Overview
On September 30, 2022, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), published final rules to implement the Corporate Transparency Act (CTA), which was enacted as part of the Anti-Money Laundering Act of 2020 within the National Defense Authorization Act for Fiscal Year 2021. This is the first of three contemplated traunches of guidance required by the CTA.
The final rules have widespread application across private client services, including large and small domestic and foreign entities created for estate planning, asset protection, real property management and family business succession purposes. Common estate planning structures employed to make gifts, leverage discounts, centralize management and protect family privacy utilizing layered trusts, LLCs and partnerships will be required to disclose the ultimate beneficial ownership of entities incorporated in these plans on an ongoing basis. The same is true for LLCs created to provide creditor protection and to protect the privacy of real property owners. Both existing entities and newly formed entities are impacted. It is estimated that 33 million entities will be subject to the disclosure rules in 2024 and then 5 million more entities per year for the next 9 years.
The final rules implement the CTA’s beneficial ownership reporting provisions and are effective January 1, 2024. They are intended to protect the US financial system from illicit use, and to provide essential information to law enforcement and others to help prevent corrupt actors, terrorists, and proliferators from hiding money or other property in the United States. The rules require certain business organizations and entities to report affirmatively information to FinCEN about the beneficial owners and controllers of such organizations and the individuals who have filed an application with state or tribal authorities to form the entity or register it to do business.
The rules describe who must file a beneficial ownership information report, what information must be reported, and when a report is due. Specifically, the rules require “reporting companies” to file reports with FinCEN that identify and provide specific information on (1) the entity itself, (2) the beneficial owners of the entity and (3) the company applicants of the entity. The CTA imposes a civil penalty and authorizes criminal penalties for providing false or fraudulent beneficial ownership information or for willfully failing to provide complete or updated beneficial ownership information.
"Reporting Companies"
With respect to US-organized entities, “reporting company” is defined to mean a corporation, limited liability company (LLC), or any other entity created by filing a document with the secretary of state of any state or a similar office of a state or tribal authority. Subject to the applicability of specific exemptions, reporting companies include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and LLCs. The preamble states that general partnerships, sole proprietorships and certain types of trusts which are not created through the filing of a document with a secretary of state would not be reporting companies.
Foreign reporting companies include corporations, LLCs, and other entities formed under the laws of a foreign country that are registered to do business in any US state or tribal jurisdiction by filing a document with the secretary of state of any state or a similar office.
Twenty-three types of entities are exempt from the reporting rules, including publicly traded companies; private companies meeting certain requirements with respect to number of employees, revenue, and physical presence in the United States; and tax-exempt entities. Many types of financial institutions already subject to FinCEN regulation are also exempt from the requirements.
"Beneficial Owners"
Reporting companies must report "beneficial owners," which includes any individual who directly or indirectly either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company.
A reporting company may be structured such that multiple individuals exercise essentially equal authority over the entity’s decisions. Exercising substantial control or owning ownership interests through intermediate entities, conferring special rights in connection with a financial arrangement, issuing puts, call, straddles or other options, and other circumstances may result in a multitude of individuals who may need to be reported as beneficial owners.
Individuals with “substantial control” are defined broadly to include: (1) senior officers of the reporting company (which includes the president, CFO, general counsel, CEO, COO and any other officer who performs similar functions regardless of title); (2) individuals with authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); (3) individuals able to direct, determine, or have substantial influence over important decisions made by the reporting company; and (4) individuals with any other form of substantial control over the reporting company.
While FinCEN specifically declined to adopt the constructive ownership rules of Section 318 of the Internal Revenue Code and other equivalent constructive ownership/attribution rules (viewing those rules as both too narrow and too broad), the rules provide standards and mechanisms for determining whether an individual owns or controls 25% of the ownership interests of a reporting company, including rules for aggregating all of an individual’s different types of ownership interests. The rules capture equity in the reporting company as well as other types of interests, such as capital or profits interests and convertible interests, warrants, rights, or other options or privileges to acquire equity, capital, or other interests. Direct and indirect interests include joint ownership interests, interests held through another individual acting as nominee, custodian or agent and interests held through ownership or control of intermediary entities.
With respect to trusts, reportable ownership interests include those of a trustee or any other individual with authority to control or dispose of trust assets; a beneficiary who is the sole permissible recipient of the trust's income and principal or has a right to withdraw substantially all of the assets from the trust; and a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.
The rules exempt certain individuals, including minor children (provided the information of the child's parent or guardian is reported); individuals whose only interest is through a right of future inheritance; a creditor of the reporting company (unless perhaps if the rights of the creditor amount to an equity interest); an individual acting as nominee, intermediary, custodian, or agent on behalf of another individual (such as a tax lawyer doing work for a reporting company, including when such work is conducted under the authority of a power of attorney); and employees (other than senior officers) who exercise substantial control solely due to their employment status.
"Company Applicants"
Reporting companies must also report "company applicants," which is defined to include (1) the individual who files the document that forms the entity (or in the case of a foreign reporting company, the individual who files the document that first registers the entity to do business in the United States) and (2) the individual who is primarily responsible for directing or controlling the filing of the formation/registration document by another individual.
Reporting companies existing or registered prior to January 1, 2024 are not required to identify and report company applicants.
Information to Be Reported
In addition to identifying information of the reporting company itself, the reporting company must provide, for each beneficial owner and company applicant required to be identified and reported, the (1) name, (2) birthdate, (3) address, (4) a unique identifying number and issuing jurisdiction from an acceptable identification document (such as a non-expired passport or a US driver’s license or other state issued id card) and (5) an image of such identification document.
Reporting companies and individuals may obtain "FinCEN identifiers" by submiting an application to FinCEN containing the information that a company would otherwise be required to provide. Individuals and entities with FinCEN identifiers may use that number for future FinCEN reports, rather than providing the full suite of required information in each report.
When Must Reports be Filed?
A reporting company created or registered before January 1, 2024, will have one year from such date to file its initial report, while a reporting company created or registered after January 1, 2024 must submit its initial report no later than 30 days after the date it receives actual notice that its creation or registration has become effective (or, if earlier, the date on which a secretary of state or similar office first provides public notice of the reporting company’s formation or registration) a welcome change from the 15 day deadline originally proposed for newly created entities. Once the initial report has been filed, both existing and new reporting companies will have to submit updates within 30 days of a change in their beneficial ownership information. Errors must be reported within 30 days of becoming aware or having reason to know of inaccuracies in earlier reports.
Penalties for Failure to Comply
Reporting violations carry penalties of up to $500 per day that the violation continues or has not been remedied up to $10,000 and up to 2 years in prison.
Penalties fall on individuals directly (not the companies), including senior officers (even without any specific knowledge) of a reporting company and beneficial owners/controllers (including ones directing the actions of others). Such a penalty regime, coupled with the certifications on the reports and the continuing obligation to update the reporting upon any change of relevant facts (such as a change in ownership or change in officer/board make-up or a reorganization of the company) constitutes a new, material cost of doing business and organizing investment structures.
What is Still to Come
FinCEN expects the vast majority of filings to be done electronically but must still publish the reporting forms that will be used to comply with the reporting obligations under the rule.
FinCEN plans additional rulemakings to safeguard the information being collected.
FinCEN plans to develop infrastructure to administer the requirements of the rules in accordance with the security and confidentiality requirements of the CTA
FinCEN’s ability to complete all of these next steps by January 1, 2024, in particular the infrastructure required to collect and safeguard reports and reported information, will be dependent on adequate funding and additional appropriations.
