On September 30, the Financial Crimes Enforcement Network (“FinCEN”), within the U.S. Department of the Treasury, issued a highly anticipated final rule, Beneficial Ownership Information Reporting Requirements (the “Final Rule”), 1 implementing the beneficial ownership reporting requirements of the Corporate Transparency Act (“CTA”).
The Final Rule requires certain entities organized or registered to conduct business in the United States to disclose identifying and beneficial ownership information (“BOI”) to the U.S. federal government. The Rule addresses a major perceived deficiency in the U.S. anti-money laundering regime and will greatly expand the scope of information that certain legal entities are required to disclose under U.S. law. The Final Rule will take effect on January 1, 2024, with a one-year grace period for covered entities created or registered prior to the effective date.
The CTA, enacted as part of the landmark Anti-Money Laundering Act of 2020, is intended to expand and modernize the U.S. government’s ability to collect beneficial ownership information to deter money laundering, corruption, tax evasion, fraud, and other financial crime. The CTA requires FinCEN, inter alia, to (1) implement rules for the reporting of BOI of legal entities organized or registered to conduct business in the United States; (2) develop protocols for access to, and the sharing of, reported BOI; and (3) amend the Customer Due Diligence (“CDD”) Rule applicable to financial institutions to account for the new requirements of the CTA. The Final Rule addresses only the reporting of BOI, with the remaining requirements to be addressed through future rulemaking.
The Final Rule requires “reporting companies” to file reports that (1) identify themselves; and (2) provide BOI of their “beneficial owners” and “company applicants,” each as discussed in greater detail below. This information will be reported to, and housed within, the Beneficial Ownership Secure System (BOSS), a non-public database under development by FinCEN. It is anticipated that information in BOSS will be available to federal agencies in support of national security, intelligence, and law enforcement activity, as well as state, local, and foreign law enforcement agencies in specified circumstances.
The Final Rule reflects public comments received by FinCEN in response to its December 8, 2021 Notice of Proposed Rulemaking on the same topic (the “Proposed Rule”). The Final Rule becomes effective on January 1, 2024. Reporting companies created or registered prior to this date will have a one-year grace period (until January 1, 2025) to file their initial reports. Reporting companies created or registered on or after January 1, 2024, will have 30 days to file their initial reports.
The Final Rule applies to reporting companies, which include both domestic and foreign companies, as described below:
The Final Rule sets forth 23 exemptions to the definition of reporting company. Consistent with the Proposed Rule, key categories of exempted legal entities include:
Also exempted are:
In addition to identifying information of the reporting company (discussed below), the Final Rule requires the reporting of BOI concerning (1) beneficial owners; and (2) company applicants of reporting companies.
Similar to the CDD Rule, the term “beneficial owner” is defined in terms of both ownership and control: any individual (i.e., natural person) who, directly or indirectly, either (1) exercises substantial control over a reporting company or (2) owns or controls at least 25% of the ownership interests of a reporting company. Limited exceptions exist to the definition, including for minor children (provided that BOI of a parent or legal guardian is reported), nominees, employees (excluding senior officers), future inheritors, and creditors (whose sole interest in a reporting company is as a creditor).
The Final Rule’s definition of “substantial control” is expansive and includes any individual who:
Notably, an individual could exercise substantial control over a reporting company through, inter alia, board representation, ownership or control of a majority of voting rights, or any other contract, arrangement, understanding, relationship, or otherwise. In its discussion of the Final Rule, FinCEN acknowledged that “there will be circumstances in which reporting companies are structured or managed in a way that generates more complexity or uncertainty regarding the scope of the application of the rule.” However, in defense of the substantial control standard’s breadth, FinCEN concluded that “fulfilling the CTA’s directives to report all beneficial owners means that certain compliance burdens may rise with the increasing structural complexity of a given entity.”
FinCEN expects that each reporting company will identify at least one beneficial owner with substantial control. Importantly, in contrast to the CDD Rule, which requires legal entity customers to identify only a single individual under the “control prong” of the definition of beneficial owner, the Final Rule requires reporting of BOI for every individual deemed to exercise substantial control over a reporting company. Indeed, FinCEN specifically rejected proposals to incorporate the “CDD Rule’s numerical limitation for identifying beneficial owners via substantial control” as “inconsistent with the CTA’s objective of establishing a comprehensive BOI database for all beneficial owners of reporting companies.”
The Final Rule incorporates special requirements for foreign pooled investment vehicles. Entities that would otherwise fall within the exemption for pooled investment vehicles, but are formed are under the laws of a foreign country, are deemed reporting companies. However, the initial reports of such foreign pooled investment vehicles are required to include BOI only for the (single) individual who has the greatest authority over the strategic management of the entity.
The Final Rule’s definition of “ownership interest” includes not only equity interests but also categories such as capital or profit interests, convertible interests (regardless of whether characterized as debt), known options (which shall be treated as exercised), and a catchall category for any other instrument, contract, arrangement, understanding, or mechanism used to establish ownership (this catchall is an addition from the Proposed Rule). An individual may own or control an ownership interest through joint ownership with other persons; through a nominee, intermediary, custodian, or agent; through certain trust arrangements; or through ownership or control of intermediary entities that separately or collectively own or control ownership interests of the reporting company.
The Final Rule provides for a special exception for reporting companies with ownership interests held by exempt entities (i.e., an entity falling into one of the 23 categories of exemptions discussed above). Such reporting companies need not provide BOI for individuals that are beneficial owners in the reporting company exclusively by virtue of the individuals’ ownership interests in the intermediate exempt entities. Instead, these reporting companies may list the exempt entities. For example, if a reporting company is owned by an exempt pooled investment vehicle, 3 the company need not provide BOI for >25% investors in the pooled investment vehicle and may instead list the name of the pooled investment vehicle. However, FinCEN declined to extend this special exception to beneficial owners qualifying under the substantial control prong, so an analysis must still be undertaken to confirm whether these investors exercise substantial control over the reporting company.
The term “company applicant” means:
In a change from the Proposed Rule, the requirement to provide BOI for company applicants applies only to reporting companies created or registered on or after the effective date of the Final Rule (January 1, 2024). These newly created or registered entities will be required to report company applicant information, but they will not be required to update it (in recognition of the fact that a company applicant may be an outside service provider with whom the reporting company does not have an ongoing relationship).
Initial reports to FinCEN must include the following information concerning the reporting company:
Beneficial Owners & Company Applicants
The following information must be reported for each beneficial owner and company applicant:
Unique FinCEN Identifier
Reporting companies and individuals may apply to FinCEN for issuance of a “FinCEN identifier” number that, upon issuance, may be submitted to FinCEN in lieu of the above-described information. Individuals and entities that obtain FinCEN identifiers are required to update and correct information submitted to FinCEN by submitting an updated application for a FinCEN identifier, subject to the same timelines and requirements as updates or corrections to BOI submitted by a reporting company (discussed below).
Any reporting company formed or registered before January 1, 2024, must submit an initial report no later than January 1, 2025.
Reporting companies formed or registered on or after January 1, 2024, must submit an initial report within 30 days of the date (1) the reporting company receives actual notice that its creation or registration has become effective; or (2) a secretary of state or similar office first provides public notice that the reporting company has been created or registered (an extension of the Proposed Rule’s 14-day deadline). If an exempt entity ceases to become exempt, a report must be filed within 30 days after the exemption criteria no longer apply.
The CTA requires reporting companies to update outdated information in a timely manner, as well as to promptly correct any inaccurate information filed in BOSS. The Final Rule accords reporting companies 30 days to (1) file updates to previously filed reports (including any change with respect to who is a beneficial owner or the BOI reported for any particular beneficial owner); and (2) correct inaccurate information contained in previously reported information. 5
The CTA provides that any willful violation of BOI reporting requirements can lead to civil or criminal penalties, including (1) civil penalties of up to $500 per day a violation has not been remedied; and (2) criminal penalties of up to $10,000 and/or imprisonment of up to two years. The Final Rule adopts the CTA’s penalty framework, clarifying that liability can be for direct or indirect violations, and for acts (i.e., reporting of inaccurate information) or omissions (i.e., failure to provide or update any required information).
As anticipated, the Final Rule will significantly expand the scope of information that legal entities must disclose under U.S. law. Although the Final Rule incorporates key exceptions to the reporting requirements—including for large operating companies and qualifying pooled investment vehicles—complex structures, in particular, may present difficult, fact-intensive determinations. For example, the breadth of the substantial control standard may necessitate detailed (subjective) assessments of the rights (and influence) exercised by individuals (e.g., board representatives) affiliated with financial investors. While FinCEN likely will publish Frequently Asked Questions (FAQs) to clarify common, fact-specific applications of the reporting requirements, the introduction to the Final Rule suggests that the bureau intends to interpret the Rule’s requirements broadly in favor of disclosure.