The Financial Crimes Enforcement Network of the Department of Treasury (FinCEN) has made it clear that the reporting obligations imposed on corporations, LLCs, and other “similar” entities under the new Corporate Transparency Act (CTA) are anything but clear.
The CTA, which likely will present a significant filing burden for many small and medium-sized businesses, was part of the National Defense Authorization Act, passed by Congress on January 1, 2021. Among other things, the CTA makes FinCEN responsible for collecting data surrounding the ownership of corporations and other entities. The CTA requires “Reporting Companies” to report the identities and information concerning their “Beneficial Owners” at the time of formation or registration of the Reporting Company and within one year after the date on which there is change with respect to any information previously reported. Entities that were in existence at the time of adoption of the regulations under the CTA and that qualify as Reporting Companies also have a reporting obligation. The effectiveness of the CTA is subject to the adoption of Regulations, which is anticipated to take place within the next two years.
Since the passage of the CTA, commenters have voiced a host of questions concerning the meanings of many of its terms in the CTA and the application of the CTA itself. For the purpose of drafting Regulations, FinCEN recently posted an extensive list of questions with respect to which it is seeking public input. The following is a relatively small sample of this extensive list of questions, but it provides a good flavor of the complexity and potential implications of this new act:
- The CTA requires information concerning corporations, LLCs and “similar entities.” How should FinCEN interpret the phrase “other similar entity;” what factors should FinCEN consider in determining whether an entity qualifies as a similar entity; and what types of entities other than corporations and LLCs should be considered similar entities?
- The CTA limits the definition of reporting companies to corporations, LLCs, and other similar entities that are “created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe” or “registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.” Does this language describe corporate filing practices and the applicable law of the states and Indian tribes sufficiently clearly to avoid confusion about whether an entity does or does not meet this requirement?
- The CTA defines the “beneficial owner” of an entity, subject to certain exceptions, as “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise” either “exercises substantial control over the entity” or “owns or controls not less than 25 percent of the ownership interests of the entity.” Is this definition, including the specified exceptions, sufficiently clear, or are there aspects of this definition and specified exceptions that FinCEN should clarify by regulation? Should the definition of Beneficial Owner be harmonized with the definition of that term adopted under the Securities Exchange Act of 1934?
- Should FinCEN define either or both of the terms “own” and “control” with respect to the ownership interests of an entity? If so, should such a definition be drawn from or based on an existing definition in another area, such as securities law or tax law?
- Should FinCEN define the term “substantial control?” If so, should FinCEN define “substantial control” to mean that no reporting company can have more than one beneficial owner who is considered to be in substantial control of the company, or should FinCEN define that term to make it possible that a reporting company may have more than one beneficial owner with “substantial control?”
- The CTA defines the term “applicant” as an individual who “files an application to form” or “registers or files an application to register” a reporting company under applicable state or tribal law. Is this language sufficiently clear, in light of current law and current filing and registration practices, or should FinCEN expand on this definition, and if so how?
- In addition to the statutory exemptions from the definition of “reporting company,” the CTA authorizes the Secretary, with the concurrence of the Attorney General and the Secretary of Homeland Security, to exempt any other entity or class of entities by regulation, upon making certain determinations. Are there any categories of entities that are not currently subject to an exemption from the definition of “reporting company” that FinCEN should consider for an exemption pursuant to this authority, and if so why?
- If a trust or special purpose vehicle is formed by a filing with a secretary of state or a similar office, should it be included or excluded from the reporting requirements?
- How should a company’s eligibility for exemption from the reporting requirements be determined? Should there be different information requirements for operating companies and holding companies, for active companies and dormant companies, or are there other bases for distinguishing between types of companies? Should exempt entities be required to file periodic reports to support the continued application of the relevant exemption?
- What information should FinCEN require a reporting company to provide about the reporting company itself to ensure the beneficial ownership database is highly useful to authorized users?
- What information should FinCEN require a reporting company to provide about the reporting company’s corporate affiliates, parents, and subsidiaries, particularly given that in some cases multiple companies can be layered on top of one another in complex ownership structures?
- Should a reporting company be required to provide information about the reporting company’s corporate affiliates, parents, and subsidiaries as a matter of course, or only when that information has a bearing on the reporting company’s ultimate beneficial owner(s)?
- What information, if any, should FinCEN require a reporting company to provide about the nature of a reporting company’s relationship to its beneficial owners (including any corporate intermediaries or any other contract, arrangement, understanding, or relationship), to ensure that the beneficial ownership database is highly useful to authorized users?
- What burdens are anticipated in connection with the new reporting requirements? How could FinCEN minimize any such burdens on reporting companies associated with the collection of beneficial ownership information in a manner that ensures the information is highly useful in facilitating important national security, intelligence, and law enforcement activities and confirming beneficial ownership information provided to financial institutions, consistent with its statutory obligations under the CTA?
- What should reporting companies or individuals holding FinCEN identifiers be required to do to satisfy the requirement that they update in a timely manner the information they have submitted when it changes, such as when beneficial owners or holders of FinCEN identifiers (i) transfer substantial control to other individuals; (ii) change their legal names or their reported residential or business street addresses; (iii) die; or (iv) when a previously acceptable identification document expires? For example, should the reporting companies or individuals be required to file a new report, or provide notice only of the information that has changed?
- Should reporting companies be required to affirmatively confirm the continuing accuracy of previously submitted beneficial ownership information on a periodic basis (e.g., annually)? How should such confirmation be communicated to FinCEN?
- For those reporting companies without FinCEN identifiers, what should be considered a “timely manner” for updating a change in beneficial ownership? How much time should reporting companies be given to update beneficial owner information upon a change of ownership?
- The CTA contains a safe harbor for persons who seek to correct previously submitted but inaccurate beneficial ownership information pursuant to FinCEN regulations. How should FinCEN’s regulations define the scope of this safe harbor? Should the nature of the inaccuracy (e.g., a misspelled address versus the complete omission of a beneficial owner) be relevant to the availability of the safe harbor?
- What steps should reporting companies be required to take to support and confirm the accuracy of beneficial ownership information? Should reporting companies be required to certify the accuracy of their information when they submit it? Should reporting companies be required to submit copies of a beneficial owner’s acceptable identification document? Should a reporting company be required to report information about a company’s “applicant” or “applicants” (the individual or individuals who file the application to form or register a reporting company) in any report after the reporting company’s initial report to FinCEN? Why or why not?
Finally, FinCEN acknowledges that “[t]he process of forming legal entities may have ramifications that extend beyond the legal and economic consequences for legal entities themselves, and the reporting of beneficial ownership information about legal entities may have ramifications that extend beyond the effect of mobilizing such information for AML/CFT purposes.” Very significantly, it asks “[h]ow can FinCEN best engage representatives of civil society stakeholders that may not be directly affected by a beneficial ownership information reporting rule but that are concerned for such larger ramifications?”
Without doubt, the CTA, regardless of FinCEN’s attempt to answer these questions in Regulations, will bedevil business owners for many years to come.