Certain companies will soon have to give the Financial Crimes Enforcement Network (FinCEN) a look behind the corporate veil. In December 2021, FinCEN issued a Notice of Proposed Rulemaking (NPRM) seeking comment on one of three rules required to implement the Corporate Transparency Act (CTA), which was enacted to “strengthen the integrity of the US financial system”¹ and reduce abuse of the US financial system for money laundering and other illicit financial activity.² The NPRM specifically sought comment regarding implementation of the CTA’s requirement that certain entities (i.e., reporting companies) file reports identifying their beneficial owners.³ On September 29, 2022, FinCEN issued a final rule that largely adopted the proposed rule, with slight modifications responsive to the more than 240 comments received in response to the NPRM.⁴ When the final rule takes effect on January 1, 2024, millions of business entities formed or operating in the United States may be required to file beneficial ownership information (BOI) reports with FinCEN.⁵ 

Who will need to report? 

The CTA, as implemented by the final rule, will require reporting companies to file reports with FinCEN disclosing information about their beneficial owners, and, in certain cases, the individual(s) responsible for filing the document that creates the entity or for registering it to do business in the United States. Reporting companies include corporations, limited liability companies, and other entities (i) created by the filing of a document with the secretary of state or similar office of a US jurisdiction or Tribal authority; and (ii) created under the law of a foreign jurisdiction that are registered to do business in the United States.⁶  

Consistent with the exemptions set forth in the CTA and proposed rule, the final rule exempts twenty-three categories of entities, including certain regulated entities and large operating companies, from the reporting requirements. For example, certain issuers of securities, banks, broker-dealers, investment advisers, insurance companies, and accounting firms are not obligated to file BOI reports with FinCEN. The rule also includes a “large operating company” exemption, which applies to an entity that (1) employs more than 20 full time employees in the United States, (2) has “an operating presence at a physical office within the United States” (i.e., “regularly conducts its business at a physical location in the United States that the entity owns or leases and that is physically distinct from the place of business of any other affiliated entity”), and (3) has filed a Federal income tax return in the United States for the previous year that reports more than $5 million in gross receipts or sales. Subsidiaries of certain exempt entities, including the regulated entities and large operating companies referenced above, may also be exempt from the CTA’s reporting requirements. 

What will they need to report?

Reporting entities will be required to identify themselves, including their taxpayer identification number (TIN) (which was voluntary and not mandatory under the proposed rule), and report in respect of each of their beneficial owners: (1) legal name, (2) birthdate, (3) address, and (4) unique identifying number from, and image of, an acceptable identification document (e.g., a passport). In lieu of this information, a reporting company can provide an individual’s “FinCEN identifier,” which FinCEN may issue to an individual who provides such information to FinCEN directly. 

The final rule incorporates the CTA’s definition of “beneficial owner”—i.e., an individual who, directly or indirectly, (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25% of a reporting company’s ownership interest. To assist companies in identifying the beneficial owner(s) of the reporting company, the rule provides additional information regarding what constitutes “substantial control” over a reporting company and “ownership interest.”

Substantial Control: The final rule largely adopts the proposed rule’s definition of “substantial control.” It provides examples of who may exercise substantial control, including (i) senior officers of the reporting company; (ii) those who have authority over the appointment or removal of senior officers or a majority of the board of directors; and (iii) those who direct, determine, or have “substantial influence” over important decisions made by the reporting company (e.g., compensation and incentives for senior officers, entry into or termination of significant contracts, or reorganization, dissolution, or merger of the company). The definition includes a catchall for anyone who exercises “any other form of substantial control,” leaving room for interpretation and potentially obligating companies to report BOI for those who do not exercise any of the enumerated functions. To address comments received in response to the NPRM, the final rule clarifies that “direct or indirect exercise of substantial control,” may include acting “as a trustee of a trust or similar arrangement” that exercises substantial control over a reporting company. 

Ownership Interest: The final rule provides several clarifications regarding “ownership interest” as defined in the proposed rule. It provides examples of direct and indirect ownership and explains how to calculate the total ownership interests of a reporting company. The final rule incorporates feedback from commentators on several points. For example, the final rule defines ownership interest to focus on arrangements that convey ownership interests (e.g., equity and stocks) instead of legal entities in which ownership interests are held, and adds a catchall provision to cover “[a]ny other instrument, contract, arrangement, understanding, relationship, or other mechanism used to establish ownership.”

The proposed rule would also have required all reporting companies to file and update information about their “company applicants” (i.e., the individual(s) who directly files, or primarily directs or controls the filing of, the document that creates the reporting company or registers it to do business). However, the final rule only requires companies created or registered to do business after January 1, 2024 to submit identifying information about their company applicants at the time of the initial report. The rule specifies that reporting companies created or registered to do business before January 1, 2024 will not need to file information about company applicants, given the “substantial and unique burdens associated with identifying company applicants and obtaining company applicant information for companies that have been in existence for some time.” In addition, reporting companies generally will not be required to update information about company applicants, because the “benefits of this information would not outweigh the burdens that the requirement would impose on small business”—“updated information about a company applicant would be of limited value for law enforcement over time.” 

When will they need to report?

Reporting companies created or registered before January 1, 2024 (the effective date) must file their initial BOI report within one year (i.e., no later than January 1, 2025). In most other instances, the final rule has imposed a uniform 30-day reporting period for reporting companies created or registered to do business after the effective date to file an initial BOI report, and for all reporting companies to update and correct inaccurate BOI reports. 

The prescribed 30-day periods for reporting companies created or registered to do business after the effective date to file initial BOI reports, and for reporting companies to disclose inaccuracies are a departure from the 14-day filing period in the proposed rule. In revising the deadline for new reporting companies’ initial BOI report, FinCEN described commentators’ concern about the potential difficulties of, for example, registering a d/b/a at the county level or obtaining TINs within a 14-day period. The final rule explains that the extended period to correct inaccurate BOI reports “reflects the concerns raised by commenters that the 14-day timeframe may not provide sufficient time for reporting companies to conduct adequate due diligence, consult with advisors, or conduct appropriate outreach…”

Impact & Takeaways

While the final rule does not take effect until January 1, 2024, companies should begin considering now whether they are subject to the CTA reporting obligations. The CTA makes it “unlawful for any person to willfully provide, or attempt to provide, false or fraudulent” BOI, or “willfully fail to report complete or updated” BOI. The final rule clarified that an individual who “causes the failure or is a senior officer of the entity at the time of the failure” may also have violated the CTA.⁷ Entities who fail to follow the rules will face a civil penalty of not more than $500 each day that the violation continues, as well as a potential criminal fine up to $10,000, imprisonment for up to 2 years, or both.⁸ 

The introduction to the final rule suggests that FinCEN intends to interpret the rule’s requirements broadly in favor of disclosure. Companies, including financial institutions and reporting companies, should continue to monitor developments, such as issuance of frequently asked questions, clarifying common, fact-specific applications of the reporting requirements. Companies may also want to consider submitting comments in response to additional notices of rulemaking designed to clarify exemptions and other filing obligations. 

As certain regulated entities and large companies are generally exempt from the reporting requirements, most of the filing obligations will be borne by smaller companies. When issuing the rule, FinCEN acknowledged the potential burden on smaller reporting companies, and noted that the rule “aims to minimize burdens on small businesses,” which “are a backbone of the US economy, accounting for a large share of US economic activity and driving US innovation and competitiveness.”⁹ Companies that may be subject to CTA reporting requirements should monitor the issuance of FinCEN’s anticipated Small Entity Compliance Guide, which will be intended to guide smaller entities through the BOI reporting process.

Finally, as noted above, this rule is the first of three rulemakings that are necessary to fully implement the CTA, and the rules are expected to broadly impact the financial industry and reporting companies. The remaining two rulemakings will (1) provide guidance regarding the ability of certain persons to access BOI, necessary safeguards to ensure BOI is secure and suitably protected, and guidelines regarding when and how BOI may be used; and (2) revise FinCEN’s 2016 customer due diligence rule in light of the BOI reporting requirements. FinCEN is also expected to solicit comments on the system and forms that will be used by reporting companies to submit BOI reports. 

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[1] Beneficial Ownership Information Reporting Rule Fact Sheet | FinCEN.gov

[2] Beneficial Ownership Information Reporting Rule Fact Sheet, FinCEN.gov (Sept. 29, 2022), https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet (BOI Rule Fact Sheet). Congress passes the Anti-Money Laundering Act of 2020, amending and modernizing the Bank Secrecy Act - Eversheds Sutherland (eversheds-sutherland.com); Congress passes the Anti-Money Laundering Act of 2020, amending and modernizing the Bank Secrecy Act - Eversheds Sutherland (eversheds-sutherland.com).

[3] “William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021,” H.R. 6395 available at https://www.govtrack.us/congress/bills/116/hr6395/text.

[4] Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 (Sept. 30, 2022), available at https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements. The final rule will be codified at 31 C.F.R. § 1010.380.

[5] Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 (Sept. 30, 2022), available at https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements. The final rule will be codified at 31 C.F.R. § 1010.380.

[6] 31 USC § 5336.

[7] 31 U.S.C. § 5336(h)(1).

[8] 31 U.S.C. § 5336(h)(3).

[9] BOI Rule Fact Sheet, supra note 1.

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