On September 30, 2022, the U.S. Treasury Department's Financial Crimes Enforcement Network ("FinCEN") published its long-anticipated final rule (the "Final Rule") implementing the beneficial ownership information reporting requirements of the Corporate Transparency Act (the "CTA").1 Under the Final Rule, which is the first of three rulemakings that FinCEN plans to undertake to implement the CTA, legal entities created or registered to do business in the United States will need to report beneficial ownership information into a centralized governmental database.
Tens of millions of legal entities, including certain holding companies, special purpose entities and investment vehicles, likely will be impacted by the Final Rule. The creation of a corporate registry at FinCEN signals a landmark change to U.S. corporate law, which international bodies have long criticized for insufficient transparency.
The Final Rule describes who must report beneficial ownership information, what information must be reported and when reports are due. As described in the preamble to the Final Rule, the requirements outlined in FinCEN's December 8, 2021 proposal (the "Proposed Rule") are being implemented largely as proposed, with a few modifications.2
The Final Rule is effective January 1, 2024, with reporting companies created or registered to do business before that date having until January 1, 2025 to file their initial reports. Importantly, the effective date specified in the Final Rule assumes that FinCEN will receive adequate funding to hire necessary staff to conduct outreach to stakeholders, design and build the secure database that will receive, store and maintain reported information and implement related rulemakings.
In this Client In Depth, we describe the Final Rule's key provisions and implications for reporting entities and their owners, control persons and formation or registration agents.
The CTA requires various legal entities organized or registered to do business in the United States to report beneficial ownership information to FinCEN. The law also requires FinCEN to maintain a secure, nonpublic database of this information for use, under varying conditions, by national security, intelligence and law enforcement agencies, federal functional regulators and financial institutions.
The beneficial ownership reporting provisions of the CTA have been a particular focus of the Biden Administration and are expected to "help prevent drug traffickers, fraudsters, corrupt actors such as oligarchs, and proliferators from laundering or hiding money and other assets in the United States."3 Recent attempts by Russian elites, stateowned enterprises and organized crime, as well as Russian government proxies, to use shell companies to evade sanctions on Russia "reinforce the point that abuse of corporate entities ... presents a direct threat to the U.S. national security and the U.S. and international financial systems" and underscore the need for beneficial ownership reporting.4
Ultimately, the Final Rule allows the United States to join at least 30 countries that have some form of beneficial ownership registry, and U.S. efforts to collect beneficial ownership information are hoped to "spur similar efforts by foreign jurisdictions" to make it more difficult for bad actors to conceal their activities.5
KEY COMPONENTS OF THE FINAL RULE
Who is required to submit beneficial ownership reports, and who is exempt?
- Reporting Companies. A "reporting company" under the Final Rule is either: (i) a domestic reporting company created by the filing of a document with a secretary of state or similar office under the law of a U.S. state or Indian tribe; 6 or (ii) a foreign reporting company formed under the law of a foreign country and registered to do business within the United States by the filing of a document with a secretary of state or similar office, in each case unless an exemption applies.7 In this regard, the Final Rule adopts the Proposed Rule's definition of reporting company and exemptions from the reporting requirements without significant changes.
- Exemptions. The Final Rule exempts 23 types of entities, as specifically set out in the CTA, from the definition of reporting company. FinCEN noted in the preamble to the Final Rule that the definition of reporting company is broad, that the 23 exemptions are "carefully circumscribed" and that any expansion of these exempt categories would require "consultation and specific findings that [beneficial ownership] reporting would not be highly useful" to law enforcement.8 The exemptions remain largely unchanged from the Proposed Rule, with only a few minor modifications.
Exempt entities include publicly traded companies; banks; bank holding companies; money services businesses registered with FinCEN; broker-dealers registered with the Securities and Exchange Commission (the "SEC"); SEC-registered investment advisers ("RIAs") and investment companies; securities exchanges, clearing agencies and other entities registered with the SEC or the Commodity Futures Trading Commission (the "CFTC"); and operating companies with more than 20 full-time employees, annual gross receipts or sales of greater than $5 million and an operating presence at a physical office in the United States.
Certain pooled investment vehicles ("PIVs") operated or advised by RIAs and other exempt financial institutions also are exempt. However, FinCEN declined to extend the PIV and RIA exclusions to certain related entities, as described below. FinCEN also declined to exempt from the reporting requirements intermediate holding companies established by foreign banks that are not bank holding companies, commodity pools that are operated by CFTC-registered commodity pool operators or advised by CFTC-registered commodity trading advisors, family offices, stateregistered money services businesses and entities registered in jurisdictions where beneficial ownership information is readily accessible, among other exemptions requested by commenters on the Proposed Rule.9 FinCEN stated in the preamble to the Final Rule that it will continue to consider potential exemptions, including the extent to which certain entities may already report their beneficial owners to the federal government through means other than the CTA.10
- No Exemption Certification Requirement. The Final Rule does not require exempt entities to file a form or obtain an exemption certificate to claim an exemption.
1. 87 Fed. Reg. 59498 (Sept. 30, 2022), available here.
3. See 31 U.S.C. 5336(b)(4)(B).
4. See 86 Fed. Reg. 17557 (Apr. 5, 2021) (advance notice of proposed rulemaking); Debevoise In Depth, Debevoise Insight: Round-up of Recent Anti-Money Laundering Developments, available here.
5. The White House, United States Strategy on Countering Corruption (Dec. 2021), available here.
6. Id. at page 20-21.
7. See FinCEN Press Release, FinCEN Issues Proposed Rule for Beneficial Ownership Reporting to Counter Illicit Finance and Increase Transparency, available here.
8. See FinCEN Fact Sheet: Beneficial Ownership Information Reporting Notice of Proposed Rulemaking (NPRM), available here.
9. See 31 U.S.C. 5336(a)(11)(B).
10. In accordance with the CTA, five types of individuals are exempt from the definition of "beneficial owner," subject to proposed clarifications to ensure that reporting companies identify real parties in interest: (i) minor children; (ii) nominees or other intermediaries; (iii) employees; (iv) inheritors; and (v) creditors. See 31 U.S.C. 5336(a)(3)(B).
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