Blog

2022-10-05

The Financial Crimes Enforcement Network (FinCEN) issued a final rule implementing the beneficial ownership information reporting provisions under the Corporate Transparency Act (CTA) enacted as part of the National Defense Authorization Act for Fiscal Year 2021 (P.L. 116-283).

The final rule sets an effective date of January 1, 2024.

Few jurisdictions in the United States require legal entities to disclose information about the individuals who actually own or control an entity (beneficial owners) or individuals who create an entity.

The CTA directs the Secretary of the Treasury to maintain beneficial ownership information (BOI) “in a secure, nonpublic database, using information security methods and techniques that are appropriate to protect non-classified information. FinCEN has been developing the Beneficial Ownership Secure System (BOSS) to receive, store, and maintain BOI.

For newly created or registered companies, proposed 31 CFR 1010.380(a)(1)(i) specified that a domestic reporting company created on or after the regulation effective date shall file a report within 30 calendar days of the date it was created as specified by a secretary of state or similar office. For entities created or registered before the effective date of the regulations, the CTA requires filing of initial reports “in a timely manner,” but “not later than” two years after the effective date of the final regulations.

The final rule provides updated reports be submitted within 30 days.

Each person filing such report shall certify that the report is accurate and complete.

Each reporting company must provide:

1. the full legal 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 (principal place of business);
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 first registers); and
5. an IRS 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)).

Information To Be Reported Regarding Beneficial Owners and Company Applicants

Consistent with the CTA, the final rule defines a “beneficial owner,” with respect to a reporting company, as any individual who, directly or indirectly, “including as a trustee of a trust or similar arrangement”, either:

1. owns or controls at least 25 percent of the ownership interests of such reporting company”;
2. exercises substantial control over such reporting company:
   1. service as a senior officer of a reporting company. The title of the officer ultimately is not dispositive, rather, the underlying question is whether the individual is exercising the authority or performing the functions of a senior officer, or otherwise has authority indicative of substantial control. The roles of corporate secretary and treasurer tend to entail ministerial functions with little control of the company. FinCEN has therefore omitted those roles from the definition of “senior officer”;
   2. 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; and
   3. direction, determination, or decision of, or substantial influence over, important decisions made by a reporting company

“Ownership interests” includes both equity in the reporting company and other types of interests, such as capital or profit interests (including partnership interests) or convertible instruments, warrants or rights, or other options or privileges to acquire equity, capital, or other interests in a reporting company. Debt instruments would be included if they enable the holder to exercise the same rights as one of the specified types of equity or other interests, including if they enable the holder to convert the instrument into one of the specified types of equity or other interests.

“Ownership or Control of Ownership Interest” addresses the means through which a beneficial owner can “own or control” an ownership interest, including “contract, arrangement, understanding, or other relationship,” “through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual,” or ownership or control of intermediary entities that own or control a reporting company as a specific means through which an individual may directly or indirectly own or control an ownership interest of a reporting company.

There are 5 exceptions to the definition of beneficial owner, for:

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

The report must include each individual’s:

1. full legal name;
2. date of birth;
3. complete current address (can be business address and does not have to be the residence address;
4. a unique identifying number from one of 4 types of acceptable NONEXPIRED identification documents, AND INCLUDING an image of the identification document from which the unique identifying number was obtained:
   1. a U.S. passport;
   2. a state, local, or Tribal identification document;
   3. a State-issued driver’s license; or,
   4. if an individual lacks one of those other documents, a foreign passport.

“Company applicant” in the case of a domestic reporting company, is an individual who files the document that forms the entity. In the case of a foreign reporting company, the company applicant is an individual who files the document that first registers the entity to do business in the United States. The proposed rule specified that a company applicant includes anyone who directs or controls the filing of the document by another.

In light of considerations that may reporting entity applicant information for existing entities formed or registered before the effective date of the final rule difficult (e.g., the applicant has died and information difficult to obtain), the report is not required to report company applicant information.

If any required information in an initial report is inaccurate or there is a change with respect to required information, an updated or corrected report shall include all information necessary to make the report accurate and complete at the time it is filed. The statute requires reporting companies are to report changes with respect to any required information, not just material changes.

An individual may obtain a FinCEN ID by submitting to FinCEN an application containing the information that the individual would otherwise have to provide to a reporting company if the individual were a beneficial owner or company applicant of the reporting company. Individuals with a FinCEN ID shall make updates or corrections to their information by submitting an updated application for a FinCEN ID to FinCEN, subject to the same timelines and terms as updates or corrections to a BOI report by a reporting company. The proposed language that a reporting company can obtain a FinCEN ID was not adopted. FinCEN is continuing to consider these issues and intends to address them before the effective date.

The CTA exempts inactive entities from the BOI reporting requirement, and defines an “inactive entity”as one that:

• was in existence on or before January 1, 2020 (i.e., the date of enactment of the CTA),
• is not engaged in active business,
• is not owned by a foreign person, whether directly or indirectly, wholly or partially,
• has not experienced any change in ownership in the preceding 12-month period,
• has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period, and
• does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.