On Sept. 29, 2022, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule requiring certain domestic and foreign corporations, limited liability companies (LLCs), and similar entities to file a report with the federal government identifying the entity’s beneficial owners.
The new rule, codified at 31 C.F.R. § 1010.380, implements the requirements of the Corporate Transparency Act (CTA), enacted in 2021 to bring the United States into alignment with international anti-money-laundering and counter-terrorist-financing (AML/CFT) standards promulgated by the Financial Action Task Force (FATF).
FATF — an independent inter-governmental body that develops measures to combat money laundering, terrorist financing, and the proliferation of weapons of mass destruction — has long recommended that countries maintain complete, accurate, and up-to-date corporate beneficial ownership information to reduce the risk that bad actors will misuse corporate entities to shield identities, launder criminal proceeds, and finance terrorism and other criminal activities.
In an evaluation report issued in 2016, FATF identified the absence of beneficial ownership reporting requirements as a significant flaw in the United States’ AML/CFT regime. As noted in the CTA, most or all states do not require beneficial owners to be identified when a company is created or registered under state law.
The CTA accordingly directed the Department of Treasury, through FinCEN, to promulgate regulations that require business entities to report beneficial ownership information to the federal government and to update that information when changes occur.
A brief summary of the new rule is provided below. Since the rule does not require a report to be filed by all business entities, and because the determination of who qualifies as a “beneficial owner” for any given company may involve complex factual analysis, companies must carefully examine the rule to determine whether the reporting obligation applies and, if so, what information must be reported.
What entities are required to file a report?
The rule’s reporting requirement applies to “domestic reporting companies” and “foreign reporting companies.” A “domestic reporting company” is a corporation, LLC, or other entity created by filing documentation with a secretary of state — or similar office — or tribal jurisdiction. A “foreign reporting company” is a corporation, LLC, or other entity formed under the law of a foreign country that is registered in any state or tribal jurisdiction.
While the definition of a “domestic reporting company” encompasses many common types of business entities, not all domestic business entities are required to file a report. For example, the rule does not require a sole proprietorship to file a report where no filing of documentation is necessary to create such an entity under state law.
Additionally, in accordance with the CTA, the rule specifically excludes more than 20 types of entities from the definition of “reporting company.” Many of these exempted entities are already subject to significant federal or state regulation, including banks, credit unions, money services businesses, securities brokers and dealers, investment companies, insurance companies, and certain pooled investment vehicles.
Subsidiaries of certain exempt entities, inactive entities, and large operating companies also are exempt from the filing requirement. The rule defines “large operating company” as a company that employs more than 20 full-time employees in the United States, has an operating presence at a physical office within the United States, and has filed an income tax return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, excluding gross receipts or sales from sources outside the United States.
What information must be reported?
The initial report filed with FinCEN must contain identification information regarding the company and all individuals who are “beneficial owners” of the company.1 Company identifying information includes full legal name, trade or “doing business as” names, current address, jurisdiction of formation, and tax identification information.
Information required to be disclosed for “beneficial owners” includes full legal name, date of birth, current address, and a unique identifying number and issuing jurisdiction — i.e., a U.S. passport, government-issued identification, driver’s license, or foreign passport.
Who qualifies as a “beneficial owner”?
For purposes of the rule, a “beneficial owner” is an individual who either exercises “substantial control” over the company or owns or controls at least 25% of the ownership interest.2
Determining whether an individual exercises “substantial control” over the company is a fact-dependent inquiry. The rule defines such an individual as someone who serves as a senior officer of the company, has authority over the appointment or removal of any senior officer or a majority of the board of directors, or directs, determines, or has substantial influence over important decisions.
The rule takes a broad view of what constitutes an important decision. Examples include decisions regarding the nature, scope, and attributes of the business; reorganization or dissolution; major expenditures or investments; the selection or termination of business lines or ventures; compensation schemes; and amendments to governance documents.
Adding to the breadth of the “substantial control” definition, the rule contains a catch-all provision to cover any person who otherwise has “any other form of substantial control.” The rule also makes clear that substantial control may be exercised directly or indirectly through board representation, control of voting power, rights associated with financing arrangements, and control over intermediary entities.
Certain individuals are excluded from the rule’s beneficial owner definition. These exclusions include minors and employees whose substantial control over or economic benefits from the entity are derived solely from the employment status of the employee, provided that such a person is not a senior officer of the reporting company.
When must reports be made?
The effective date of the rule is Jan. 1, 2024. Companies created or registered prior to Jan. 1, 2024, must file an initial report not later than Jan. 1, 2025. Domestic companies created, or foreign companies registered, on or after Jan. 1, 2024, are required to file a report within 30 calendar days of the date of creation or registration.
The rule requires companies to file an updated report upon any change with respect to the required information previously submitted. While some changes to reportable information may seem relatively inconsequential — for example, a beneficial owner moving to a different residential address — the rule contemplates an updated report in such circumstances. Newly exempt entities that previously filed an initial report are required to file an updated report in light of the new exemption status. All updated reports must be filed within 30 calendar days after the date on which the change in information or status occurred.
Previously exempt entities that no longer qualify for an exemption must file a report within 30 calendar days after the date that they no longer meet the criteria for an exemption.
What penalties are associated with violations of the rule?
Both the CTA and the rule make it unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, and to willfully fail to report complete or updated beneficial ownership information. These violations are punishable by up to two years of imprisonment, a fine of $10,000, and a civil penalty of not more than $500 for each day the violation continues or has not been remedied.
Does FinCEN contemplate further regulations related to beneficial ownership information?
FinCEN will next promulgate rules to implement requirements in the CTA regarding security and disclosure of beneficial ownership information collected from companies, and to make conforming amendments to existing customer due diligence requirements for financial institutions related to beneficial ownership.
What should companies do in response to the new rule?
Prior to Jan. 1, 2024, companies should evaluate the new rule to determine whether they are subject to the reporting requirement. Companies subject to the reporting requirement should develop a process for identifying who qualifies as a beneficial owner and track changes to reportable information to ensure that updated reports are timely filed.
The determinations of whether a company qualifies as a reporting company and who qualifies as a beneficial owner may be straightforward for some companies. In other circumstances, the exemptions and definitions in the new rule — in particular, definitions related to “substantial control” — will make those determinations more difficult, especially for companies with complex corporate or ownership structures. Accordingly, companies should begin evaluating the rule as soon as possible to be prepared for the filing deadline in January 2025.
Dominick Gerace is a partner in Taft’s Compliance, Investigations, and White Collar Defense practice and is a Certified Anti-Money Laundering Specialist. If you have any questions regarding the information in this bulletin, please contact the author or the Taft attorney with whom you regularly work.
1The rule also requires companies established after Jan. 1, 2024, to report “company applicant” information. A “company applicant” is an individual who directly files, or is primarily responsible for directing or controlling the filing of, the document that creates or registers the entity.
2“Ownership interest” is defined to include equity, stock, or similar instruments; capital or profit interests; any instrument convertible into any such interest; any put, call, straddle, or other option or privilege of buying or selling ownership instruments; and any other instrument, contract, or arrangement used to establish ownership.