Major legislative reforms addressing such concerns include: establishing the “FinCEN Exchange” to facilitate information sharing; modifying the AML whistleblower program; extending BSA (Bank Secrecy Act) enforcement to dealers in antiquities; extending BSA enforcement to digital currency; expanding foreign bank access to U.S. SARs (suspicious activity reports); expanding subpoena powers; extending the scope of BSA violations; and increasing penalties. The most significant reforms involve the new beneficial ownership rules, which provide law enforcement access to essential data for investigations, among other purposes.
Corporate Transparency Act Overview
Within the AMLA, Congress passed the Corporate Transparency Act (CTA). The CTA requires certain corporations and limited liability companies (reporting companies) to disclose beneficial owner information to FinCEN and update ownership information within one year of any changes. It also directs FinCEN to create a non-public registry tracking the beneficial owners of reporting companies, which may be shared with law enforcement and financial institutions conducting due diligence under certain circumstances. FinCEN was also required to issue regulations on beneficial ownership disclosures within one year of its enactment (discussed below).
In the CTA, the term “beneficial owner” applies to an individual who directly or indirectly exercises “substantial control” over an entity, or owns or controls not less than 25 percent of an entity.
The definition of “substantial control” is expected to be addressed in the FinCEN regulations.
Proposed Regulations Released in December 2021
FinCEN released proposed regulations on Dec. 7, 2021, seeking to implement the “beneficial ownership information” (BOI) requirement of the Corporate Transparency Act (CTA). FinCEN expects that the proposed regulations will address the lack of beneficial ownership information (BOI) “critical for money laundering investigations,” bring the United States into alignment with international anti-money laundering/combatting the financing of terrorism (AML/CFT) standards and clarify CTA ambiguities. The Notice of Proposed Rulemaking (NPRM) clarifies who must file a report, what constitutes beneficial ownership, what information must be disclosed in a BOI report and when such information must be reported.
Who Must File a Report Under the Act and Regulations
The NPRM recognizes two types of “reporting companies” that are required to disclose BOI to FinCEN—foreign and domestic. (See Proposed 31 CFR 1010.380(c)(1).) The related proposed rule defines a “domestic reporting company” to include any “corporation,” “limited liability company” or “other entity that is created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe.” Similarly, a “foreign reporting company” would be any entity that is a “corporation,” “limited liability company,” or other entity formed under the law of a foreign country and “registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian Tribe.”
Exempt Entities Under the Act and Regulations
The regulations provide clarity to earlier guidance and make practical implementation possible. While these definitions are expansive, the CTA specifically excludes from the definition of “reporting company” 23 different types of entities which operate in heavily regulated settings, including banks, domestic credit unions, securities issuers, money transmitting businesses, registered investment advisors, insurance companies and other entities. Also exempt are “large operating companies,” which are companies that employ more than 20 employees on a full-time basis in the U.S. and “filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate,” and 3) have an “operating presence at a physical office within the United States.” (See § 31 U.S.C. § 5336(a)(11)(B)(xxi).) Under the proposed regulations, an entity with an “operating presence” at a physical office within the U.S. would “be one for which the physical office is owned or leased by the entity, is not a residence, and is not shared space (beyond being shared with affiliated entities)—in short, a genuine working office of the entity.” The CTA exempts other entities, such as “public utilities” and entities owned or controlled by one or more entities that do not qualify as reporting companies. The NPRM seeks to define these terms and close any ambiguities in the statute.
This list of exempt entities includes securities issuers, domestic governmental authorities, banks, domestic credit unions, depository institution holding companies, money transmitting businesses, brokers or dealers in securities, securities exchange or clearing agencies, other Securities Exchange Act of 1934 entities, registered investment companies and advisers, venture capital fund advisers, insurance companies, state licensed insurance producers, Commodity Exchange Act registered entities, accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax exempt entities, entities assisting tax exempt entities, large operating companies, subsidiaries of certain exempt entities and inactive businesses. (See 31 U.S.C. § 5336(a)(11)(B)(i)-(xxiii).) Currently, FinCEN is not recommending any additional exemptions under the CTA provision stating “any entity or class of entities that the Secretary of the Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security,” determines should be exempt. (31 U.S.C. § 5336(a)(11)(B)(xxiv).)
Who is a Beneficial Owner and What Are Company Applicants
The CTA requires reporting companies to report to FinCEN certain identifying information for both “beneficial owners” and company “applicants.” (Id. § 5336(b)(2)(A).) The proposed regulations attempt to fill in the meaning of those terms, among others.
Under the CTA, a “beneficial owner” is “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise 1) exercises substantial control over the entity; or 2) owns or controls not less than 25 percent of the ownership interests of the entity.” The proposed rule further seeks to clarify the meaning of “beneficial owner” by defining the terms “substantial control” and “ownership interests.”
Substantial Control Explained
The proposed regulations set forth three specific indicators of “substantial control.” The first is service as a senior officer of a reporting company. Next is authority over the appointment or removal of any officer or dominant majority of the board of directors (or similar body) of a reporting company. Last is direction, determination or decision of, or substantial influence over, important matters of a reporting company, including, for example, the sale, lease or transfer of any principal assets of the company, the entry into or termination of significant contracts, major expenditures and investments by the company and compensation schemes for senior officers. (See Proposed 31 CFR 1010.380(d)(1).) As noted in the NPRM, “[e]ach of these indicators supports the basic goal of requiring a reporting company to identify the individuals who stand behind the reporting company and direct its actions.”
Additionally, the proposed regulations include a catch-all provision defining “substantial control” to include “[a]ny other form of substantial control over the reporting company.” FinCEN states that it included this “catch-all” provision to clarify that “substantial control can take additional forms not specifically listed” in the regulations and to hinder individuals from evading identification by “hiding behind formalisms.” The NPRM clarifies that there can exist more than one person who exercises “substantial control” over a reporting company, and the rule will necessitate the identity of each person to be disclosed. FinCEN purposefully diverged from the Customer Due Diligence (CDD) Rule’s definition of “significant degree of control” because “the CTA does not require the identification of only one person in substantial control,” but rather the identification of “all” such persons.
Ownership Interests in More Detail
Ownership interest, or control of ownership interests, are also defined. The proposed regulations take an expansive view of what constitutes an “ownership interest,” continuing the trends of the proposed regulations. Under the proposed rule, “ownership interests” include both equity in the reporting company and other forms of interests, including capital or profit interests (such as partnership interests) or convertible instruments, warrants or rights, or other options or privileges to acquire equity, capital or other interests in a reporting company. An “ownership interest” would also include any ownership interest by another person that an individual has the ability to control. With this definition, FinCEN is broadening a reporting company’s analysis of who has an “ownership interest” by using language in the proposed rule reminding reporting companies that ownership interests can be owned or controlled directly or indirectly or “through a variety of means.” For example, the proposed rule specifies that an individual may directly or indirectly own or control an ownership interest in a reporting company through a trust or similar arrangement. The proposed rule details that percentage of ownership is determined by aggregating all an individual’s ownership interests in comparison to the undiluted ownership interests of the company.
Who is Excluded from the Definition of Beneficial Owner
The NPRM excludes five categories of individuals from the definition of “beneficial owner.” These are: minor children, as long as the reporting company provides information of a parent or legal guardian as required under the rule; individuals acting as nominees; employees acting solely as employees and not as senior officers; individuals whose only interest in a reporting company is a future interest through the right of inheritance; and creditors of a reporting company.
Company Applicant Clarification
Company applicants are also clarified. The proposed regulations adopt the statutory definition of a company “applicant.” Thus, for domestic reporting companies, the company applicant is the person who files the document that forms the entity. Meanwhile, for foreign reporting companies, that applicant is the individual who files the document that first registers the entity to do business in the United States. A company applicant also “includes anyone who directs or controls the filing of the document by another.”
Information Disclosure Required in More Detail
Certain information must also be disclosed. The statute and proposed rule require reporting companies to disclose four pieces of information about each of its beneficial owners and company applicants:
- full legal name;
- date of birth;
- current residential or business street address ;and
- a unique identifying number from an acceptable identification document or FinCEN identifier.
The NPRM states that the statute “does not specify when or whether one type of address should be used in preference to another or resolve more specific questions regarding secondary addresses or whether addresses should be domestic, if possible, or can be foreign.” Therefore, the proposed rule would require individual beneficial owners and company applicants who do not act as formation agents to report their residential address for tax residency purposes, as such information would be most “useful for establishing the unambiguous identity of an identified beneficial owner.”
For company applicants, FinCEN proposes a “bifurcated approach.” Company applicants who provide a business service as a corporate or formation agent would need to report their business address. The NPRM clarifies that such applicants are “of particular interest” to FinCEN because of their role in creating or registering reporting companies. Therefore, requiring these applicants to disclose their business addresses will, according to FinCEN’s, allow law enforcement and other government agencies to identify patterns that may indicate individuals are “engaged in the business of creating legal entities for the purpose of obscuring the beneficiaries of transactions or the owners of valuable assets.” For all other company applicants, the reporting company will be required to report the residential street address that the individual uses for tax residency purposes. Although the CTA specifies what constitutes an “acceptable identification document” for purposes of the BOI report, (See 3 U.S.C. § 5336(a)(1)) not specified is how an entity is to be identified by such a document.
Based on other language included in the statute, FinCEN has determined it has authority to require reporting companies to provide scanned copies of identification documents to the agency in connection with reporting the unique identifying number. Seemingly, collecting such images would “significantly contribute to the creation of a highly useful database for law enforcement and other authorized users” and the requirement will “make it more difficult to provide false identification information” to the agency because it will be “significantly” harder to falsify an image of an identification document than to merely report an inaccurate number.
While not specified by statute, under the proposed rule, reporting companies are required to provide specified information about themselves to FinCEN. The proposed rule requires reporting companies to include the following information in a BOI report:
- name and any alternative names;
- business street address;
- jurisdiction of formation or registration; and
- a unique identification number. For purposes of the unique identification number, reporting companies may submit their taxpayer identification number (TIN) – including an Employer Identification Number (EIN) – or if a TIN is not yet issued, a Dun & Bradstreet Data Universal Numbering System (DUNS) number or a Legal Entity Identifier (LEI).
Timing of Implementation
As specified in the NPRM, the CTA requires FinCEN to prescribe regulations “for when exactly reporting companies must file” BOI reports. When related disclosures are requires varies based upon when a reporting company is formed, relative to the effective date of the regulations. Under the proposed rule, companies formed or registered on or after the effective date of the regulations must file initial reports within 14 calendar days of the date the company was formed as specified by a secretary of state or similar office, or, if a foreign reporting company, the date it first became a foreign reporting company. FinCEN believes the timeframe is “reasonable” and necessary to provide the agency with “timely and highly useful” information. Reporting companies formed before the effective date of regulation would be required under the proposed rule to file reports “not later than one year after the effective date of the regulation.” Any previously exempt company that no longer meets any exemption criteria would be required to file a report within 30 calendar days after the date on which the entity no longer meets any exemption criteria.
Updating Information and Other Obligations When Incorrect Information Is Filed
A company that reports inaccurate information to FinCEN must file a corrected report within 14 calendar days after the date on which the company becomes aware or has reason to know that any required information contained in any report was inaccurate. The NPRM notes that this time period is consistent with FinCEN’s belief that “quickly correcting errors is essential for fulfilling Congress’s instruction that BOI reported to the agency be ‘accurate, complete and highly useful.’” Similarly, the NPRM requires reporting companies to disclose “update[d] information” to FinCEN within 30 calendar days “after the date on which there is any change.”
Conclusion and Comment Period for the Proposed Regulation
While focused only on the beneficial owner information requirement of the CTA, the NPRM covers extensive areas and provides valuable insight into how FinCEN might interpret and implement the CTA. However, we will need to analyze the final rules when published, most likely sometime in the next year, before forming any concrete opinions. Still, reading through the proposed regulations makes clear that they are exacting and will require extensive burdens on the part of reporting taxpayers. Comments on the proposed rule were required to be submitted to FinCEN on or before Feb. 7, 2022. Specifically requested are comments on how to treat trusts under the Act. Future rulemakings will address other aspects of the CTA, including the establishment of protocols to determine access to and disclosure of BOI and revisions to the CDD rule.
