Treasury Issues Final Rule on Disclosure of Beneficial OwnershipSeptember 29, 2022 | Katherine A. Heptig | Bernadette Kasnicki | Louis Vlahos | |
In an effort to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, the United States Department of the Treasury just issued a final rule [RIN: 1506-AB49]. The rule requires certain businesses to file reports with FinCEN (Financial Crimes Enforcement Network) 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.
These regulations implement Section 6403 of the Corporate Transparency Act (CTA), which was enacted in 2021, and describe who must file a report, what information must be provided, and when a report is due. The rules are effective January 1, 2024, and violations carry with them fines of up to $10,000 and up to two years of imprisonment.
Who is Subject to these Reporting Requirements?
The reporting requirements apply to all entities that are created by filing a document with a secretary of state or other similar office of a State or Indian tribe. They also apply to all entities formed under the law of a foreign country that register to do business in any State or tribal jurisdiction by filing a document with a secretary of State or other similar office of a State or Indian tribe.
The final rule contains significant categorical exemptions from the reporting requirements, as follows:
- Entities that (1) employ more than 20 full time employees in the United States, (2) have an operating presence at a physical office in the United States, and (3) have filed a Federal income tax or information return for the previous year showing more than $5 million in gross receipts or sales excluding gross receipts or sales from sources outside of the United States;
- Issuers of securities registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act) or that are required to file supplementary and periodic information under the Exchange Act.
- Governmental authorities.
- Section 501(c)(3) tax exempt entities, political organizations, charitable trusts, and split-interest trusts and entities that operate exclusively to provide financial assistance to, or hold governance rights over, such entities.
- Pooled investment vehicles that are operated or advised by a bank, credit union, registered broker-dealer, registered investment company, registered investment adviser, or certain venture capital fund advisers.
- Inactive entities in existence on or before January 1, 2020, that have no foreign ownership, no assets (including interests in other entities), no change in ownership during the last 12 months, and have not sent or received funds in excess of $1,000 in the last 12 months.
- Specified types regulated entities the majority of which are in financial services industry.
- Subsidiaries of exempted entities, other than subsidiaries of money transmitting businesses, pooled investment vehicles, or entities assisting 501(c)(3) tax exempt entities, political organizations, charitable trusts, and split-interest trusts.
An initial report for entities formed (or, in the case of foreign entities, registered) after January 1, 2024, will be required to be filed with FinCEN within 30 days after such formation (or registration). Any domestic reporting company created before January 1, 2024, and any entity that became a foreign reporting company before January 1, 2024, will be required to file its initial report not later than January 1, 2025.
An initial report will require the following information about the reporting company:
- Full name and address.
- Trade or fictitious names used.
- Jurisdiction of formation or, in the case of a foreign company, jurisdiction in which first registered.
- Taxpayer Identification Number or, if not yet issued, the reporting company’s Dun & Bradstreet Data Universal Numbering System number or a Legal Entity Identifier.
An initial report will require the following information with respect to each beneficial owner and each company applicant:
- Full legal name.
- Date of birth.
- Current address.
- A unique identifying number from a non-expired passport, driver’s license, government-issued ID, or identification document issued by a State, local government or tribe.
- An image of the document containing the unique identifying number used and photograph.
Companies required to file initial reports must file an updated report within 30 days after there is any change in the information reported to FinCEN, including any change with respect to who is a beneficial owner and any change in the information previously reported for any beneficial owner or company applicant.
A reporting company must file a corrected report within 30 days after becoming aware or having reason to know that any previously reported information was inaccurate when filed and remains inaccurate. A corrected report filed within that 30-day period will provide a safe harbor from the civil and criminal penalties under the Act for the inaccurate report as long as the corrected report is filed within 90 days after the inaccurate report was filed.
For purposes of this requirement, “Beneficial Owner” means an individual 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. This definition draws our attention to two key phrases – (i) substantial control and (ii) owns or controls.
Substantial control of a reporting company includes:
- serving as a senior officer;
- having authority over the appointment or removal of a senior officer or a majority of the board of directors (or similar governing body);
- directing, determining or having substantial influence over important decisions made by the reporting company (e.g., the nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company; major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company; compensation schemes and incentive programs for senior officers; and the entry into or termination, or the fulfillment or non-fulfillment, of significant contracts); and
- otherwise directly or indirectly substantially controlling the reporting company.
An individual may, directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through: (A) board representation; (B) ownership or control of a majority of the voting power or voting rights of the reporting company; (C) rights associated with any financing arrangement or interest in a company; (D) control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company; (E) arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or (F) any other contract, arrangement, understanding, relationship, or otherwise.
For purposes of determining whether an individual owns or controls 25% or more of the ownership interests of a reporting company, ownership includes equity interests, capital or profits interests in the case of limited liability companies or partnerships, proprietorship interests, and instruments convertible or exercisable for the foregoing interests.
Ownership or control may exist through having joint ownership of an undivided interest in an ownership interest, control of an ownership interest owned by another individual, being the trustee of a trust having authority to dispose of trust assets, being certain trust beneficiaries, or being the grantor or settlor of a revocable trust.
Minors, nominees, persons whose only interest is future inheritance, creditors, and employees not acting as senior officers are excluded from the definition of beneficial owner.
First, you will want to determine whether your company is exempt from the reporting requirements. If exempt, there is no preparation necessary at this time. If, however, your company is not exempt, it is prudent to gather the necessary reporting information. All reporting companies should establish a process for continued compliance with the reporting requirement, including designating the person or persons internally or externally (e.g., professional advisors) who will be responsible for (i) gathering the information necessary to determine who your beneficial owners are and (ii) capturing the reportable information about each beneficial owner.
While this rule was enacted to unveil corrupt actors in the system, including kleptocrats, human rights abusers, and other criminals, it will undoubtedly place a significant burden on the millions of entities that will be subject to its requirements. In the coming weeks, we will analyze the many details of the rule, and will provide additional information to aid with efficient compliance.
- Katherine A. Heptig
- Bernadette Kasnicki
- Louis Vlahos