FinCEN Issues Beneficial Ownership Reporting Rule

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. 

How Did We Get Here?

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:

1. Establish reporting requirements for “reporting companies” organized or registered to conduct business in the United States regarding their beneficial ownership and “company applicant” information;
2. Create and maintain a secure central database with the beneficial ownership information that is accessible to designated government entities, with certain safeguards; and
3. Revise FinCEN’s existing customer due diligence rule (“CDD Rule”) applicable to financial institutions.

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.

Who Is Impacted?

The Rule covers reporting companies, which include the following entities:

• Domestic: Any entity that is created by the filing of a document with a secretary of state or similar office of a jurisdiction within the United States.
• Foreign: Any entity created under the law of a foreign jurisdiction that is registered to do business within the United States.

Who is exempt?

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:

• certain securities reporting issuers registered with the Securities and Exchange Commission (the “SEC”);
• certain U.S. federal, state, and tribal governmental entities and public utilities;
• certain financial institutions, including banks, bank holding companies, federal or state credit unions, FinCEN-registered money services businesses, SEC-registered broker-dealers, SEC-registered exchange or clearing agencies, and certain other SEC-registered entities;
• registered investment companies and advisers;
• registered venture capital fund advisers;
• insurance companies and state-licensed insurance producers;
• Commodity Exchange Act-registered companies;
• public accounting firms registered pursuant to the Sarbanes-Oxley Act of 2002;
• certain pooled investment vehicles;
• certain tax-exempt entities, including 501(c) entities, political organization; and charitable trusts;
• “large operating companies” with a U.S. presence, as described in more detail below;
• entities whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities that themselves qualify for certain of the foregoing exemptions; and
• certain inactive entities.

What is a “large operating company”?

Entities classified as large operating companies are exempt, as noted above. To qualify as a large operating company, an entity must:

• employ more than 20 employees on a full-time basis in the United States;
• have filed in the previous year federal income tax returns in the United States demonstrating more than $5 million in gross receipts or sales in the aggregate, including the receipts or sales of other entities owned by the entity and through which the entity operates; and
• have an operating presence at a physical office within the United States, meaning the entity regularly conducts its business at a physical location in the United States that the entity owns or leases, that is not the place of residence of any individual, and that is physically distinct from the place of business of any other unaffiliated entity.

When Does a Company Need to Submit Reports to FinCEN?

• The Rule will go into effect on January 1, 2024.
• Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial Beneficial Ownership Information (“BOI”) reports to FinCEN.
• Reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial BOI reports.
• Once an initial BOI report has been filed, both existing and new reporting companies will have to file updates with FinCEN within 30 days of a change in their beneficial ownership information.

What if a Company’s Status Changes?

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.

What Information Must Be Reported?

The Rule requires reporting companies to file BOI reports with FinCEN that include identifying information for the following:

• the reporting company;
• the beneficial owners of the entity; and
• the company applicants of the entity.

For the reporting company, companies are required to provide:

1. the full name of the reporting company;
2. any trade name or “doing business as” name of the reporting company;
3. the business street address of the reporting company;
4. the state or Tribal jurisdiction of formation of the reporting company (or for a foreign reporting company, the state or Tribal jurisdiction where such company registers); and
5. an IRS Taxpayer Identification Number (“TIN”) of the reporting company (or, where a reporting company has not yet been issued a TIN, either a Dun & Bradstreet Data Universal Numbering System (DUNS) Number or a Legal Entity Identifier (LEI)).

The BOI report must also include the following personal information for all beneficial owners and all company applicants:

1. full legal name;
2. date of birth;
3. current residential or business street address; and
4. a unique identifying number from an acceptable identifying document, such as a passport or driver’s license, plus an image of the identifying document.

How Can Companies Identify Their Beneficial Owners and Company Applicants?

Beneficial Owners Defined

Any individual who, directly or indirectly, either:

• exercises substantial control over a reporting company or

• 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.

    • For example, for reporting companies that issue capital or profit interests, the individual’s ownership interests are the individual’s capital and profit interests in the entity, calculated as a percentage of the total outstanding capital and profit interests of the entity.

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.

Substantial Control Defined

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:

• serves as a senior officer of the reporting company;
• has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of a reporting company;
• directs, determines, or has substantial influence over important decisions made by the reporting company; or
• has “any other form of substantial control” over the reporting company.

In addition, the Rule provides that an individual may exercise substantial control over a reporting company indirectly through:

• 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 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; or
• any other contract, arrangement, understanding, relationship, or otherwise.

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.

Exceptions to the Definition of Beneficial Owner

There are five exceptions to the definition of beneficial owner:

• a minor child, provided that a parent or guardian’s information is reported;
• an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
• an individual acting solely as an employee of a reporting company in specified circumstances;
• an individual whose only interest in a reporting company is a future interest through a right of inheritance; and
• a creditor of a reporting company.

Company Applicant Defined

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.

Where Will the Information Be housed?

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:

• Federal agencies may obtain access to the BOI in furtherance of a national security, intelligence, or law enforcement activity.
• State, local, and Tribal law enforcement agencies must seek a court order to obtain BOI 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 BOI to financial institutions to help them comply with customer due diligence requirements.
• Finally, a financial institution’s regulator can obtain BOI that has been provided to such financial institution for the purpose of performing regulatory oversight that is specific to the financial institution.

Penalties for Violations of the CTA and BOI Reporting Requirements

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.

What’s Next?

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.