FinCEN Issues Final Rule for Beneficial Ownership Reporting Requirements Under the Corporate Transparency Act

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On September 29, 2022, the Financial Crimes Enforcement Network (“FinCEN”) promulgated its much-anticipated Final Rule implementing the beneficial ownership reporting scheme mandated by the Corporate Transparency Act. FinCEN’s Final Rule is considered a compliance gamechanger that Anti-Money Laundering compliance personnel and professionals who engage in corporate formation and governance must be aware of.

1. General Overview

The Corporate Transparency Act was passed by Congress on January 1, 2021. As we described at the time, the Corporate Transparency Act, found at sections 6401 to 6403 of the National Defense Authorization Act for fiscal year 2021, made important changes to the Bank Secrecy Act, including by requiring “reporting companies” to disclose “beneficial owner” and “company applicant” information to FinCEN. The purpose of the beneficial owner reporting requirement is to deter the creation and use of shell companies which facilitate money laundering or other illicit activities.

The Corporate Transparency Act’s beneficial ownership reporting requirements have been codified at 31 U.S.C. § 5336, but have been pending rulemaking by the United States Treasury Department. With the Final Rule now published by FinCEN, we now know who must file a beneficial ownership report, what information must be reported, and when reports are due to be filed. FinCEN’s new rules, which will be codified at 31 CFR Part 1010, will become effective on January 1, 2024.

2. What is and is not a “reportable company”?

The Corporate Transparency Act defines a “reportable company” broadly as: “a corporation, limited liability company, or other similar entity that is – (i) created by the filing of a document with the secretary of state or similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state  or a similar office under the laws of a State or Indian Tribe….” Building upon this, the Final Rule further defines “reportable company” to include either a “domestic reporting company” or a “foreign reporting company.” Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498, 59593 (Sept. 30, 2022) (to be codified at 31 C.F.R. § 1010.380(c)(1)).

A “domestic reporting company” means any entity that is “(A) a corporation; (B) a limited liability company; or (C) created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.” Id. (to be codified at 31 C.F.R. § 1010.380(c)(1)(i)).

A “foreign reporting company” has been defined by rule to mean any entity that is: “(A) a corporation or limited liability company or other entity; (B) formed under the law of a foreign country; and (C) registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe.” Id. (to be codified at 31 C.F.R. § 1010.380(c)(1)(ii)).

FinCEN expects that, under its broad definition, domestic and foreign reporting companies will include a variety of business entities beyond corporations and LLCs including limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships.

However, the Act and the Final Rule include important exemptions from the definition of “reporting company” and therefore the reach of the beneficial owner disclosure requirement. These exemptions include: publicly-traded companies; securities issuers; banks; credit unions; bank holding companies; money transmitters; money services businesses; broker dealers; exchanges; investment companies; investment advisors; public accounting firms; pooled investment vehicles; and tax-exempt entities. Additionally, any entity that: i) employs 20 or more employees on a full-time basis in the United States; ii) has gross sales or receipts over $5 million; and iii) maintains an operating presence at a physical United States office are also exempt from the definition of a “reportable company.” A complete list of exemptions can be found at 87 Fed. Reg. at 59593-59594 (Sept. 30, 2022) (to be codified at 31 C.F.R. § 1010.380(c)(2)).

3. Who is a “beneficial owner”?

With the understanding of which companies are required to disclose their beneficial owner information to FinCEN, we now turn to the specifics of the beneficial owner information that must be disclosed. The Corporate Transparency Act defines a “beneficial owner” as any individual who directly or indirectly: i) owns or controls 25% of the entity; or ii) exercises “substantial control” over the entity. However, the Act left undefined what “substantial control” meant. The Final Rule fills this void and provides a more detailed definition of who qualifies as a “beneficial owner” as it defines what an “ownership interest” is and what constitutes “substantial control.”

Under the Final Rule, a “beneficial owner” is any individual who, “directly or indirectly,” either: i) “owns or controls at least 25 percent of the ownership interests” of a reporting company; or ii) “exercises substantial control over such reporting company.” 87 Fed. Reg. at 59594-59595 (Sept. 30, 2022) (to be codified at 31 C.F.R. § 1010.380(d)).

The Final Rule defines “ownership interest” broadly including, but not limited to: equity or stock instruments; any capital or profit interest in an entity; convertible and futures; puts, calls, straddles, and other options for buying and selling such instruments; and “any other instrument, contract, arrangement, understanding, relationship, or mechanism use to establish ownership.” Id. at 59595 (to be codified at 31 C.F.R. § 1010.380(d)(2)(i)). The Final Rule makes clear that such ownership can be held directly or indirectly and details relationships giving rise to a direct or indirect ownership interest. Id. (to be codified at 31 C.F.R. § 1010.380(d)(2)(ii)). The Final Rule also provides how to calculate total ownership interests of a reporting company. Id. (to be codified at 31 C.F.R. § 1010.380(d)(2)(iii)).

As to what constitutes “substantial control”, the Final Rule details a range of activities that could trigger the reporting requirement for any particular owner. Such activities include i) serving as a senior officer of the reporting company; ii) having the authority to remove senior officers or a majority of the board of directors; iii) directing, determining, or having substantial influence over important decisions made by the reporting company such as the scope of the reporting company’s business, the ability to sell or mortgage company assets, the ability to reorganize dissolve or merge the company, the ability to authorize major expenditures, investments or the issuance of equity, and the ability to amend corporate governance documents. 87 Fed. Reg. at 59594-59595 (Sept. 30, 2022) (to be codified at 31 C.F.R. § 1010.380(d)(1)(i)). Similar to the Final Rule’s definition of ownership interest, the Final Rule also includes a catch-all definition of “substantial control” to include anyone having “any other form of substantial control over the reporting company.” Id. at 59595 (to be codified at 31 C.F.R. § 1010.380(d)(1)(i)(D)). The Final Rule further explains the circumstances under which substantial control may be directly or indirectly asserted by a beneficial owner. Id. (to be codified at 31 C.F.R. § 1010.380(d)(1)(ii)).

In creating broad definitional categories, FinCEN’s goal was to reduce money-laundering risks by closing loopholes that have previously allowed corporate structuring to hide owners and decisions makers. Importantly, the Final Rule provides five exceptions to the definition of “beneficial owner.” Practitioners are encouraged to review these exemptions to ensure compliance. Id. (to be codified at 31 C.F.R. § 1010.380(d)(3)).

4. Who is a “company applicant”?

In addition to disclosing beneficial owners, the Corporate Transparency Act and Final Rule also require companies formed after January 1, 2024 to disclose “company applicants” to FinCEN. The Act defines an “applicant” is any individual who: i) files an application to form the entity under the laws of a State or Indian Tribe; or ii) registers or files an application to register a foreign formed entity to do business in the United States.

The Final Rule clarifies that who a “company applicant” is depends on whether the company is a “domestic reporting company” or a “foreign reporting company.” For a “domestic reporting company,” it is “the individual who directly files the document that creates the domestic reporting company….” 87 Fed. Reg. at 59596 (to be codified at 31 C.F.R. § 1010.380(e)(1)). For a “foreign reporting company,” it is “the individual who directly files the document that first registers the foreign reporting company….” Id. (to be codified at 31 C.F.R. § 1010.380(e)(2)). The Final Rule also contemplates situations where more than one person is involved in the filing of documents. In such instances, the Final Rule explains: “Whether for a domestic or a foreign reporting company, the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.” Id. (to be codified at 31 C.F.R. § 1010.380(e)(3)).

It should be noted that the Final Rule does not define the term “individual.” Nor does the Final Rule limit the company applicant to an “individual” within the company itself. It appears the Final Rule contemplates outsiders such as attorneys, accountants, or other outside corporate formation agents would be included in this disclosure rule. Consistent with this broad language, the Final Rule provides that “[i]n the case of a company applicant who forms or registers an entity in the course of such company applicant’s business, the street address of such business” shall be reported in lieu of the company applicant’s residential address. 87 Fed. Reg. at 59592 (to be codified at 31 C.F.R. § 1010.380(b)(1)(ii)(C)). FinCEN explained that “[c]ollecting the business addresses of such company applicants may also allow law enforcement to identify patterns of entity creation or registration by linking the business addresses of company applicants for different entities.” Practitioners are advised to use a plain language meaning of the term “individual” in order to ensure full compliance with reporting requirements.

5. What must be reported?

The Act and the Final Rule require reporting companies to provide FinCEN with a beneficial ownership information (“BOI”) report containing information concerning the company, its beneficial owners, and every individual who is a company applicant with respect to a reporting company.

As to the reporting company itself, the BOI report shall contain: 1) the full legal name of the reporting company; 2) any trade name or d/b/a name; 3) a complete current address (defined by rule) for the company; 4) the State, Tribal, or foreign jurisdiction of formation of the reporting company; 5) for a foreign reporting company, the State or Tribal jurisdiction where such company first registers; and 6) the IRS TIN of the reporting company, or where a foreign reporting company has not been issued a TIN, the tax identification number issued by a foreign jurisdiction and the name of such jurisdiction. 87 Fed. Reg. at 59592 (to be codified at 31 C.F.R. § 1010.380(b)(1)(i)).

For every “beneficial owner”, the BOI report shall contain: 1) the individual’s full name; 2) their date of birth; 3) a complete current address (defined by rule); 4) a “unique identifying number and the issuing jurisdiction” from either i) a non-expired US Passport, ii) a non-expired State or Tribal issued ID, iii) a non-expired State-issued driver’s license, or iv) a non-expired foreign passport if the above are not available; and 5) an image of the document from which the unique identifying number was obtained. Id. (to be codified at 31 C.F.R. § 1010.380(b)(1)(ii)).

For companies created after January 1, 2024, the Final Rule provides that this identifying information must also be provided for every “company applicant.” Companies created prior to January 1, 2024 must merely report that they were created prior to that date in lieu of providing company applicant information. Id. at 59593 (to be codified at 31 C.F.R. § 1010.380(b)(3)).

The Final Rule also provides that if an individual provides their identifying information directly to FinCEN, that individual may obtain a “FinCEN identifier” which can be provided on the BOI report in lieu of the required identifying information. Id. (to be codified at 31 C.F.R. § 1010.380(b)(4)).

6. When must applicant and beneficial owner information be reported?

The deadline by which a “reporting company” is required to report beneficial ownership information to FinCEN depends on whether the company is in existence at the time the Act is implemented. Reporting companies created or registered before January 1, 2024 will have one year—no later than January 1, 2025—to file their initial reports. Id. (to be codified at 31 C.F.R. § 1010.380(a)(1)(iii)). Reporting companies created after January 1, 2024 shall have thirty (30) days to file their initial reports after receiving notice of their creation or registration from the secretary of state or similar office of the State in which they are created or registered. Id. at 59591 (to be codified at 31 C.F.R. § 1010.380(a)(1)(i), (ii)).

Changes to the information provided in the initial report must be made via the filing of an updated BOI report within thirty (30) days of the change in information. Id. at 59592 (to be codified at 31 C.F.R. § 1010.380(a)(2)).

7. Penalties for non-compliance.

Under the Act, it is unlawful to willfully fail to report completed or updated beneficial ownership information. The Act also makes it unlawful to willfully provide or attempt to provide false/fraudulent beneficial ownership information. The Final Rule provides for similar, yet more detailed, prohibitions. Id. at 59596 (to be codified at 31 C.F.R. § 1010.380(g)).

The Act provides for multiple penalties including a civil penalty of $500 per day for each day the violation continues; and a fine up to $10,000, imprisonment up to 2 years, or both.

8. FinCEN will clarify confidentiality and agency information sharing in subsequent rulemakings.

Although “reporting companies” must report beneficial ownership to FinCEN, the Act requires that FinCEN keep such information confidential. However, “FinCEN is authorized to disclose reported BOI in limited circumstances to a statutorily defined group of governmental authorities and financial institutions.” 87 Fed. Reg. at 59507. BOI information may be shared under certain circumstances such as: i) in response to a request federal agency engaged in national security, intelligence, or law enforcement activity; ii) with state and local law enforcement upon court order; iii) upon request of certain foreign law enforcement agencies; iv) upon request of certain regulatory agencies; and v) upon request from a financial institution with consent of the “reporting company”. See generally, 31 U.S.C. § 5336(c)(2)(B)-(C).

FinCEN intends to address the regulatory requirements related to access to information reported through future rulemaking. 87 Fed. Reg. at 59507.

9. How to prepare?

Although the Final Rule is not effective until January 1, 2024 and companies in existence before that time have until January 1, 2025 to submit their initial BOI report, companies should proactively analyze whether they qualify as a “reporting company” under the Act and Final Rule and, if so, begin to identify potential “applicants” and “beneficial owners.”

Additionally, corporate lawyers and regulatory compliance personnel should review the Federal Register and the Final Rule to familiarize themselves with the new beneficial owner reporting requirements so as to better advise prospective and current clients on business structuring. Moreover, practitioners should be on the lookout for additional FinCEN rulemakings concerning the conditions under which FinCEN can share BOI information.

Finally, businesses who are in the business of assisting in corporate formation, such as attorneys, accountants, or other corporate formation agents, should familiarize themselves with the Final Rule and the requirements that may exist in disclosing these corporate formation agents’ identities as  “company applicants.”

Fuerst Ittleman David & Joseph has years of experience assisting businesses with corporate governance and compliance. We also specialize in anti-money laundering law, and represent a wide array of financial institutions in matters involving anti-money laundering compliance. For more information about the Bank Secrecy Act, anti-money laundering compliance, or the new disclosure laws described in this article, contact us by email at info@fidjlaw.com or by phone at 305-350-5690.