurance model
in the cannabis industry to deliver the essential, industry-specific, and risk management
anchored insurance products that the cannabis vertical needs to expand and sustain their
business. TRICHOME™ an NCRMA endorsed product, initially offers general liability,
premises liability, product liability and property coverages for dispensaries and those with
associated grow facilities.
Further, state departments of insurance are generally prohibited from sharing information about the
captives they regulate. Some have gone so far as to assert confidentiality over even the corporate names
of the captives they licene.8
The South Dakota division of insurance sums up this “hands-off” regulatory
philosophy succinctly:9
4
IRS urges participants of abusive micro-captive insurance arrangements to exit from arrangements (April 9, 2021);
and https://www.irs.gov/newsroom/dirty-dozen.
5
https://jason-schupp.medium.com/tria-eligible-insurers-include-subsidiaries-of-a-sanctioned-communist-
chinese-military-company-c1d4fe947e35
6
Alternative Risk Strategies Closes $10 Million D&O Captive Insurance Arrangement for Large Cannabis Client,
www.altrisks.com/news/alternative-risk-strategies-closes-%2410-million-d%26o-captive-insurance-arrangement-
for-large-cannabis-client
7
www.trichomerisk.com.
8
Respondent’s Brief, Schupp v. Ohio Department of Insurance, No. 2021-00199PQ, Court of Claims of Ohio
(claiming the “General Assembly did not need to specify that the company names were confidential when the
names are already protected as ‘information’ provided to the superintendent); Motion to Dismiss Complaint for
Writ of Mandamus, Schupp v. Navarro, C.A. No. K21M-05-020 (recounting Delaware Department of Insurance
efforts to prevent public access to "captive insurance company licenses”).
9
Appellee’s Brief, Schupp v. South Dakota Division of Insurance, No. 32 CIV21-000107, 6th
Judicial Circuit of South
Dakota (claiming that state law “create[es] a ‘need to know’ atmosphere around captive insurer information).](https://image.slidesharecdn.com/responsetonprmonbeneficialownership-211212191409/85/CBI-Comments-on-FATF-Implementation-of-Corporate-Transparency-Act-2-320.jpg)
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[C]aptive insurers do not serve the public at large, they only serve their creator. It is only
necessary to regulate captive insurers at a high level, i.e., to prevent the captive from
financially harming its parent companies or itself and to prevent outright illegality.
In summary, captive insurance companies are secretive corporate vehicles regulated (at least in some
states) with what can only be described as a “see no evil, hear no evil” attitude.10
The NPRM disregards these red flags by cloaking captive insurers with an exemption from reporting
ultimate beneficial ownership information. The Financial Action Task Force has warned that close
surveillance of the ownership of financial institutions is critical to reduce the risk of money laundering and
other illegal activity:11
Competent authorities or financial supervisors should take the necessary legal or
regulatory measures to prevent criminals or their associates from holding, or being the
beneficial owner of, a significant or controlling interest, or holding a management
function in, a financial institution.
The NPRM makes no distinction between the level of insurance supervision over large insurance groups
such as AIG, MetLife or Prudential by many dozens of U.S. and foreign insurance regulators and the level
of supervision over such enigmatic insurers as DaddysBabyDoll Reinsurance Company, Inc. (AA-777-0022),
Squirrel-Away Reinsurance, Inc. (AA-7770223), and Beast Mode Reinsurance Company, Inc. (AA-7770011)
regulated by the Delaware Tribe of Indians.
Evidence of the Lack of Transparency
In exempting insurance companies from beneficial ownership reporting, Treasury attempted to quantify
the number of entities that would come within this exemption. Treasury considered its data rather
unprecise and characterized its understanding of the number of insurers exempted from reporting as no
more than “estimates or broadly indicative of the sector.” The grand total Treasury came up with is 4738
individual insurance entities (with 3471 of those entities existing as part of an insurance group).12
According to the National Association of Insurance Commissioner’s (NAIC) List of Insurance Companies
(December 2020), the NAIC has assigned insurance company codes to 6509 U.S. domiciled insurance
companies. In addition, the NAIC has “white-listed” some 150 alien insurers. Moreover, the NAIC has
identified more than 500 U.S. insurance pools and associations as well as in excess of 600 tribal insurance
companies. Through independent research, CBI has identified a further 3132 captives domiciled in U.S.
10
See United States of America v. Delaware Department of Insurance, CA No. 20-CV-829-MN-CJB (D. Del.) (resisting
IRS summons that “seeks information pertaining to approximately 200 insurance certificates of authority that DDOI
issued to micro-captive insurance companies”).
11
FATF Recommendation #26 (corresponding interpretive note recommending “supervisors should take into
consideration the characteristics of the financial institutions/groups, in particular the diversity and number of
financial institutions, and the degree of discretion allowed to them under the [risk-based assessment]”).
12
86 FR 69959.](https://image.slidesharecdn.com/responsetonprmonbeneficialownership-211212191409/85/CBI-Comments-on-FATF-Implementation-of-Corporate-Transparency-Act-3-320.jpg)
CBI Comments on FATF Implementation of Corporate Transparency Act
- 1. 1 Centers for Better Insurance, LLC www.betterins.org December 11, 2021 Financial Crimes Enforcement Network (FinCEN), Treasury Submitted via regulations.gov Re: NPRM – Beneficial Ownership Information Reporting Requirements Docket Number FINCEN-2021-0005 and RIN 1506-AB49 The Centers for Better Insurance, LLC (CBI) is an independent organization focused on optimizing the value the insurance industry delivers to all stakeholders (including policyholders, employees, and society at large). CBI does so by making available unbiased analysis and insights about key regulatory issues facing the industry for use by insurance professionals, regulators, and policymakers. CBI receives no outside funding. In response to the earlier ANPR,1 CBI drew FinCEN’s attention to how U.S. domiciled captive insurance companies may interact with the provisions and intent of the Corporate Transparency Act (CTA). Treasury has defined a captive insurance company as an “[i]nsurer formed to insure the risk exposures of its policyholder owner(s) and regulated by the captive insurance laws of a particular state jurisdiction.”2 30 U.S. states, territories and possessions currently maintain captive insurance laws under which more than 3000 captive insurance companies hold active licenses – half the world’s total.3 A “reporting company” is defined by the CTA as “a corporation, limited liability company, or similar other entity that is created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe.” However, the definition of reporting company exempts “an insurance company (as defined in section 2 of the Investment Company Act of 1940).” The Investment Company Act defines an insurance company as follows: “Insurance company” means a company which is organized as an insurance company, whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies, and which is subject to supervision by the insurance commissioner or a similar official or agency of a State; or any receiver or similar official or any liquidating agent for such a company, in his capacity as such. 1 86 FR 17557 (Apr. 5, 2021). 2 Report on the Effectiveness of the Terrorism Risk Insurance Program (June 2020), Federal Insurance Office at page iii. 3 Background on: Captives and other risk-financing options, Insurance Information Institute (Mar, 2021).
- 2. 2 The NPRM Exempts High-Risk Entities from CTA Despite the IRS designation of certain captive arrangements in its “Dirty Dozen” of tax fraudsters and an increasingly intense IRS campaign scrutinizing alleged financial abuses by these entities,4 the NPRM does nothing to close or otherwise control the massive loophole in U.S. financial crime defenses created by an exemption of captive insurance companies from the Corporate Transparency Act. The financial crime risks associated with captive insurers go well beyond tax fraud. Through independent research, CBI has identified two captive insurance companies (regulated by the Vermont and District of Columbia departments of insurance) whose ultimate beneficial owner is Aviation Industry Corporation of China (AVIC).5 AVIC is on U.S. Treasury’s list of sanctioned Communist Chinese Military Companies because it is “directly supporting the efforts of the [People’s Republic of China’s] military, intelligence, and other security apparatuses [and] constitutes an unusual and extraordinary threat . . . to the national security, foreign policy, and economy of the United States.” Other state-licensed captive arrangements exclusively and expressly serve the (federally) illegal marijuana trade.6 For example, the National Cannabis Risk Management Association provides its members with access to a specialized cannabis captive:7 TRICHOME™ was established in 2020 and is the first risk-bearing captive insurance model in the cannabis industry to deliver the essential, industry-specific, and risk management anchored insurance products that the cannabis vertical needs to expand and sustain their business. TRICHOME™ an NCRMA endorsed product, initially offers general liability, premises liability, product liability and property coverages for dispensaries and those with associated grow facilities. Further, state departments of insurance are generally prohibited from sharing information about the captives they regulate. Some have gone so far as to assert confidentiality over even the corporate names of the captives they licene.8 The South Dakota division of insurance sums up this “hands-off” regulatory philosophy succinctly:9 4 IRS urges participants of abusive micro-captive insurance arrangements to exit from arrangements (April 9, 2021); and https://www.irs.gov/newsroom/dirty-dozen. 5 https://jason-schupp.medium.com/tria-eligible-insurers-include-subsidiaries-of-a-sanctioned-communist- chinese-military-company-c1d4fe947e35 6 Alternative Risk Strategies Closes $10 Million D&O Captive Insurance Arrangement for Large Cannabis Client, www.altrisks.com/news/alternative-risk-strategies-closes-%2410-million-d%26o-captive-insurance-arrangement- for-large-cannabis-client 7 www.trichomerisk.com. 8 Respondent’s Brief, Schupp v. Ohio Department of Insurance, No. 2021-00199PQ, Court of Claims of Ohio (claiming the “General Assembly did not need to specify that the company names were confidential when the names are already protected as ‘information’ provided to the superintendent); Motion to Dismiss Complaint for Writ of Mandamus, Schupp v. Navarro, C.A. No. K21M-05-020 (recounting Delaware Department of Insurance efforts to prevent public access to "captive insurance company licenses”). 9 Appellee’s Brief, Schupp v. South Dakota Division of Insurance, No. 32 CIV21-000107, 6th Judicial Circuit of South Dakota (claiming that state law “create[es] a ‘need to know’ atmosphere around captive insurer information).
- 3. 3 [C]aptive insurers do not serve the public at large, they only serve their creator. It is only necessary to regulate captive insurers at a high level, i.e., to prevent the captive from financially harming its parent companies or itself and to prevent outright illegality. In summary, captive insurance companies are secretive corporate vehicles regulated (at least in some states) with what can only be described as a “see no evil, hear no evil” attitude.10 The NPRM disregards these red flags by cloaking captive insurers with an exemption from reporting ultimate beneficial ownership information. The Financial Action Task Force has warned that close surveillance of the ownership of financial institutions is critical to reduce the risk of money laundering and other illegal activity:11 Competent authorities or financial supervisors should take the necessary legal or regulatory measures to prevent criminals or their associates from holding, or being the beneficial owner of, a significant or controlling interest, or holding a management function in, a financial institution. The NPRM makes no distinction between the level of insurance supervision over large insurance groups such as AIG, MetLife or Prudential by many dozens of U.S. and foreign insurance regulators and the level of supervision over such enigmatic insurers as DaddysBabyDoll Reinsurance Company, Inc. (AA-777-0022), Squirrel-Away Reinsurance, Inc. (AA-7770223), and Beast Mode Reinsurance Company, Inc. (AA-7770011) regulated by the Delaware Tribe of Indians. Evidence of the Lack of Transparency In exempting insurance companies from beneficial ownership reporting, Treasury attempted to quantify the number of entities that would come within this exemption. Treasury considered its data rather unprecise and characterized its understanding of the number of insurers exempted from reporting as no more than “estimates or broadly indicative of the sector.” The grand total Treasury came up with is 4738 individual insurance entities (with 3471 of those entities existing as part of an insurance group).12 According to the National Association of Insurance Commissioner’s (NAIC) List of Insurance Companies (December 2020), the NAIC has assigned insurance company codes to 6509 U.S. domiciled insurance companies. In addition, the NAIC has “white-listed” some 150 alien insurers. Moreover, the NAIC has identified more than 500 U.S. insurance pools and associations as well as in excess of 600 tribal insurance companies. Through independent research, CBI has identified a further 3132 captives domiciled in U.S. 10 See United States of America v. Delaware Department of Insurance, CA No. 20-CV-829-MN-CJB (D. Del.) (resisting IRS summons that “seeks information pertaining to approximately 200 insurance certificates of authority that DDOI issued to micro-captive insurance companies”). 11 FATF Recommendation #26 (corresponding interpretive note recommending “supervisors should take into consideration the characteristics of the financial institutions/groups, in particular the diversity and number of financial institutions, and the degree of discretion allowed to them under the [risk-based assessment]”). 12 86 FR 69959.
- 4. 4 states, territories, and possessions.13 In addition, there are well over 1000 active cell captives (and perhaps thousands more) in the U.S. that CBI has yet to identify. Rather than the fewer than 5000 exempt insurance entities estimated by Treasury, NAIC and CBI data suggests the total number is closer to 12,000.14 The fact that Treasury’s estimate of the number of licensed insurers exempted from reporting beneficial ownership under its NPRM misses the mark by multiples speaks to the opacity of certain corners of the insurance industry. The Corporate Transparency Act is meant to shine light into corporate crevices where “money laundering, terrorist financing, tax fraud, and other illicit activity” can fester. Instead, while the enforcement hand of Treasury battles for access to information about captive insurers in court, the policy hand of Treasury publishes this NPRM exempting captive insurers from basic transparency requirements. Insurance Companies v. Insurance Producers The NPRM suggests that entities may be likely to meet both the definition of “insurance company” and the definition of “state-licensed insurance producer.” Specifically, the NPRM states “specific exemptions may overlap, such as insurance companies and state-licensed insurance producers.” An overlap is highly unlikely. An insurance company is a person “engaged in the business of insurance” which includes being a party to the insurance contract.15 An insurance producer is a person licensed “to sell, solicit or negotiate insurance.”16 Further, insurers are not required to obtain producer licenses in order to directly sell, solicit or negotiate insurance.17 Respectfully submitted, /s/ Jason M. Schupp Founder and Managing Member Centers for Better Insurance, LLC Frederick, Maryland 240-357-8914 jason.schupp@betterins.org 13 Over the last year CBI has pursued public records requests (with certain litigation still pending) to obtain the names of single parent captives domiciled in the US. Outside of the US, regulators make the names of captives freely accessible. 14 Inexplicably, the NPRM omits any count of exempt insurance companies from Table 2 purporting to summarize Treasury’s estimate of the number of entities in each of 22 exempt categories. 15 NAIC Nonadmitted Insurance Model Act, Section 3(G). 16 NAIC Producer Licensing Model Act, Section 2(D). 17 NAIC Producer Licensing Model Act, Section 4(A).