FinCEN Issues Final Rule Implementing Corporate Transparency Act Requirement

The U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued a final rule on Sept. 29, 2022, implementing the beneficial ownership information (BOI) reporting requirement of the Corporate Transparency Act (CTA), which was passed by Congress as part of the Anti-Money Laundering Act of 2020. See 31 CFR 1010.380. The CTA, which requires certain domestic and foreign entities to submit specified BOI to FinCEN, is designed to protect the U.S. financial system from illicit financial activity and national security threats, such as the use of shell companies to launder money or evade U.S. sanctions. FinCEN expects that the final rule will help efforts to identify illicit actors and combat their financial activities. Essentially, the final rule addresses the lack of a comprehensive federal BOI reporting requirement and database.

This Holland & Knight alert discusses key components of the final rule issued by FinCEN, including who must file a report, what information must be provided and when a report is due. Furthermore, this alert highlights some of the revisions made to FinCEN's Notice of Proposed Rulemaking (NPRM) of Dec. 8, 2021, in light of the comments received in response thereto.

Who Must File a Report?

Any entity that meets the definition of a "reporting company" must file a BOI report with FinCEN. In particular, FinCEN has identified domestic and foreign companies as reporting companies. The final rule defines a "domestic reporting company" to include "a corporation, limited liability company (LLC), or any entity 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."

Similarly, a "foreign reporting company" is defined as a "corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office." Based on the foregoing definitions, FinCEN expects limited liability partnerships, limited liability limited partnerships, business trusts and most limited partnerships to submit BOI reports, considering such entities are generally created by a filing with a secretary of state or similar office. Certain entities are excluded from the definition of a "reporting company" to the extent that they are not created by a filing with a secretary of state or similar office.

Further, the final rule exempts 23 enumerated entities from the definition of a "reporting company," including, but not limited to, governmental authorities, banks, depository institution holding companies, money services businesses, brokers or dealers in securities and accounting firms. These exempted entities also include certain large operating companies that meet certain employment and/or tax reporting criteria and publicly traded companies that are issuers of securities that are registered under Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l) or otherwise required to file supplementary and periodic information under Section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78o(d)). While the final rule authorizes the Secretary of the Treasury to exempt additional entities from the definition of a "reporting company," FinCEN has expressed reluctance to expand the exemptions as doing so would require a finding that requiring such entities to submit BOI reports would not serve the public interest and would not be highly useful in furthering the objectives of the CTA.¹

As a result of the foregoing, it is anticipated that many large operating companies or publicly traded companies will likely meet one or more exemptions, but both domestic and foreign commercial groups that have U.S. subsidiaries will need to evaluate their own particular circumstances to ensure that they qualify for such exemptions.

Who Are Beneficial Owners and Company Applicants?

The CTA requires reporting companies to file with FinCEN reports that identify a company's "beneficial owners," as well as information about "company applicants." This alert will address each category of individuals below.

Beneficial Owners

A "beneficial owner" includes "any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least twenty-five (25) percent of the ownership interests of a reporting company." The CTA requires the identification of each beneficial owner of the respective reporting company. As such, all individuals that exercise substantial control and own or control at least 25 percent of the reporting company must be identified. The final rule provides some color as to the definitions of "substantial control" and "ownership interests."

Substantial Control

Most notably, FinCEN revised the definition of "substantial control" to ensure that reporting companies identify key individuals who direct the actions of such entities. Under the final rule, an individual exercises substantial control over a reporting company if the individual:

1. serves as a senior officer of the reporting company
2. has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the reporting company
3. directs, determines or has substantial influence over important matters of the reporting company, including, for example, the reorganization, dissolution or merger of the reporting company, the selection or termination of business lines or ventures of the reporting company and the amendment of any governance documents of the reporting company, or
4. has any other form of substantial control over the reporting company

As reflected above, No. 4 serves as a catch-all provision to address control that may be exercised in less conventional ways with respect to emerging entities with varying governance structures. In other words, this provision is expected to prevent any efforts to circumvent the final rule.

Ownership or Control of Ownership Interests

The final rule establishes standards for determining whether an individual has an ownership interest in a reporting company. An "ownership interest" is defined as any instrument, contract, arrangement, understanding or mechanism used to establish ownership, such as any equity, stock, capital or profit interest. In turn, an individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding or relationship, including, for example, joint ownership, certain trust arrangements and acting as an intermediary, custodian or agent on behalf of another.

The definition of "beneficial owner" does not include 1) minor children, 2) individuals acting as nominees, intermediaries, custodians or agents, 3) employees acting solely as employees and not as senior officers, 4) individuals whose only interest in a reporting company is a future interest through a right of inheritance, and 5) creditors of a reporting company.

Company Applicants

The final rule requires the identification of company applicants who are primarily responsible for directing or controlling the filing of the formation documents for the reporting company. The "company applicant" is either 1) the individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business within the U.S., or 2) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another. Notably, FinCEN modified this rule to limit the definition of "company applicant" to only one or two individuals.

What Information Must Be Disclosed

The final rule requires a reporting company to submit the following information to FinCEN for itself: 1) full legal name, 2) any trade name, 3) current address, 4) the jurisdiction of formation, and 5) the Internal Revenue Service Taxpayer Identification Number (TIN) (including an Employer Identification Number) of the reporting company, or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction. Reporting companies with a principal place of business in the U.S. must provide the street address of such principal place of business; while reporting companies with a principal place of business outside of the U.S. must provide the street address of the primary location in the U.S. where their business is conducted.

Additionally, the final rule requires a reporting company to submit the following to FinCEN, for each beneficial owner and company applicant: 1) the individual's full legal name, 2) date of birth, 3) current residential or business street address, and 4) a unique identifying number from an acceptable identification document (and the image of such document) or the individual's FinCEN identifier. The CTA adopts a bifurcated approach for beneficial owners and company applicants that requires a business address for company applicants who create or register companies in the course of their business, while requiring a residential address for all other individuals (such as beneficial owners).

When Disclosures Must Be Made

The final rule will go into effect on Jan. 1, 2024. Reporting companies created or registered before Jan. 1, 2024, will have one year (until Jan. 1, 2025) to file their initial reports, while reporting companies created or registered after Jan. 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports. Reporting companies have 30 days to report changes to the information in their previously filed reports and must correct inaccurate information in previously filed reports within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports. Importantly, the final rule no longer requires reporting companies created or registered prior to Jan. 1, 2024, to submit BOI for company applicants. Rather, such reporting companies will only have to submit information required for reporting companies and beneficial owners.

Future Rulemakings

In light of the final rule discussed herein, FinCEN intends to engage in additional rulemakings to establish who may access BOI and for what purposes. In addition, FinCEN is in the process of developing the Beneficial Ownership Secure System in accordance with the confidentiality requirements of the CTA. It is expected that FinCEN will release notices pertaining to such proposed regulations in the near future.

For additional information, questions or guidance on FinCEN's CTA requirement, contact the authors.

Notes

¹ The final rule and regulations indicated that while FinCEN considered comments proposing additional exemptions, "commenters generally did not provide enough information to support making those determinations at this time." FinCEN will continue to consider potential exemptions, but any additional exemptions would require approval from the Secretary of the Treasury, Attorney General and Secretary of Homeland Security.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.