In a purported effort to close supposed loopholes that allow illicit actors to use corporate structures such as shell companies to hide their identities and launder their ill-gotten gains in or through the United States, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) recently issued a final rule establishing beneficial ownership information reporting requirements pursuant to the Corporate Transparency Act (CTA).
The rule addresses an important deficiency in the U.S. anti-money laundering regime identified for some time by the Financial Action Task Force, which establishes international standards in the sector. FinCEN also anticipates that the new rule "will enhance the ability of FinCEN and other agencies to protect U.S. national security and the U.S. financial system from illicit use and provide essential information to national security, intelligence, and law enforcement agencies…." Which entities are subject to the rule?
The new rule will apply to most corporations; limited liability companies; limited partnerships; limited liability partnerships; and business trusts formed in, or registered to do business in, the United States (known as reporting companies). The impact of the rule will be widespread, affecting millions of businesses already operating in the United States and millions more formed each year. The rule will require the collection of sensitive personal information from the vast majority of those businesses.
What must reporting companies disclose?
The rule will require reporting companies to identify the beneficial owners and applicants of the entity. Beneficial ownership is defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns/controls at least 25% of the ownership interests of a reporting company.
The rule also contains a list of activities constituting "substantial control" of a reporting company, purportedly designed to capture anyone who is able to make important decisions on behalf of a reporting company and to close loopholes that previously allowed corporate structuring to obscure owners and/or decision makers.
The new rule defines a "company applicant" as the individual who files the document creating the entity (or, in the case of foreign company registered to do business in the United States, the person who first registers the entity to do business in the United States), or the individual who is primarily responsible for directing or controlling the filing of the aforementioned documents by another person.
When filing beneficial ownership reports with FinCEN, reporting companies will be required to identify themselves and report the following information for each beneficial owner: name, birthdate, address, and a unique identifying number from an acceptable identification document such as a driver's license or a passport. Reporting companies created after January 1, 2024, will be required to provide the same information for company applicants.
Critically, the final rule exempts 23 types of entities from the definition of reporting company (and therefore from the beneficial ownership reporting regime). These exempt entities include:
1. securities reporting issuers,
2. governmental authorities,
4. credit unions,
5. depository institution holding companies,
6. money services business,
7. brokers or dealers in securities,
8. securities exchanges or clearing agencies,
9. other Exchange Act registered entities,
10. investment companies or investment advisers,
11. venture capital fund advisers,
12. insurance companies,
13. state-licensed insurance producers,
14. Commodity Exchange Act registered entities,
15. accounting firms,
16. public utilities,
17. financial market utilities,
18. pooled investment vehicles,
19. tax-exempt entities,
20. entities assisting a tax-exempt entity,
21. large operating companies,
22. subsidiaries of certain exempt entities, and
23. inactive entities.
When does the new rule go into effect?
The new rule will take effect on January 1, 2024. Reporting companies created or registered prior to that date will have one year to file their initial reports. However, reporting companies created or registered after January 1, 2024, will only have 30 days after receiving notice of the creation or registration to file their initial reports.
All reporting companies will have 30 days to report changes to information filed in previous reports or to correct inaccurate information after becoming aware of the inaccuracy.
What is the anticipated burden on reporting companies?
FinCEN intends to develop compliance and guidance documents to help reporting companies comply with the new rule.
According to FinCEN, the rule aims to minimize burdens on small businesses and other reporting companies. The anticipated cost on companies with simple management and ownership structures, which FinCEN expects to be the majority of reporting companies, will be about $85 to prepare and submit an initial beneficial ownership report. FinCEN did not report anticipated costs for companies with more complex management and ownership structures.
What are FinCEN's next steps?
FinCEN plans to engage in further rulemaking, addressing who can access beneficial ownership information and how such information will be safeguarded, among other things. FinCEN also intends to revise its customer due diligence rule following promulgation of the new beneficial ownership "access" rule.