As we have previously reported, on January 1, 2021, the US enacted into federal law the Corporate Transparency Act (the "Act"), which is a new national beneficial ownership reporting regime for US companies and certain non-US companies.
In broad terms, the Act creates a national company beneficial ownership registry accessible only by law enforcement, government agencies and other officials, and requires reporting companies to provide certain identifying information on its US and non-US beneficial owners and company applicants to the Financial Crimes Enforcement Network ("FinCEN")1. The purpose of the Act is to prevent the illicit use of so-called 'shell companies' to conceal illegal activity or to facilitate money laundering and tax evasion, among other things.
On September 29, 2022, FinCEN issued a final rule implementing the Act's beneficial ownership information ("BOI") reporting provisions. The final rule reflects FinCEN's careful consideration of detailed public comments and extensive interagency consultations. FinCEN largely adopted the proposed rule with minimal modifications. We refer to our prior article summarizing the key aspects of the Act and the proposed rule.2 This article summarizes key aspects of the final BOI reporting rules.
The Act obligates a "reporting company" to report the requisite information on its beneficial owners and company applicants. The final rule also obligates a reporting company to report its (i) full legal name, (ii) the principal business address of its U.S. operations (P.O. boxes or addresses of a company formation agent are insufficient), (iii) jurisdiction of formation and in the case of foreign reporting companies, the jurisdiction where the company registers in the U.S. and (iv) a TIN (if not yet issued a TIN, a DUNS or an LEI).
A reporting company is generally defined in the Act as a: (i) US corporation, limited liability company ("LLC") or other similar entity; or (ii) foreign (non-US company)3formed under the law of a foreign country and registered to do business in the US. Pursuant to the final rule, FinCEN expects that reporting companies will include LLPs, LLLPs, and most LPs because most require a filing with a secretary of state. It is not expected that estate planning type trusts, sole proprietorships, and general partnerships would be a reporting company as in most circumstances these types of entities are not created by filing a document with a secretary of state.4
Under the final rule, twenty-three types of entities are exempt from the definition of "reporting company." No additional exemptions to the BOI reporting provisions were provided under the final rule, despite numerous comments from a broad array of individuals and organizations.5
The Act generally defines "beneficial owner" as an individual who, directly or indirectly: (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.6 FinCEN expects that a reporting company will always identify at least one beneficial owner under the "substantial control" component, even if all other individuals are subject to an exclusion or fail to satisfy the "ownership interests" component.
Substantial control includes anyone who is able to make important decisions on behalf of the entity. The final rule makes certain modifications to the list of activities that could constitute substantial control of a reporting company, but still keeping a broad scope to capture many types of individuals and arrangements. FinCEN did omit the roles of corporate secretary and treasurer from the definition of "senior officer," but retained the role of general counsel. Notably, FinCEN does not envision that the performance of ordinary, arms-length advisory or other third-party professional services to a reporting company, such as lawyers or accountants, would provide an individual with the power to direct or determine, or have substantial influence over, important decisions of a reporting company.
Regarding situations in which ownership interests are held in trust, FinCEN modified the final rule to provide that a trustee is deemed to have substantial control of a reporting company. The final rule does not, however, define a "trustee," nor does it exclude other people within a trust arrangement (e.g., trust advisor or protector) from also having substantial control.
The final rule provides mechanisms for calculating whether an individual owns or controls 25% of the ownership interests of a reporting company. FinCEN also made clearer, as suggested by some commenters, that the listed forms of ownership (like equity or stocks) are independent of voting power or voting rights. Unfortunately, FinCEN declined to provide any further clarification on how, if at all included, beneficiaries of discretionary trusts would be treated for purposes of the ownership test.
A reporting company is not only required to report its beneficial owners but also any "company applicants." Under the final rule, FinCEN clarified that no more than two people need to be identified: (1) the individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States; and (2) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another. With much welcomed relief, FinCEN further made it clear that the final rule does not require reporting companies existing or registered as of January 1, 2024 to report its company applicants. In addition, reporting companies formed or registered after January 1, 2024 do not need to update company applicant information.
Beneficial Ownership Information and Company Applicants Reports
Under the Act, a reporting company must provide to FinCEN the following information for each beneficial owner and each company applicant: (i) their full legal name; (ii) birth date; (iii) a current home or work address; and (iv) a unique identification number from a non-expired US passport, a state or US tribal identification documents or lacking those, a non-expired foreign passport, along with a photo of such identification document. The final rule omits the requirement that the reported residential street address must be the address an individual uses for "tax residency" purposes. Under the final rule, the address must be the individual's current street address, but the final rule does not require that it be an address in the United States. A beneficial owner, company applicant or reporting company may request that FinCEN provide such individuals and entities with a unique identifier (a "FinCEN ID"). Once issued, a FinCEN ID can be provided in lieu of providing beneficial ownership or company applicant information, provided that such information remains up to date.
The regulations contained in the final rule will become effective on January 1, 2024. Reporting companies created or registered before January 1, 2024 will have one year to file their initial reports (i.e. until January 1, 2025), while reporting companies created or registered after January 1, 2024 will under the final rule have 30 days (instead of the 15 days under the proposed rule) after receiving notice of their creation or registration to file their initial reports. The final rule now specifies a trigger for the reporting period for an initial report for new companies created or registered after January 1, 2024. That trigger is the earlier of the date on which the reporting company receives actual notice that its creation or registration has become effective and the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created or the foreign reporting company has been registered.
Moreover, reporting companies will have 30 days to report changes to the information in their previously filed reports and must correct inaccurate information in previously filed reports within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports. FinCEN declined to provide for any longer period of time beyond 30 days to file the initial report, a corrected reporting or an updated report despite a number of comments requesting same. FinCEN also declined to provide for any extensions to file such reports.
The Act does not have a specific filing fee. FinCEN notes, however, the costs it has estimated for a reporting company to a BOI report depend on the complexity of the beneficial ownership structure of an entity. For entities with a simple structure, FinCEN estimates that it will cost a reporting company $85.14 to prepare and submit an initial BOI report. On the other end of the spectrum, FinCEN estimates that it will cost a reporting company more than $2,600 on average for entities with complex beneficial ownership structures to complete an initial filing. Despite FinCEN's estimates, it is very likely that these estimates are significantly understated.
The Act makes it unlawful for any person to willfully provide false or fraudulent BOI to FinCEN, or to willfully fail to report complete or updated BOI to FinCEN. Such a violation subjects that person to civil and criminal penalties. FinCEN intimates in its comments that whether false information was "willfully" filed would depend on all of the facts and circumstances based on existing case law, but as a general matter, FinCEN does not expect that an inadvertent mistake by a reporting company acting in good faith after diligent inquiry would constitute a "willfully" false or fraudulent violation. The final rule does not provide any other penalty relief other than to say that FinCEN will monitor the situation and consider publishing FAQs in the future.
FinCEN expects to have the infrastructure in place for reporting companies to electronically file their initial reports by the first filing deadline above.7 With final rules now confirming the due dates for filings under the Act, it is time for domestic and international clients and their advisors to start identifying all of the reporting companies in their organizational structures and gather information and necessary documents on all of the beneficial owners and company applicants. With no ability to request an extension and no specific relief from penalties at this time, it is important to avoid non-compliance.
We will continue to monitor developments of the Act. We are available to answer your questions.
1 According to FinCEN, the Act provides that foreign government access is limited to requests made by foreign law enforcement agencies, prosecutors, and judges in specified circumstances.
3 FinCEN declined to provide a definition of "foreign" and instead commented that the Act makes clear that the country of origin is relevant for the purposes of the definition of a foreign reporting company, rather than state law convention.
4 It is expected that "business trusts" are a reporting company if such type of trust is created by filing a document with a secretary of state.
5 FinCEN acknowledged requests to exempt family offices, trust companies, law firms and accounting firms, as well as other organizations that are regulated under state law. However, FinCEN's position is that any additional exemptions need to meet a "high bar" to overcome the Act's purpose.
6 In keeping with the Act, the final rule continues to exempt only five types of individuals from the definition of "beneficial owner," which consist of the following: (1) a minor child; (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 the entity and whose control over or economic benefit from such entity is derived solely from the person's employment status; (4) an individual whose only interests in the entity are through a right of inheritance; or (5) a creditor of an entity, unless the creditor exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity.
7 FinCEN notes that this is assumed based on adequate funding by the government.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.