Knowing who owns legal entities is essential to stopping terrorism, money laundering, and other sophisticated criminal enterprises. For entities formed in the United States there has never been a requirement to disclose ownership. But that’s about to change.
On September 29, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued final rules regarding the requirements for certain business entities to report beneficial ownership information under the Corporate Transparency Act (CTA). As highlighted below, FinCEN made various changes to the proposed regulations issued last April (see here and here for our earlier reports on this).
Reporting Companies
The final rules provide two categories of reporting companies: domestic and foreign. A domestic reporting company is defined as a corporation, limited liability company, or other entity that is created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.[1] A foreign reporting company is defined as a corporation, limited liability company, or other entity that is formed under the law of a foreign country that has registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar agency.[2] FinCEN believes these definitions are comprehensive, each requiring some filing with a secretary of state or similar office to “create” the entity. Certain entities, such as trusts, sole proprietorships or general partnerships, typically are formed or created without filing documents with a government entity and therefore generally will not be reporting companies and not be subject to the disclosure and filing requirements under the CTA.
Beneficial Owners
The CTA requires reporting companies to disclose “beneficial owners” of the entity. A beneficial owner for this purpose is “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company.”[3]
As with the proposed rule, there are certain notable exceptions. Specifically, a beneficial owner is not (i) an individual acting solely as an employee of an entity whose control over or economic benefits from such entity are derived solely from that person’s employment status, (ii) an individual whose only interest in an entity is through a right of inheritance (until such inheritance occurs), (iii) a minor child (if the information of the parent or guardian of the minor child is reported), (iv) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another, or (v) a creditor of the reporting company.[4]
Substantial Control
The final rules clarify what constitutes substantial control over a reporting company. An individual exercises substantial control if that person (A) serves as a senior officer of the reporting company, (B) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), (C) directs, determines, or has substantial influence over important decisions made by the reporting company, or (D) has any other form of substantial control over the reporting company.[5] An individual, including a trustee, can indirectly “exercise substantial control over a reporting company,” but the regulations provide only limited guidance in this area.[6]
25 Percent Ownership Interest
The final rules focus on the types of arrangements conveying ownership interests, such as equity, voting trusts, capital or profit interests, convertible interests, options and any “other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership”.[7]
A reporting company is required to disclose individuals who own or control at least 25% of the company’s ownership interests.[8] The individual’s ownership in a reporting company is determined by taking into account an individual’s total ownership interests relative to the outstanding ownership interests in the company.[9]
In making this calculation, an individual’s options are treated as exercised, and both capital and profit interests are taken into account. With respect to corporations (and entities treated as corporations for U.S. federal income tax purposes), an individual’s ownership of 25% or more of the combined voting power or combined value of the corporation’s outstanding ownership interests will result in classification as a 25% owner. Where the capital structure of an entity may make this calculation too difficult, an individual who owns or controls 25% or more of any class or type of ownership interest will be deemed a 25% owner of a reporting company.[10] This last provision is a significant change from the proposed regulations.
Trusts as Beneficial Owners
Individuals who own or control an ownership interest in the reporting company specifically include (i) a trustee of a trust and those individuals who have the authority to dispose of trust assets;[11] (ii) a beneficiary who (a) is the sole permissible beneficiary of trust income and principal, or (b) has the right to demand a distribution or withdraw all of the assets of the trust;[12] or (iii) the grantor or settlor who retains the right to revoke a trust or withdraw the trust’s assets.[13] As a result, if a trust owns an interest in a reporting company, it may be necessary to disclose the trustee, the beneficiary, the grantor, or some combination of the foregoing depending on the terms of the trust.
Company Applicants
The reporting company is also required to report its “company applicant.” A company applicant is defined as “[f]or a domestic reporting company, the individual who directly files the document that creates the domestic reporting company”; “[f]or a foreign reporting company, the individual who directly files the document that first registers the foreign reporting company”; and, for both domestic and foreign reporting companies, “the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.”[14] These individuals will differ based on how the reporting company is created. For example, in a law firm setting, the “company applicant” may include both the attorney primarily responsible for overseeing the filing of incorporation documents and the paralegal who directly files the documents.
The requirement to disclose the company applicant applies only to reporting companies formed on or after January 1, 2024, which is a significant departure from the proposed regulations.
Disclosure Requirements
Each reporting company must disclose in its initial report: (i) its full legal name; (ii) its trade name or d.b.a. name; (iii) its current address (including the street address of its principal place of business); (iv) its jurisdiction of formation; and (v) its IRS taxpayer identification number (which generally would be its EIN).[15]
The final rule also requires disclosure of information on beneficial owners and company applicants. For each beneficial owner and company applicant, the reporting company must disclose: (i) the full legal name of the individual; (ii) the individual’s date of birth; (iii) the individual’s residential street address;[16] (iv) a unique identifying number and the issuing jurisdiction from: (a) a non-expired passport issued by the US government; (b) a non-expired identification document issued to the individual by a state, local government, or Indian tribe to identify the individual; (c) a non-expired driver’s license issued to the individual by a state; or (d) a non-expired passport issued by a foreign government to the individual; and (v) an image of the document from which the unique identifying number was obtained.[17] FinCEN eliminated from the final rule the optional submission of a beneficial owner’s taxpayer identification number (TIN) since FinCEN believed that few, if any, companies would actually report a beneficial owner’s TIN due to privacy concerns regarding TIN disclosure.
Following an initial report, a reporting company subsequently is required to file an updated report to reflect any change with respect to previously submitted information concerning the company itself or its beneficial owners.[18]
Reporting companies and individuals may obtain FinCEN identifiers by submitting an application to FinCEN, and thereafter individuals may provide such identifiers for purposes of a reporting company’s required reports in lieu of the information that otherwise would be required to be submitted.[19]
Time to Comply and Penalties
The final CTA regulations become effective on January 1, 2024. Reporting companies in existence before the effective date must file a report with FinCEN not later than January 1, 2025.[20] Any reporting company created after the effective date has thirty days from the earlier occurrence of (1) the time it receives actual notice that its creation or registration to do business is effective, or (2) the date on which a secretary of state (or similar office) first provides public notice that a reporting company has been created or registered to do business.[21] The final regulations extended the time to file for the new reporting companies from fourteen to thirty days, and clarified the point at which the thirty-day reporting window begins. Finally, a reporting company has thirty days to update the required information previously submitted to FinCEN regarding changes in its beneficial ownership or information reported for any particular beneficial owner, such as a change in address.[22] In a helpful change from the proposed regulations, it is no longer necessary to update information regarding a company applicant.
An entity subject to the reporting obligations that willfully fails to submit the required beneficial ownership information, or that provides false or fraudulent beneficial ownership information, may be subject to (1) a civil penalty of up to $500 for each day that the violation continues, and (2) a criminal fine of up to $10,000, imprisonment for up to two years, or both.[23] If a person submits incorrect information, there is a 90-day safe harbor after submitting the original report, allowing that person to avoid civil and criminal penalties if the person did not knowingly submit inaccurate information with the original report and voluntarily submits a report containing corrected information.[24]
Next Steps
FinCEN is working on additional rulemaking to (i) establish rules regarding who may access the disclosed beneficial ownership information, for what purpose, and safeguards ensuring that the information is secured and protected; and (ii) revise FinCEN’s 2016 Customer Due Diligence rule to avoid duplication with the CTA. We will continue to provide updates as further regulations are released and are available to help clients comply with the CTA’s requirements.
[1] 31 C.F.R. § 1010.380(c)(1)(i) (2022).
[2] 31 C.F.R. § 1010.380(c)(1)(ii) (2022).
[3] 31 C.F.R. § 1010.380(d) (2022).
[4] 31 C.F.R. § 1010.380(d)(3) (2022).
[5] 31 C.F.R. § 1010.380(d)(1) (2022). Examples of important decisions of a company the direction of or influence over which can result in “substantial control” are found in § 1010.380(d)(1)(i)(C)(1)-(7).
[6] Cf. 31 C.F.R. § 1010.380(d)(1)(ii) (2022).
[7] 31 C.F.R. § 1010.380(d)(2)(i)(A)-(E) (2022).
[8] 31 C.F.R. § 1010.380(d) (2022).
[9] 31 C.F.R. § 1010.380(d)(2)(iii)(A-D) (2022).
[10] 31 C.F.R. § 1010.380(d)(2)(iii)(D) (2022).
[11] 31 C.F.R. § 1010.380(d)(2)(ii)(C)(1) (2022).
[12] 31 C.F.R. § 1010.380(d)(2)(ii)(C)(2)(i-ii) (2022).
[13] 31 C.F.R. § 1010.380(d)(2)(ii)(C)(3) (2022).
[14] 31 C.F.R. § 1010.380(e) (2022).
[15] 31 C.F.R. § 1010.380(b)(1)(i) (2022).
[16] For a company applicant, this is the applicant’s business address.
[17] 31 C.F.R. § 1010.380(b)(1)(ii)(A-E) (2022).
[18] 31 C.F.R. § 1010.380(b)(3)(i) (2022).
[19] 31 C.F.R. § 1010.380(b)(4) (2022).
[20] 31 C.F.R. § 1010.380(a)(1)(iii) (2022).
[21] 31 C.F.R. § 1010.380(a)(1)(i-ii) (2022).
[22] 31 C.F.R. § 1010.380(a)(2) (2022).
[23] 31 U.S.C. § 5336(h)(1-3) (2021).
[24] 31 U.S.C. § 5336(h)(3)(C) (2021).
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