On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury adopted its final rule implementing the beneficial ownership reporting requirements of the Corporate Transparency Act (Act). The final rule requires certain entities to file with FinCEN identifying information on their beneficial owners. Certain entities formed or registered after the January 1, 2024 effective date of the final rule will also have to provide information on their company applicants.
What Companies Are Subject to the Reporting Requirements?
Subject to certain exemptions, the reporting requirements apply to all entities that are created by filing a document with a secretary of state or other similar office of a State or Indian tribe. They also apply to all entities formed under the law of a foreign country that register to do business in any State or tribal jurisdiction by filing a document with a secretary of state or other similar office of a State or Indian tribe.
There are a large number of entities that are exempt from the reporting requirements, most notably:
- Entities that (1) employ more than 20 full time employees in the United States, (2) have an operating presence at a physical office in the United States, and (3) have filed a Federal income tax or information return for the previous year showing more than $5 million in gross receipts or sales excluding gross receipts or sales from sources outside of the United States.
- Issuers of securities registered under Section 12 of the Securities Exchange Act of 1934 (Exchange Act) or that are required to file supplementary and periodic information under the Exchange Act.
- Governmental authorities.
- Section 501(c) tax exempt entities, political organizations, charitable trusts, split-interest trusts and certain entities that operate exclusively to provide financial assistance to, or hold governance rights over, such entities.
- Pooled investment vehicles that are operated or advised by a bank, credit union, registered broker-dealer, registered investment company, registered investment adviser, or certain venture capital fund advisers.
- Inactive entities in existence on or before January 1, 2020 that have no foreign ownership, no assets (including interests in other entities), no change in ownership during the last 12 months, and have not sent or received funds in excess of $1,000 in the last 12 months.
- Many types of highly regulated entities, primarily in the financial services industry.1
- Subsidiaries in which the ownership interests are controlled or wholly owned by exempted entities, other than subsidiaries of money transmitting businesses, pooled investment vehicles, or entities assisting 501(c) tax exempt entities, political organizations, charitable trusts, and split-interest trusts.
What Are the Required Reports?
An initial report for an entity formed (or, in the case of a foreign entity, registered) after January 1, 2024 must be filed with FinCEN within 30 days after the earlier of the date the entity receives actual notice that its creation has become effective (or, in the case of a foreign entity, that it has been registered to do business) or the date on which the secretary of state or similar office provides public notice that the entity has been created (or registered).
Entities that have been created (or, in the case of foreign entities, registered) before January 1, 2024 will have up until January 1, 2025 to file an initial report with FinCEN.
An initial report will require the following information about the reporting company:
- Full name.
- Street address of principal place of business in the US. For a company with a principal place of business outside of the US, the street address of its primary location in the US.
- Trade or fictitious names used.
- Jurisdiction of formation and, in the case of a foreign company, jurisdiction in which first registered.
- IRS Taxpayer Identification Number. For a foreign company without an IRS Taxpayer Identification Number, a tax identification number issued by a foreign jurisdiction and the name of the jurisdiction.
An initial report will require the following information with respect to each beneficial owner:
- Full legal name.
- Date of birth.
- Current residential address.
- A unique identifying number from a non-expired US passport, state driver’s license, identification document issued by a State, local government or tribe. If the beneficial owner does not have any of these forms of identification, a unique identifying number from a non-expired foreign passport may be provided.
- An image of the document containing the unique identifying number used.
In addition, an initial report filed by a company formed (or registered) on or after January 1, 2024 will also have to include the above individual identifying information with respect to each company applicant, except that a business address, rather than a residential address must be provided.
Companies required to file initial reports must file an updated report within 30 days after there is any change in the information reported to FinCEN about the reporting company or any beneficial owner.
A reporting company must file a corrected report within 30 days after becoming aware or having reason to know any previously reported information was inaccurate when filed and remains inaccurate. A corrected report filed within that 30 day period will provide a safe harbor from the civil and criminal penalties under the Act for the inaccurate report as long as the corrected report is filed within 90 days after the inaccurate report was filed.
Who Are Beneficial Owners?
The term “beneficial owner” has a different definition than under most laws. It is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.
Substantial control of a reporting company includes:
- Serving as a senior officer.
- Having authority over the appointment or removal of a senior officer or a majority of the board of directors or other governing body.
- Directing, determining, or having substantial influence over important decisions.2
- Any other form of substantial control over the reporting company.
Substantial control may be exercised, directly or indirectly, including as the trustee of a trust or similar arrangement, through the following means:
- Board representation.
- Ownership or control of a majority of the voting power or voting rights of the reporting company.
- Rights associated with any financing arrangement or interest in a company.
- Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company.
- Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees.
- Any other contract, arrangement, understanding, relationship, or otherwise.
For the purposes of determining whether an individual owns or controls 25% or more of the ownership interests of a reporting company, an ownership interest includes equity interests, capital or profits interests, proprietorship interests, and instruments convertible or exercisable for the foregoing interests, in each case regardless of whether any such ownership interest includes voting rights.
Ownership or control of an ownership interest may exist through (1) having joint ownership of an undivided interest in an ownership interest, (2) another individual acting as a nominee, intermediary, custodian, or agent, (3) being the trustee of a trust having authority to dispose of trust assets, (4) being certain trust beneficiaries, (5) being the grantor or settlor of a revocable trust or (6) having ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.
Persons Excluded as Beneficial Owners
The following persons are excluded from the definition of beneficial owner:
- A minor, if the reporting company provides the required information for a parent or guardian.
- A nominee, intermediary, custodian, or agent on behalf of another individual.
- An employee of the reporting company who is not a senior officer, acting solely as an employee of the reporting company.
- An individual whose only interest in a reporting company is a future interest through a right of inheritance.
- A creditor of a reporting company solely having rights or interests for the payment of a predetermined sum of money and loan covenants that are intended to secure the right to receive payment or enhance the likelihood of repayment.
Who Are Company Applicants?
The company applicants that must be included in a report filed by a company formed (or registered) after January 1, 2024 are the individual who directly files the document that creates the reporting company or registers the foreign reporting company and the individual who is primarily responsible for directing or controlling such filing.
Who Has Access to the Reported Information?
The Act imposes strict confidentiality, security, and access restrictions on the data FinCEN collects. FinCEN is authorized to disclose reported beneficial ownership information in limited circumstances to a statutorily defined group of governmental authorities and financial institutions. Federal agencies may only obtain access to the beneficial ownership information when it will be used in furtherance of a national security, intelligence, or law enforcement activity. State, local, and Tribal law enforcement agencies must have authorization from a court of competent jurisdiction to seek beneficial ownership information as part of a criminal or civil investigation. Foreign government access is limited to requests made by foreign law enforcement agencies, prosecutors, and judges in specified circumstances. With the consent of the reporting company, FinCEN may also disclose the reported information to financial institutions to help them comply with customer due diligence requirements under applicable law. Finally, a financial institution's regulator can obtain the reported information that has been provided to a financial institution it regulates for the purpose of performing regulatory oversight that is specific to that financial institution.
As required by the Act, FinCEN’s release adopting the final rule indicates that it will engage in additional rulemaking to address the regulatory requirements related to access to the reported information.
What Are the Penalties for Failing to Comply With the Reporting Requirements?
The Act provides civil and criminal penalties for, among other things:
- Knowingly providing, or attempting to provide, false or fraudulent beneficial ownership information.
- Willfully failing to provide complete or updated beneficial ownership information to FinCEN.
The civil penalty for a violation is $10,000. The criminal penalty for a violation is a fine under Title 18 of the United States Code or imprisonment for up to three years, or both. The Secretary of the Treasury can waive a penalty if the Secretary determines that the violation was due to reasonable cause and was not due to willful neglect.
The final rule makes it clear that a person (such as a beneficial owner) providing information to another person for inclusion in a report to FinCEN is providing, or attempting to provide, such information to FinCEN for purposes of these penalties.
In addition, the final rule also makes it clear that a senior officer of a reporting company will be subject to these penalties if a reporting company fails to report required information to FinCEN, as well as any person who caused the failure.
- Banks; credit unions; bank or savings and loan holding companies; registered money transmitting businesses; broker-dealers, securities exchanges, clearing agencies, and other entities registered under the Exchange Act; investment companies and investment advisers registered with the Securities and Exchange Commission; venture capital fund advisers that have filed Item 10, Schedule A and Schedule B of Part 1A of Form ADV with the Securities and Exchange Commission; insurance companies; state licensed insurance producers; certain entities registered with the Commodity Futures Trading Commission under the Commodity Exchange Act; public accounting firms registered under the Sarbanes-Oxley Act of 2002; public utilities; financial market utilities designated by the Financial Stability Oversight Council; and pooled investment vehicles operated or advised by a bank, credit union, registered broker-dealer, registered investment adviser, registered investment company, or venture capital fund adviser.
- The final rule provides the following examples of important decisions with respect to a reporting company: (1)The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets; (2) Reorganization, dissolution, or merger; (3) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget; (4) Selection or termination of business lines or ventures, or geographic focus; (5) Compensation schemes and incentive programs for senior officers; (6) Entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; (7) The amendment of any substantial governance documents of the reporting company, including significant policies or procedures.