On September 30, 2022, the Financial Crimes Enforcement Network (“FinCEN”) of the United States Treasury issued a new final rule (“Final Rule”), requiring certain entities to file with FinCEN reports that identify two categories of individuals:
- the beneficial owners of the entity, and
- individuals who have filed an application with specified governmental authorities to create the entity or register it to do business.
Companies created after January 1, 2024, will be required to file this information within thirty (30) days of their creation, while existing companies will be required to file this information by January 1, 2025.
According to the Final Rule itself, it was issued to combat “[i]llicit actors [who] frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system.” The Final Rule implements Section 6403 of the Corporate Transparency Act (“CTA”) and was adopted pursuant to the comprehensive revisions to the United States anti-money laundering statutes, as part of the National Defense Authorization Act for Fiscal Year 2021. The Final Rule is a major departure from the current system of FinCEN’s regulations regarding the identification of the beneficial ownership of legal entities, which only requires banks, other lenders, and certain other financial intermediaries to obtain a limited amount of beneficial ownership information (“BOI”) prior to engaging in a financing transaction or opening an account relationship with a covered legal entity — known as the “CDD Rule”, as it requires customer due diligence by financial institutions. As a result of the new rule the scope of reportable BOI will be greatly expanded, and, by January 1, 2025, the Final Rule will require millions of existing and newly-formed smaller-sized legal entities to register directly with FinCEN. In fact, the Final Rule “estimates that there will be approximately 32.6 million reporting companies in Year 1, and 5 million additional reporting companies each year in Years 2-10.”
Entities that will have to report under the Final Rule include corporations, limited liability companies, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships. The Final Rule divides reporting companies into two types: domestic and foreign. A domestic reporting company is created by the filing of a document with a secretary of state or any similar office under the law of a state, the District of Columbia or an Indian tribe. A foreign reporting company is formed under the law of a foreign country that is registered to do business in any state, the District of Columbia or a tribal jurisdiction by the filing of a document with a secretary of state or any similar office. Under the Final Rule, twenty-three (23) types of entities do not have to report, including, without limitation, governmental authorities and banks. Other types of legal entities, including certain trusts, are also excluded from the reporting requirements to the extent that they are not created by the filing of a document with a secretary of state or similar office. While none of these exceptions apply directly to small businesses, there is a reporting requirement exception for nonprofit corporations (small or large).
Owners of any legal entity should note that, under the Final Rule, a “beneficial owner” now includes any individual who either:
- owns or controls at least twenty-five percent (25%) of the ownership interests of a reporting company; or
- exercises “substantial control” over – i.e., make important decisions for — the reporting company. Prior to the implementation of the Final Rule, a “beneficial owner” did not include individuals exercising “substantial control” over a reporting company.
This change will have a material effect on any non-exempt entities on a going forward.
Entities should be aware that the Final Rule is actually the first in a series of proposed regulations that FinCEN has planned in order to implement the CTA’s legal entity reporting requirements. It is expected that the next proposed rule will create regulations establishing who may request BOI from FinCEN, who may receive it, how recipients may use the information, how they must secure the information, and the penalties for failing to follow applicable requirements. This next proposed rule was submitted for public comment on December 16, 2022, and the commenting period ended on February 14, 2023.
Please note that this blog post provides general information regarding FinCEN’s Final Rule and the effect it may have on entities. If you are a small business owner or the owner or manager of a legal entity, it is important to reach out to a member of your legal team, who can provide more specific advice based on the facts and circumstances relating to your entity, including whether or not your entity is required to register with FinCEN in accordance with the Final Rule. Additionally, as mentioned above, determining registration requirements requires a thorough review of the legal structure and type of business your entity is. As such, the information in this blog post is merely an overview and cannot be applied to your specific set of facts without additional information.
[View source.]
