Proposed regulations promulgated on December 8, 2021 by the Financial Crimes Enforcement Network ("FinCEN"), a bureau of the Department of the Treasury, bring the beneficial ownership reporting rules of the Corporate Transparency Act1 (the "CTA") one step closer to life. Though only proposed and not effective until a date to be specified in the final regulations, these rules represent a meaningful step in the fight against money laundering, tax fraud, terrorism, and other national security risks. FinCEN's action also responds to decades-long criticism from the Financial Action Task Force (an intergovernmental body comprised of 37 members, including the United States) that the United States has been dilatory and deficient in its duty to promote the transparency in legal entity ownership believed to be necessary to counter such unlawful conduct.
Upon finalization and entry into effect of these regulations, countless corporations, limited liability companies, and certain other entities will have to report detailed information regarding their beneficial owners and incorporation agents to FinCEN and will have an ongoing obligation to keep the agency abreast of changes.
The Broad and Sweeping Rules
The CTA sets out to create a consolidated repository of beneficial ownership information to, among other things, "better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity."2 The proposed regulations implement Congress's instructions for building and maintaining a beneficial ownership repository to close the information gap. The database will be populated by requiring certain entities to report pertinent information to FinCEN:
- Who Must Report. Many entities will be subject to the reporting obligations. Any domestic or foreign "reporting company", broadly defined, must file a report with FinCEN in the form and manner to be prescribed in forthcoming forms and instructions.
- A domestic reporting company is a corporation, limited liability company, or other entity that is created by the filing of a document with a secretary of state or any other similar office under the law of a State or Indian tribe. FinCEN believes this definition likely includes various types of partnerships (LPs, LLPs, LLLPs) and business trusts.
- A foreign reporting company is a corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.
While a non-business, non-statutory trust would generally fall outside the "reporting company" definition, information regarding a trust, its grantor, and its beneficiaries may nevertheless end up on a report if the trust owns a reporting company, as described below.The rules adopt the CTA's list of twenty-three types of entities that are to be exempt from reporting, with clarification where necessary. In doing so, FinCEN commented that many of these entities are already subject to substantial Federal or state regulation under which their beneficial ownership may be known (e.g., banks, credit unions, Securities Act of 1934 entities, tax-exempt organizations). Of note, "large operating companies"-i.e., entities employing more than 20 full-time employees in the United States, reporting more than $5 million in gross receipts on its prior year's Federal tax return, and having an operating presence at a physical office in the United States-are exempt. Small and medium sized businesses with similar indicia of no malintent in using the corporate-form, however, must bear the reporting obligations. As proposed, an exempt entity does not need to file its claim of exemption with FinCEN, but if a reporting entity later becomes an exempt entity, the change must be reported.
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This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.