Takeaways

• Under the final rule, many domestic and foreign companies must report information regarding themselves and their beneficial owners and company applicants to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).
• Absent exemptions, companies subject to these reporting requirements include nearly all corporations, limited liability companies, limited liability partnerships, limited liability limited partnerships, business trusts and limited partnerships.
• The rule becomes effective January 1, 2024, at which time (i) reporting companies that existed prior to the effective date must file their initial report within one year, (ii) new companies that are formed after the effective date must file their initial report within 30 days from their initial creation or registration date, and (iii) existing companies with changes to their beneficial owners must file an updated report within 30 days of the change.
• Noncompliance with the rule may subject companies and their senior officers to penalties under the bipartisan Corporate Transparency Act (CTA) – including criminal penalties for willful violations.

Background

On September 29, 2022, FinCEN issued a final rule requiring most corporations, limited liability companies and other entities created in or registered to do business in the United States to report information regarding their beneficial owners to FinCEN. The rule – the first of three rulemakings planned to implement the CTA, which was enacted as part of the Anti-Money Laundering Act of 2020 – supports ongoing efforts to enhance the transparency of the U.S. financial system and to stop criminal actors from processing illicit financing through the United States. The rule and its accompanying release and fact sheet note that recent events have revealed how illicit actors and corrupt officials evade detection by using shell or front companies to launder money in the United States.

Broad Application to Many Domestic and Foreign Companies

The rule applies to a wide array of both domestic and foreign companies that do business in the United States. Specifically, domestic reporting companies include all entities that are created by a filing with a secretary of state or similar office under U.S. state or tribal law, and foreign reporting companies include entities formed under the law of a foreign country that are registered to do business in any state or tribal jurisdiction through filing with a domestic secretary of state or similar office.[1] Given these broad definitions, companies subject to reporting requirements will include – subject to certain exemptions listed below – nearly all corporations, limited liability companies, limited liability partnerships, limited liability limited partnerships, business trusts and limited partnerships. 

The rule nevertheless exempts the following types of companies from the reporting requirements because many of them are already subject to substantial regulation and oversight or currently must provide their beneficial ownership information to a governmental authority:[2]

• Securities issuers;
• Domestic governmental authorities;
• Banks;
• Domestic credit unions;
• Depository institution holding companies;
• Registered money services businesses;
• Securities brokers or dealers registered with the Securities and Exchange Commission (SEC);
• SEC-registered securities exchanges or clearing agencies;
• SEC-registered investment advisers or investment companies;
• Other entities registered with the SEC;
• Venture capital fund advisers;
• Insurance companies;
• State-licensed insurance providers;
• Entities registered with the Commodity Futures Trading Commission;
• Accounting firms;
• Public utilities;
• Financial market utilities;
• Pooled investment vehicles that are advised by banks, credit unions, securities brokers or dealers, investment advisers, investment companies, or venture capital fund advisers;
• Domestic tax-exempt entities;
• Entities that assist domestic tax-exempt entities;
• Large operating companies that (i) employ more than 20 full-time employees in the United States, (ii) operate a physical office in the United States, and (iii) filed a federal income tax form for the previous year reflecting more than $5 million in gross sales;
• Subsidiaries of certain exempt entities; and
• Inactive entities.

Other types of entities, including certain trusts, are excluded by definition because they are not created by the filing of a document with a secretary of state or similar office.

Reporting Companies Must Identify Beneficial Owners and Company Applicants

Effective January 1, 2024, all other companies that are incorporated or registered to do business in the United States must file reports with FinCEN identifying their beneficial owners and company applicants as follows:[3]

• By January 1, 2025, for all companies that existed prior to the effective date;
• Within 30 days from the initial creation or registration date, for all companies that did not exist or do business in the United States prior to the effective; and
• Within 30 days from any change in beneficial ownership information for all reporting companies.

According to the rule, a “beneficial owner” is any individual who, directly or indirectly, either (i) exercises “substantial control” over a reporting company or (ii) owns or controls at least 25 percent of its “ownership interest.”[4] The rule broadly defines “substantial control” to cover senior officers and anyone else who is able to make important decisions, and provides several examples of ways an individual may attempt to conceal their control of an entity through, among others, board representation, intermediary entities, and nominee arrangements.[5] Notably, all individuals who exercise “substantial control” over a reporting company must be identified, unlike FinCEN’s customer due diligence rule that currently requires only one individual who exercises substantial control over the company be identified.[6] Similarly, the rule broadly defines “ownership interest” to cover traditional equity, structured products, and other arrangements that establish ownership as held directly by the individual or indirectly by the individual’s agent.[7]

Meantime, a “company applicant” includes those individuals who file the document creating or registering the entity in the United States and those individuals who are primarily responsible for either directing or controlling the filing of the document by another.[8] Companies registered and existing prior to the rule’s effective date need not report information about their company applicants, but new companies must do so.

Unless a reporting company obtains a FinCEN identifier that can be provided in lieu of identifying information, it must report the following information for all beneficial owners and company applicants: (i) name, (ii) birthdate, (iii) address, and (iv) a passport number or other unique identifying number as well as an image of the document displaying this number.[9] The company must also report the following information for itself: (a) full legal name, (b) any trade name or “doing business as” name, (c) complete current address, (d) jurisdiction of formation or registration, and (e) taxpayer identification number.[10]

Reporting Violations

The rule makes it unlawful for willful violations – including providing false or fraudulent identifying information or failing to provide or update beneficial ownership information – by individuals who caused the failure or are a senior officer of the entity at the time of the failure.[11] FinCEN warned that its “approach of holding individuals in these specific positions of authority responsible for ensuring that the information filed with FinCEN is correct and up to date provides additional clarity and certainty and appropriately rests that obligation with those in charge of an entity.” Nevertheless, while FinCEN recognized that violation determinations are inherently factual in nature, it noted that it did “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.” 

Conclusion

This rule appears to be the most recent development in what may be a flurry of activity by FinCEN. In particular, the fact sheet accompanying the final rule indicates that FinCEN will develop guidance documents to help companies comply with this rule, and that it expects to promulgate two additional rules to further implement the CTA by (i) identifying who may be granted access to beneficial ownership information and for what purposes, (ii) establishing guidance on the appropriate safeguards to secure this information, and (iii) revising FinCEN’s existing customer due diligence rule. As FinCEN further implements the CTA and revises existing rules, BakerHostetler and our cross-disciplinary team of attorneys – composed of former prosecutors, regulators, Capitol Hill staff members and in-house counsel – will continue to report on these developments and remain available to help clients with their attendant regulatory reporting and compliance obligations. 

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