11 minute read | November.17.2022
This fall the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) published a final rule (the “Rule”), effective January 1, 2024, to implement beneficial ownership reporting requirements included in the Corporate Transparency Act (the “CTA”) for certain legal entities. As indicated in FinCEN’s Fact Sheet, the Rule is intended to enhance the ability of U.S. government agencies to protect U.S. national security and the U.S. financial system from illicit use and to provide essential information to government agencies, state officials, and financial institutions to prevent the laundering or hiding of money and other assets in the United States. Smaller, more lightly regulated entities—including real estate and start-up companies, and other nonexempt entities with complex ownership structures—will be significantly impacted.
As discussed below, the Rule requires that many corporations, limited liability companies (“LLCs”), partnerships, and other companies created in or, in the case of non-U.S. entities, registered in the United States, report information to FinCEN disclosing the individuals with key ownership stakes in and maintaining substantial control over such entities.
Congress and FinCEN are concerned that illicit actors frequently use corporate structures such as shell and front companies to obscure their identities and launder their ill-gotten gains through the U.S. financial system. In particular, the U.S. government has documented the use of legal entities by criminal actors to purchase real estate, conduct wire transfers, burnish the appearance of legitimacy when dealing with counterparties and financial institutions, and control legitimate businesses for ultimately illicit ends.
Recent geopolitical events have reinforced FinCEN’s concern regarding the threat of abuse of corporate entities, including Russia’s unlawful invasion in Ukraine. FinCEN has reported that Russian elites, state-owned enterprises and organized crime, and the Russian government have attempted to use U.S. and non-U.S. shell companies to evade sanctions imposed on Russia and for money laundering.
On January 1, 2021, Congress took significant steps to reform the U.S. anti-money laundering regulatory scheme by enacting the Anti-Money Laundering Act of 2020 (the “AML Act”). Among other things, the AML Act included the CTA—legislation intended to protect national security, deter money laundering and other financial crimes, and promote financial transparency.
The CTA includes three key provisions that require FinCEN to:
On December 7, 2021, FinCEN released a Notice of Proposed Rulemaking (the “Proposed Rule”) to implement the first provision—the beneficial ownership reporting requirement. The Rule reflects FinCEN’s consideration of comments submitted on the Proposed Rule. FinCEN will conduct additional rulemakings to implement the second and third CTA requirements.
The Rule covers reporting companies, which include the following entities:
The Rule includes twenty-three exemptions to the definition of “reporting companies.” Entities that are already subject to significant state or federal regulation such that their beneficial ownership structure may already be known are exempt from the reporting obligations. Exempt entities include:
Entities classified as large operating companies are exempt, as noted above. To qualify as a large operating company, an entity must:
Any entity that was exempt from the reporting requirements but longer meets the criteria for an exemption will have 30 calendar days after the date that it no longer qualifies for an exemption to satisfy its reporting requirements under the Rule.
The Rule requires reporting companies to file BOI reports with FinCEN that include identifying information for the following:
For the reporting company, companies are required to provide:
The BOI report must also include the following personal information for all beneficial owners and all company applicants:
Any individual who, directly or indirectly, either:
directly or indirectly owns or controls at least 25% of the ownership interests of a reporting company.
The Rule provides mechanisms for calculating the total ownership interests of a reporting company.
Notably, the term “ownership interest” is very broad—much broader than the comparable equity interest concept from the CDD Rule—and covers virtually all instruments, contracts, arrangements, understandings, relationships, or mechanisms used to establish ownership.
An individual with substantial control over the company includes anyone authorized to make important business decisions on behalf of the company.
The Rule provides that an individual exercises substantial control over a reporting company if the individual:
In addition, the Rule provides that an individual may exercise substantial control over a reporting company indirectly through:
FinCEN expects that a reporting company will always have at least one beneficial owner under the substantial control definition.
Notably, the Rule’s definition of beneficial owner is significantly broader than the definition of the same term under FinCEN’s CDD Rule, which requires the identification of only one individual under the substantial control prong. Further, the definitions of ownership interest and substantial control are broader in the Rule than in the CDD Rule.
There are five exceptions to the definition of beneficial owner:
In addition to information about the beneficial owners of the company, the BOI report must include information about the company applicant. The company applicant is each of (i) the individual who directly files the document to create or register the reporting company, and (ii) the individual who is primarily responsible for directing or controlling such filing, if more than one individual is involved in the filing.
In many cases, company applicants may be employed by a business formation service or law firm. For example, there may be an attorney primarily responsible for overseeing the preparation and filing of incorporation documents and a paralegal who directly files them with a state office to create the reporting company. In this example, the reporting company would report two company applicants—the attorney and the paralegal—but additional individuals who may be indirectly involved in the filing would not need to be reported.
Entities created before the effective date of the Final Rule will not be required to report company applicant information. Entities that are required to report company applicant information will not be required to update it.
The information from the BOI reports will be reported to and stored in a private database currently under development by FinCEN, the Beneficial Ownership Secure System (“BOSS”). Given the sensitivity of the information reported, the CTA imposes strict confidentiality, security, and access restrictions on the data that is stored in the BOSS.
However, FinCEN is authorized under the CTA to disclose the reported BOI in a limited set of circumstances to a certain governmental authorities and financial institutions:
The CTA establishes both civil and criminal penalties for willful violations of the reporting requirements. The CTA makes it unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FinCEN, or to willfully fail to report complete or updated beneficial ownership information to FinCEN.
Aa a general matter, an inadvertent mistake by a reporting company acting in good faith after diligent inquiry would not constitute a willfully false or fraudulent violation.
FinCEN still has significant work to do to implement the CTA. Through future rulemaking processes, FinCEN will address the regulatory requirements regarding access the BOSS and will amend the CDD Rule to bring it into alignment with the Rule and the future BOSS access rule.
Consistent with past practices, we also expect FinCEN to publish written guidance to address questions that arise as companies begin tackling their future beneficial ownership information reporting obligations.