On September 30, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued a final rule requiring certain entities to file with FinCEN reports that identify two categories of individuals: the beneficial owners of the entity, and individuals who have filed an application with specified governmental authorities to create the entity or register it to do business (the “Final Rule”).[1] The Final Rule provides additional clarity on the implementation of Section 6403 of the Corporate Transparency Act (“CTA”), which became law in January 2021. The CTA and the Final Rule represent a significant change to U.S. corporate and anti-money laundering laws and will have a broad impact on the estimated 32 million entities that will be subject to its reporting requirements.
The Final Rule revises FinCEN’s December 8, 2021 Notice of Proposed Rulemaking[2] after consideration of the public comments received in response to that proposed rule, noting specifically those comments that requested a refined scope of the rule and reduced reporting burdens upon small businesses. Notably, the Final Rule provides that, unless a reporting exemption applies (see “Exemptions to Reporting Companies”, below), all companies formed or registered to do business in the U.S. after January 1, 2024, will be required to file their initial reports within 30 days after receiving notice of their creation or registration. Reporting companies created before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports.
Reporting Companies Subject to the Final Rule of the Corporate Transparency Act
The Final Rule applies to both “domestic reporting companies”, defined to include corporations, limited liability companies, or other entities created by the filing of a document with the Secretary of State or any similar office under the law of a U.S. state or Indian tribe as well as “foreign reporting companies”, defined as any corporation, LLC, or other entity that is formed under the law of a foreign country and that is registered to do business in the U.S. by the filing of a document with a secretary of state or equivalent office of a state or Indian tribe.
Exemptions to Reporting Companies
Certain types of U.S. businesses are exempt from the Final Rule’s reporting requirements[3], most notably: large operating companies, which must have a physical office in the U.S., more than 20 U.S.-based full-time employees, and more than $5 million in gross receipts or sales made in the U.S. as reported on prior federal income tax returns; banks, bank holding companies, credit unions, governmental entities, entities with publicly traded securities registered under Section 12 of the Securities Exchange Act of 1934, registered investment companies, insurance companies, public accounting firms, public utilities, 501(c) tax-exempt entities, tax-exempt political organizations, 4927(a) trusts, and any U.S. entity formed to hold governance rights over any of these entities meeting certain additional requirements.
Key Changes in the Final Rule
Among several changes from the previously proposed draft, the Final Rule revises the definition of “substantial control” which is relevant for the purposes of identifying key individuals who direct the actions of reporting entities. Under the Final Rule, a “beneficial owner” includes anyone who, directly or indirectly, exercises “substantial control” over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. The broad scope of what constitutes “substantial control” is intended by FinCEN to close loopholes that allow corporate structuring to obscure the identity of a reporting company’s decision-makers. The Final Rule sets forth a range of activities that could constitute “substantial control” of a reporting company, including serving as a “senior officer” of a reporting company (i.e. chief executive officer, president, general counsel, chief financial officer, chief operating officer, or any other officer performing a similar role regardless of title), having the authority to appoint and remove senior officers or the majority of a board of directors, or having substantial influence over important decisions made by the reporting company. Indirect substantial control is less easily defined, as an individual or entity could have indirect substantial control through informal arrangements, business relationships, or by virtue of having rights associated with financing or interest in a business. While the 25% ownership test is more straightforward and easier to follow logically for purposes of determining whether an individual is a “beneficial owner”, it is important to note that Final Rule’s definition of “ownership interest” is broadly defined to include any type of instrument or relationship that establishes ownership, including stock, equity, capital or profits interests, convertible equity, as well as options, puts, and calls to acquire or sell the same.
Additionally, the Final Rule revises the proposed rule to extend the deadline to file initial reports, as well as filings to correct inaccurate reports, to 30 days (increased from 14 days under the proposed rule) after the formation of the reporting company or the date upon which the reporting company became aware of an inaccuracy in a previous report, respectively. The 30-day filing deadlines now match the timetable to file updated reports with respect to information previously filed with FinCEN. The consistent reporting deadlines will ease the administrative burden of reporting when the Final Rule goes into effect. The Final Rule also removes the proposed rule’s requirement that a reporting company disclose the residential address of company applicants and beneficial owners.
Also notable, the Final Rule no longer requires reporting companies to: (a) identify company applicants for reporting companies formed prior to January 1, 2024; or (b) update company applicant information for reporting companies formed after January 1, 2024, both of which requirements were included in the December 2021 proposed rule.
Beneficial Ownership Secure System (BOSS)
Under the CTA, the Department of the Treasury will create a new “secure, nonpublic database” to store and protect beneficial ownership information disclosed pursuant to the Final Rule. Fittingly named the Beneficial Ownership Secure System, or “BOSS”, this database will be protected at the highest level under the Federal Information Security Management Act for non-classified information. For the time being, subject businesses should expect to submit required disclosures to BOSS electronically, though FinCEN has acknowledged that accepting paper forms may be acceptable in certain situations.
Consistent with the anticipated security measures, beneficial ownership reports will be confidential and only disclosed in a limited number of circumstances. Federal agencies will have restricted access to beneficial ownership information only when furthering national security, intelligence or law enforcement activities. State, local and tribal agencies may seek beneficial information reports as part of criminal or civil investigations if authorized by a court of competent jurisdiction. Foreign governments may be granted access in certain circumstances if requests are made by a foreign law enforcement agency, prosecutor, or judge. And lastly, certain private entities may also access beneficial ownership reports – such as financial institutes seeking to comply with customer due diligence requirements if they have the permission of the disclosing entity or financial institution regulators if their purpose is specific to the disclosing financial institution.
Corporate Transparency Act Best Practices
While 2024 may seem far off, businesses and their counsel should start evaluating whether they will be subject to the Final Rule’s reporting requirements sooner rather than later as failure to comply with the CTA’s requirements can lead to civil and criminal penalties, including a maximum civil penalty of $500 per day (up to $10,000) and imprisonment for up to two years. Covered entities should also consider how these upcoming reporting requirements could impact other areas of their business. Businesses should consider updating their organic documents to require beneficial owners to provide the entity with the personal information necessary to comply with the CTA’s reporting requirements and covenants requiring those parties to promptly provide updated information following any subsequent change to previously reported information. Companies involved in transactional activity should also consider adding CTA reporting compliance to their legal due diligence process. Being well-versed in the Final Rule and up to date on a business’s beneficial ownership reporting could be the difference between moving quickly on a deal or getting bogged down in remedial compliance efforts.
Be sure to watch out for additional education and outreach regarding beneficial ownership reporting requirements, as FinCEN is expected to provide future resources, such as guidance, FAQs, and interpretive advice.
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- Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498.
- https://www.federalregister.gov/documents/2021/12/08/2021-26548/beneficial-ownership-information-reporting-requirements
- See 31 CFR 1010.380(c)(2) for a full list of the 23 exemptions from the definition of “reporting company.”