New federal reporting requirements that implicate many small businesses will soon take effect. If your business is required to report under the new regulations, certain information about your business, personal information of business owners, and certain key individuals within the business will be required to be reported to the federal government.
On January 1, 2021, Congress passed new anti-money laundering legislation as part of the National Defense Authorization Act, which expanded on the Anti-Money Laundering Act of 2020 (“AMLA”) and included the “Corporate Transparency Act” (“CTA”).[1] The CTA and the proposed regulations thereunder provide for certain entity ownership reporting requirements and direct the Financial Crimes Enforcement Network (“FinCEN”), a department of the United States Treasury, to implement and enforce such reporting requirements consistent with the AMLA. As part of the implementation, on December 8, 2021, FinCEN issued proposed regulations (the “Proposed Rule”) “designed to protect the United States financial system from illicit use and impede malign actors from abusing legal entities, like shell companies, to conceal proceeds of corrupt and criminal acts.”[2] The CTA also directs FinCEN to establish and maintain a national database and directory of entities with respect to certain ownership information.[3]
On September 29, 2022, FinCEN published its final rule (the “Final Rule”), largely confirming the Proposed Rule but making some further clarifications. Entities that may be implicated by the CTA and Final Rule should begin to prepare for the federal reporting requirements based on the Final Rule. As discussed below, the CTA, FinCEN’s Final Rule and its enforcement will have a sweeping effect on entities across the United States (including foreign entities registered in the United States). Below is a review of the basics of the CTA and the Final Rule, in preparation for these reporting requirements.
General Reporting Requirements
The Final Rule requires many entities, their key stakeholders, and the individuals who filed or registered such entities, to report certain information to FinCEN. The discussion below highlights the CTA’s reporting requirements, FinCEN’s interpretation and the Final Rule thereunder, covering the (1) types of entities required to report to FinCEN; (2) types of individuals within reporting entities that are required to report; (3) type of information to be provided; (4) timelines for reporting; and (5) penalties for non-compliance. We will also highlight whether reported information will be kept private, and the impact the Final Rule may have on small businesses.
Which Entities Are Required to Report?
The CTA and Final Rule applies to (1) corporations, limited liability companies, and other similar entities that are created by filing documents with a secretary of state or similar office in such entity’s state jurisdiction, or (2) entities that have been formed under the laws of a foreign country and registered to do business in the United States (collectively, called “reporting companies”), unless an enumerated exemption is met as outlined below.[4] These entities, defined as “reporting companies,” are required to disclose “beneficial ownership information” (“BOI”).[5]
The Final Rule exempts twenty-three categories of entities from the definition of a “reporting company.” Exempt entities include those that are already subject to substantial federal or state regulation under which their beneficial ownership is likely already known.[6] In particular, large operating companies are exempt.[7] In order to meet the large operating company exemption, an entity must (1) employ more than twenty employees on a full-time basis; (2) file in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of (i) other entities owned by the entity and (ii) other entities through which the entity operates; and (3) have an operating presence at a physical office within the United States.[8]
Accordingly, unless a “reporting company” meets one of the exemptions, it is subject to the CTA and Final Rule’s disclosure provisions.
What Information Must be Reported?
A reporting company must provide FinCEN the following in its initial report: (1) full legal name; (2) any alternative names by which the reporting company engages in business (e.g. dba and trade names); (3) business address; (4) jurisdiction; and (5) tax identification number.[9] Under the Final Rule, a beneficial owner and company applicant must provide the following: (1) full legal name; (2) date of birth; (3) current residential or business street address; and (4) unique identifying number from an acceptable identification document and a photograph or image of such identification document (e.g. state-issued ID, federally issued passport) or a specific FinCEN identifier.[10]
Who Is Required to Report Within a Reporting Company?
The CTA mandates two categories of individuals who are required to report with FinCEN: (1) the “beneficial owners” of the entity; and (2) the “company applicants” of the entity.[11] The Final Rule either adopts these definitions of the CTA verbatim, or slightly clarifies certain terms as indicated below.
A “beneficial owner” means an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, owns or controls at least 25% of the reporting company or exercises substantial control over the reporting company.[12] Under the Final Rule, FinCEN defines “substantial control” as: (1) services as a senior officer of a reporting company; (2) authority over the appointment or removal of a senior office or dominant majority of the board of directors (or similar body) of a reporting company; and (3) direction, determination, or decision of, or substantial influence over, important matters of a reporting company.[13] The definition of a beneficial owner includes certain exceptions, such as minor children, nominees, other intermediaries, employees, inheritors, and creditors.[14]
A “company applicant” or “applicant” means an individual who directly files an application to register a corporation, limited liability company, or other similar entity under the laws of a state or who registers the same under the laws of a foreign country to do business in the United States.[15] Importantly, for entities created or registered prior to the effective date of the Final Rule—January 1, 2024—such entities do not have to report information about their company applicants.[16]
When Are Reports Due?
Under the Final Rule, a reporting company that was formed or registered before January 1, 2024, is required to submit its reports to FinCEN not later than January 1, 2025.[17] Any reporting company formed on or after January 1, 2024, is required to submit its reports to FinCEN within thirty days of formation.[18]
Reporting companies must also timely report changes in beneficial ownership and correct inaccurately reported information. Although the CTA requires reporting companies to update information submitted in prior reports to FinCEN in a timely manner, and not later than one year after the date on which there is a change with respect to reporting information,[19] the Final Rule provides for reporting companies to, within thirty days, correct any inaccurate information filed with FinCEN from the date on which the inaccuracy is discovered and thirty days to update with FinCEN information that has changed after filing.[20]
What Penalties Apply for Reporting Violations?
The CTA provides that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, or to willfully fail to report complete or updated beneficial ownership information to FinCEN.[21] Violations carry civil and criminal penalties. Those who violate reporting requirements will be liable for a civil penalty of up to $500 per day for so long as the violation continues, and may be fined up to $10,000 and imprisoned for up to two years, or both, for a criminal violation. Under the Final Rule, FinCEN adopts the CTA’s penalties, but FinCEN is considering how to exercise its enforcement discretion of violations in reporting. There is, however, a safe harbor available under the CTA and the Final Rule for persons potentially in violation of these reporting requirements: a person will not be subject to civil or criminal penalties if such person had reason to believe that any report submitted contained inaccurate information, and voluntarily and promptly, in no case later than ninety days after which the report was submitted, submits a corrected report.[22]
Privacy of Reported Information
To some extent, beneficial ownership information will be private. Beneficial ownership information reported to FinCEN under the CTA will be kept confidential and may not be disclosed by a United States officer or employee, state or local agency officer or employee, or any employee of a financial institution or regulatory agency receiving such information. In other words, FinCEN’s database should not be publicly available.[23] However, FinCEN may disclose beneficial ownership information upon request to Federal law enforcement, intelligence agencies, the Department of Treasury and regulators—which includes the IRS.[24] Additionally, FinCEN may disclose beneficial ownership information upon request by a financial institution subject to customer due diligence requirements, with the consent of the reporting company, to facilitate the compliance of the financial institution with customer due diligence requirements under applicable law—also known as “Know Your Client” information.[25] Under the Final Rule, FinCEN intends to address regulatory requirements related to access to information reported pursuant to the CTA through a future rulemaking process.[26]
Impact on Small Businesses
The CTA and specifically the Final Rule’s reporting requirements generally affect smaller, unregulated entities that may not be subject to any other similar BOI reporting requirements. During the public comment period for the Proposed Rule, the U.S. Small Business Administration Office of Advocacy submitted a comment letter (the “SBA Comment Letter”) discussing the impact the Proposed Rule would have on small businesses.[27] The SBA Comment Letter details how the Proposed Rule will be economically burdensome for small businesses and urges FinCEN to issue a compliance guide for small business owners to provide information about the requirements of the Proposed Rule.
Although FinCEN claims to recognize this economic impact, concluding that small businesses would be substantially impacted, FinCEN adopted the Final Rule, without including alternatives that would provide greater flexibility (such as collaborating with all fifty states to integrate the FinCEN filing process into existing corporate formation and registration processes). Mr. Bill Hulse, Vice President of the Center for Capital Markets Competitiveness, U.S. Chamber of Commerce stated in a comment letter to the Proposed Rule on February 7, 2022, to the Acting Director of FinCEN, Himamauli Das that the U.S. Chamber of Commerce is disappointed that the Proposed Rule does not describe FinCEN’s plans to establish partnerships with state, local and tribal agencies nor a process for collecting required information via existing federal, state, and local procedures, despite the CTA’s clear requirement that FinCEN does so to the greatest extent possible.[28]
Practically speaking, the real economic and administrative burden of FinCEN’s enforcement of the CTA and the Final Rule is yet to be analyzed, but it will undoubtedly be significant with respect to preparing and filing required reports. In its comment letter, the U.S. Chamber of Commerce went on to state that the Proposed Rule “…should not cast a wide net that imposes challenging, ambiguous, and unnecessary compliance burdens on America’s small businesses.” Unfortunately, FinCEN cast a wide net and the Final Rule does not provide any alternatives to reduce potential costs to small businesses. Instead, FinCEN reasoned that “while many of the rule’s benefits are not currently quantifiable, FinCEN assesses that the rule will have a significant positive impact and that the benefits justify the costs.”[29]
Conclusion
The Final Rule is the first of three anticipated rules to implement the CTA. FinCEN will issue two additional rules that address who will have access to the information submitted and how the information will be secured. Now that the Final Rule will go into effect on January 1, 2024, entities should familiarize themselves with the Final Rule’s requirements and begin to prepare to report.[30] If you would like to prepare for the CTA and its regulatory reporting requirements and/or have questions as to how the CTA and Final Rule apply to your business and how to file, please contact Steve Lawrence and Aaron Kacer.
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[1] The CTA is Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116-283 (January 1, 2021). Division F of the National Defense Authorization Act is the Anti-Money Laundering Act of 2020, which includes the CTA.
[2] Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69920 (Dec. 8, 2021).
[3] 31 U.S.C. § 5336.
[4] 31 U.S.C. § 5336(a)(11)(A)(i)-(ii).
[5] 87 Fed. Reg. 59536, 59591.
[6] Exempt entities include: security issuers under the Securities Exchange Act of 1934, domestic government authorities, banks, domestic credit unions, depository institution holding companies, money transmitting businesses, brokers or dealers in securities, securities exchange or clearing agencies, other Securities Exchange Act of 1934 entities, registered investment companies and advisers, venture capital fund advisers, insurance companies, state licensed insurance producers, Commodity Exchange Act registered entities, accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax exempt entities, entities assisting tax exempt entities, subsidiaries of certain exempt entities and inactive businesses. 31 U.S.C. § 5336(a)(11)(B)(i)-(xxiv); 87 Fed. Reg. 59539, 59593.
[7] 31 U.S.C. § 5336(a)(11)(B)(xxi); 87 Fed. Reg. 59542.
[8] Id.
[9] 87 Fed. Reg. 59515, 59592.
[10] 31 U.S.C. § 5336(b)(2)(A); 87 Fed. Reg. 59592.
[11] 31 U.S.C. § 5336(a)(2)-(3).
[12] 31 U.S.C. § 5336(a)(3)(A)(i)-(ii).
[13] 87 Fed. Reg. 59525.
[14] 31 U.S.C. § 5336(a)(3)(B).
[15] 31 U.S.C. § 5336(a)(2)(A)-(B). Note, “Company Applicant” also includes the individual responsible for directing or controlling a formation filing if more than one individual is involved with such document filing. 87 Fed. Reg. 59536. FinCEN’s design behind the foregoing is to identify the individual who is responsible for the creation of a reporting company through the filing of formation documents, and the individual that directly submits the formation documents, if that function is performed by a different person, but it reduces potential burdens by limiting the definition of company applicant to only one or two individuals. Id.
[16] 87 Fed. Reg. 59522.
[17] Id. at 59510.
[18] Id. Note the reporting deadlines under the CTA are less strict compared to the Final Rule. FinCEN’s position on stricter reporting deadlines is that the CTA directs the reporting of entities be conducted in accordance with regulations prescribed by the Secretary of the Treasury, meaning the CTA requires FinCEN to prescribe regulations for exactly when a report company must file its report.
[19] 31 U.S.C. § 5336(b)(1)(D).
[20] 87 Fed. Reg. 59511.
[21] 31 U.S.C. § 5336(h)(1).
[22] 31 U.S.C. § 5336(h)(3)(C); 87 Fed. Reg. 59513.
[23] 31 U.S.C. § 5336(c)(2)(A).
[24] 31 U.S.C. § 5336(c)(2)(B)(i)-(iv) and § 5336(c)(5).
[25] 31 U.S.C. § 5336(c)(2)(B)(iii).
[26] 87 Fed. Reg. 59507.
[27] U.S. Small Business Administration, Office of Advocacy, Comment Letter on Proposed Rule, Beneficial Ownership Information Reporting Requirements (Dec. 8, 2021). The SBA Comment Letter is available here.
[28] U.S. Chamber of Commerce, Center for Capital Markets Competitiveness, Comment Letter on Proposed Rule, Beneficial Ownership Information Reporting Requirements (Dec. 8, 2021). The Chamber Comment Letter is available here.
[29] 87 Fed. Reg. 59549, 87 Fed. Reg. 59582.
[30] Financial Crimes Enforcement Network Press Release, dated September 29, 2022, available here; Financial Crime Enforcement Network Fact Sheet, available here.