Summary
On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN), a unit of the U.S. Department of Treasury, issued its final rule, Beneficial Ownership Information Reporting Requirements (Final Rule), implementing the beneficial ownership reporting requirements of the Corporate Transparency Act (CTA). Starting January 1, 2024, the Final Rule will require many corporations, limited liability companies, and other entities created in or registered to do business in the United States to report beneficial ownership information (BOI) about their beneficial owners—the persons who ultimately own and control the company—to FinCEN. This information will be housed within the forthcoming Beneficial Ownership Secure System, a non-public database that will be accessible by regulators and law enforcement.
The Upshot
- Tens of millions of companies soon will need to report to the U.S. government information about the individuals who either own or control the companies.
- A company often will have to report more than one person who exercises “substantial control,” a phrase which the Final Rule defines broadly.
- Companies also will need to report their “company applicants,” which could include lawyers, accountants or other third-party professionals.
- The Final Rule’s broad definition of the “substantial control” prong of beneficial ownership presumably will lead FinCEN to expand the definition of “beneficial owner” under the existing Customer Due Diligence rule applicable to banks and other financial institutions.
The Bottom Line
The CTA and the Final Rule seek to maximize corporate transparency in order to deter money laundering, tax evasion, and other illicit activity by so-called “shell companies.” The net that has been cast, however, is very broad. All existing companies, and everyone contemplating the creation of a new company, will need (1) to review their structures and operations to determine whether they qualify for an exemption from the Final Rule, (2) if no exemption applies, to determine who qualifies as having sufficient ownership interests so as to trigger the reporting requirement, and (3) to identify everyone who exercises “substantial control” over the company and must be reported (a determination which may involve difficult judgment calls).
The Final Rule, which is effective as of January 1, 2024, was promulgated pursuant to the Corporate Transparency Act (CTA), enacted as part of the landmark Anti-Money Laundering Act of 2020. Congress passed the CTA because it found that the ability to operate through legal entities without requiring the identification of beneficial ownership information (BOI) posed important money laundering and terrorist financing risks to the U.S. financial system.
The Final Rule will have broad effect. FinCEN estimates that over 32 million initial BOI reports will be filed in the first year of the Final Rule taking effect, and that approximately 5 million initial BOI reports and over 14 million updated reports will be filed in each subsequent year.
In a nutshell, companies (including corporations, limited liability companies, partnerships, business trusts, etc.) subject to the BOI reporting rules (reporting companies) that are created or registered before January 1, 2024, will have one year, until January 1, 2025, to file their initial reports of BOI. Reporting companies created or registered after the effective date will have 30 days after creation or registration to file their initial reports. In addition to the initial filing obligation, reporting companies will have to file updates within 30 days of a relevant change in their BOI.
BOI reporting requirements apply to all domestic entities created by filing a document with a secretary of state or other similar office of a state or Indian tribe. A foreign reporting company is a corporation, LLC, or other entity formed under the law of a foreign country that is 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. The Final Rule therefore does not apply to trusts not organized by filing a form with a secretary of state or similar office. The Final Rule also exempts 23 types of entities from the definition of “reporting company,” including SEC reporting companies, banks and credit unions, tax exempt entities, broker-dealers, investment companies and their advisors, and companies that (a) have 20 or more full-time employees in the U.S., (b) have an operating presence through a physical office in the U.S., and (c) filed a federal income tax or an information return showing more than $5 million in gross receipts or sales in the prior year. Violators are subject to potential civil penalties of up to $500 for every day of a violation, and criminal penalties including up to two years of imprisonment. Each person filing a report must certify that the report is accurate and complete.
The Final Rule defines a “beneficial owner” as any individual who, directly or indirectly, owns or controls at least 25 percent of the ownership interest of the reporting company, or who exercises “substantial control” over the company. FinCEN expects reporting companies to always identify at least one beneficial owner under the broad “substantial control” prong, even if all other individuals are subject to an exclusion or fail to satisfy the “ownership interests” prong. The Final Rule contemplates that a covered reporting company may need to report multiple individuals under the “substantial control” prong. Although FinCEN still needs to issue additional proposed regulations, the Final Rule’s broad definition of the “substantial control” prong under the CTA presumably will lead to FinCEN expanding the definition of “beneficial owner” under the existing Customer Due Diligence (CDD) rule applicable to banks and other financial institutions.
In addition to beneficial owners, “company applicants” also must be reported. A company applicant is defined as the individual who directly files the document that creates or registers a domestic or foreign reporting company respectively, as well as the individual who is primarily responsible for directing or controlling such filing. This could include lawyers, accountants, or other third-party professionals.[1]
FinCEN still must issue two additional proposed rulemakings under the CTA to (1) the address the implementation of the Beneficial Ownership Secure System, related data privacy issues, and establish rules for whom may access BOI, and (2) revise and conform FinCEN’s existing CDD rule for covered financial institutions with the Final Rule.
For an in-depth discussion of the Final Rule and what it requires, see our blog posts here and here in Money Laundering Watch – a blog which regularly discusses significant issues pertaining to beneficial ownership, corporate transparency, anti-money laundering obligations and more.
Ballard Spahr attorneys represent a broad range of financial institutions and other businesses regarding Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) regulatory compliance, and defense relating to examinations and enforcement. We help clients establish and refine AML policies and procedures. Please contact us for more information.
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