FinCEN’s New Beneficial Ownership Reporting Rules
July 11, 2022
Background. The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the United States Department of the Treasury, issued a notice of proposed rule-making in late 20211 related to proposed regulations that would require certain business entities to submit and report information with respect to beneficial ownership. The rule implements the reporting of beneficial ownership information of the Corporate Transparency Act of 2019 (the “CTA”), which is part of the Anti-Money Laundering Act of 2020, aimed at preventing and detecting money laundering and discouraging the use of corporate vehicles to hide or conduct illicit activity. This legislation was enacted in part to implement anti-money laundering best practices recommended by the Financial Action Task Force. FinCEN is responsible for the implementation and enforcement of the CTA and related regulations. The comment period for the rulemaking closed on February 7, 2022, and the final version of the proposed rule is expected later this year although it has yet to be issued as of the date hereof.
Entities Subject to the New Rules. The proposed regulation requires business entities, including corporations, limited liability companies and other legal entities formed under the laws of the United States or any foreign country that is qualified to do business within the United States, to report certain beneficial ownership information. The foregoing entities are deemed to be a “reporting company” for purposes of the CTA and subject to the new beneficial ownership reporting requirements. Significantly, there are 23 exclusions from the definition of “reporting company” and many of the exclusions apply to entities subject to existing regulations or oversight, including, without limitation, SEC reporting companies and registered entities, broker-dealers, registered investment companies and advisors, bank holding companies and credit unions, state-regulated insurance companies and large operating companies. A large operating company that is proposed to be exempt from reporting requirements means a company with active operations that owns or leases physical office space located in the United States (not shared space or a residence), employs more than 20 full-time employees and files US federal income taxes evidencing more than $5 million in gross receipts or sales (net of returns or allowances) for the preceding year. These regulated or otherwise large US companies may present a lower risk for money laundering and illegal activities as well as have control and ownership more broadly distributed among numerous individuals. In addition, wholly-owned subsidiaries of exempt entities are generally exempt from reporting as well.
Required Information. The proposed beneficial ownership reporting requirement requires a reporting company to submit a report listing its corporate name, any trade or fictitious names, its business address, its jurisdiction of formation or registration and its taxpayer identification number or other identification number. For each beneficial owner (i.e., owner that directly or indirectly exercises “substantial control” or owns 25% or more of the “ownership interests”) and filer of the report, the report must contain such person’s legal name, date of birth, mailing address and unique identifying number from qualifying identification documents (e.g., an unexpired passport or driver’s license) along with a scan or image of such document. Both “substantial control” and “ownership interests” are broadly defined with control deemed to include officer or director roles, sizeable voting power or other substantial influence over the company and interests deemed to include equity interests, profit or convertible interests, options, privileges and other trust or similar arrangements affording the benefits of ownership.
Reporting Requirements. Under the proposed rule, preexisting reporting companies will have one year to submit reports to FinCEN following the enactment of the final rule. Any new companies formed after the enactment of the final rule must file within 14 days from the date such company was created or, in the case of foreign entities, upon registration to conduct business in the United States. Corrections to any inaccurate report made at the time of filing must also be submitted within 14 days of the date the information was known to be inaccurate. Reporting companies must update reports submitted to FinCEN within 30 days of a change in beneficial ownership of the company. The beneficial ownership information submitted to FinCEN will not be made publicly available in a database or otherwise. Nonetheless, the information may be made available to US federal and state law enforcement agencies and other federal regulatory authorities. The US Department of the Treasury, which oversees FinCEN and the enforcement of the proposed rule, may also share information with the Internal Revenue Service for tax administration purposes.
Penalties for Violations. There are both civil and criminal penalties for violations of the CTA and the proposed rule, which can include a maximum civil penalty of up to $10,000 and/or criminal penalty of two years imprisonment for the willful failure to report or the fraudulent reporting of information. The penalties may be imposed on the reporting company or the responsible individuals or entities of the reporting company.
Conclusion. While financial institutions may be accustomed to “know your client” requirements, the proposed rule drastically increases the number of business entities, both domestic and foreign, that will have affirmative obligations to report information and establish procedures for information gathering and initial and ongoing compliance, which includes updating information upon changes in control or ownership of such business entities. Many privately held corporations, limited liability companies and other legal entities engaged in all types of businesses, including closely held entities formed for real estate, investment, estate planning and other planning purposes, will be subject to these reporting requirements. Therefore, it is important for all business owners and management and other business professionals to be aware of these upcoming reporting obligations and to prepare and plan accordingly for the release of the final rule.