As the world becomes more engrained as a global marketplace, transparency reporting to governmental authorities is a common theme. As set forth below, small companies, unless exempt, will be required to report certain ownership information to the federal government. Congress is concerned about money laundering and other illegal activities that are more easily accomplished with a small entity versus a large publicly traded company.
The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Treasury Department, was established by Congress. It is the government agency charged with enforcing the Bank Secrecy Act and Anti-Money Laundering. On January 1, 2021, Congress enacted the Corporate Transparency Act (“CTA”) as part of the FY2021 National Defense Authorization Act.
After the statute’s enactment in January 2021, FinCEN released proposed regulations on December 7, 2021. Final rules were issued on September 29, 2022, and will go into effect on January 1, 2024. FinCEN expects that these regulations will help address the lack of beneficial ownership information (“BOI”), and that the majority of reporting companies are those with simple management and ownership structures.
The reporting will center around a beneficial owner which is defined as “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.”
Like the proposed rules, the final rules bifurcate reporting entities into two broad categories: domestic and foreign. Any corporation, limited liability company, or any other entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe is a domestic reporting company. FinCEN expects these definitions to mean that a reporting company includes limited liability partnerships, business trusts and most limited partnerships. When the proposed rules were issued in 2022, there was concern that trusts used for estate tax and asset protection planning may be a reporting entity. The final rules clarify that a trust is generally excluded to the extent that it is not created by the filing of a document with the secretary of state. As such, the typical living trust or irrevocable trust used for estate tax or asset protection planning will not have a reporting requirement.
Any foreign reporting company would also include a corporation, limited liability company, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction.
CTA exempts 23 types of entities from the definition of “reporting company” particularly those that are subject to regulatory reporting like a bank or insurance company. Exempt entities also include “large operating companies,” which are companies that 1) employ more than 20 employees on a full-time basis in the U.S., 2) “filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000.00 in gross receipts or sales in the aggregate,” and 3) have an “operating presence at a physical office within the United States.”
For any entity that is required to report to FinCEN, the entity must disclose four pieces of information about each of its beneficial owners and company applicants: 1) full legal name, 2) date of birth, 3) current address and 4) a unique identifying number from an acceptable identification document. The reporting company itself must also report four pieces of information: 1) full legal name, 2) address, 3) jurisdiction of formation or registration, and 4) its taxpayer identification number.
When is the report due? The due date depends on (1) when a reporting company was created or registered, and (2) whether the report at issue is an initial report, an updated report providing new information, or a corrected report (i.e., correcting erroneous information in a previous report). However, please note that FinCEN will not begin accepting reports until January 1, 2024.
- Domestic reporting companies that were established prior to January 1, 2024 will have to file their report no later than 1 year after the effective date of the final rule. Since the effective date of the final rule is January 1, 2024, reports are due January 1, 2025 for reporting companies created or registered with a state prior to January 1, 2024. A foreign reporting company would also have to report no later than 1 year after the effective date of the final rules. FinCEN estimates that the initial BOI reports to be filed in the first year will total approximately 32.6 million.
- Both domestic and foreign reporting companies that were either created (domestic) or registered (foreign) after January 1, 2024 will be required to file their report within 30 days of the date of their formation or registration. This requires that the incorporator has processes in place to make sure that the reporting is timely made.
- If a reporting company must update the previously filed reports, such update is due 30 days after the date on which there is any change.
- Finally, to correct a report, the reporting company has 30 days to correct an inaccurate report after they discover, or have reason to know, that the report information was inaccurate.
To enforce reporting, there are both civil and criminal penalties for violating the reporting obligations. The civil penalty is up to $500 for each day that a violation continues or has not been remedied, and the penalty for criminal violation is up to $10,000 or imprisonment for up to 2 years, or both.
On December 15, 2022, FinCEN issued proposed regulations to implement the BOI access and safeguard provisions of the CTA. The proposed regulations would establish who may request BOI reported to FinCEN, who may receive the information, how it can be used, how it must be secured, and associated penalties for failure to follow the applicable requirements. The objective of the proposed rule reflects FinCEN’s commitment to establishing a useful database of authorized BOI recipients while simultaneously protecting the sensitive information gathered by FinCEN from unauthorized disclosure.
There are five categories of authorized recipients of BOI:
- U.S. Federal, state, local, and Tribal government agencies requesting BOI for specified purposes;
- Foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities;
- Financial institutions using BOI to facilitate compliance with customer due diligence (CDD) requirements under applicable law;
- Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing FIs for compliance with CDD requirements; and
- The Department of the Treasury.
These rules are a significant development for our clients and carry the potential for excessive penalties for failure to comply. Please contact us for more information and how we can help you comply with these rules.
1. 31 U.S.C. § 310; “The mission of the Financial Crimes Enforcement Network is to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence.”
2. “The rule will enhance the ability of FinCEN and other agencies to protect U.S. national security and the U.S. financial system from illicit use and provide essential information to national security, intelligence, and law enforcement agencies; state, local, and Tribal officials; and financial institutions to help prevent drug traffickers, fraudsters, corrupt actors such as oligarchs, and proliferators from laundering or hiding money and other assets in the United States.” https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet
3. 31 U.S. Code § 5336(a)(3).
4. The list of exempt entities includes securities issuers, domestic governmental authorities, banks, domestic credit unions, depository institution holding companies, money transmitting businesses, brokers or dealers in securities, securities exchange or clearing agencies, other Securities Exchange Act of 1934 entities, registered investment companies and advisers, venture capital fund advisers, insurance companies, state licensed insurance producers, Commodity Exchange Act registered entities, registered accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax exempt entities, entities assisting tax exempt entities, large operating companies, subsidiaries of certain exempt entities and inactive businesses. See 31 U.S.C. § 5336(a)(11)(B)(i)-(xxiii).
5. See § 31 U.S.C. § 5336(a)(11)(B)(xxi).
