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FinCEN Issues Final Rule for CTA’s Beneficial Owners Reporting Requirements

White Collar Defense & Investigations

Congress passed the Corporate Transparency Act of 2021 (CTA) as part of the Anti-Money Laundering Act of 2020 (AMLA) included in the National Defense Authorization Act (NDAA). The CTA created a beneficial ownership registry within the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). On September 29, 2022, FinCEN issued a final rule implementing the beneficial ownership information (BOI) reporting requirement of the CTA, which will go into effect on January 1, 2024. Reporting companies created or registered before January 1, 2024 will have one year to file their initial reports, whereas reporting companies created or registered on or after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.

Unless they are exempt under the CTA, companies will be required to submit information to FinCEN on their beneficial owners or face the prospect of civil and criminal penalties if they fail to comply. FinCEN estimates that most of the 32 million companies anticipated to be subject to the Final Rule will be small businesses, single-owner LLCs, or other types of business entities with four or fewer beneficial owners. The overall compliance costs could reach $22.8 billion for the first year and $5.65 billion annually after that.[1]

AMLA Background

The NDAA took center-stage when former President Trump vetoed the bill in 2021, taking issue with the bill’s failure to repeal Section 230 of the Communications Decency Act. Following a veto override, however, the NDAA became law, marking the 59th consecutive year in which some form of the NDAA has been passed. This Section 230 scuffle diverted attention away from the AMLA, a separately named Act within the NDAA. The AMLA represented the most significant reform to anti-money laundering laws in two decades, since the 2001 USA PATRIOT Act.

Among the AMLA’s sweeping reforms are efforts to strengthen FinCEN, extend the reach of the Bank Secrecy Act (BSA), and expand the Department of Justice and Treasury Department’s ability to subpoena foreign financial institutions. The AMLA also enhanced incentives, as well as protections, for whistleblowers who provide information leading to a successful money laundering enforcement action under the BSA. Modeled after the Securities and Exchange Commission’s program, the BSA’s reinvigorated whistleblower program reflects a more robust approach to whistleblower incentives and protections. Whistleblowers are now eligible for awards when they volunteer “original information” to the DOJ, the Treasury Department or the whistleblower’s employer, and when that information results in a successful enforcement action and monetary sanctions exceeding $1 million.

CTA Beneficial Ownership Registry

For years, federal regulators have grappled with the issue of so-called “shell companies” utilized by bad actors, such as money launderers and terrorists, to funnel money into illicit activities.

Financial institutions have been tasked with the responsibility of discerning the true ownership of business entities under “know your customer” guidelines, instituted as part of the 2001 PATRIOT Act. The CTA attempts to shift this burden from financial institutions to companies themselves. For the first time, the CTA requires certain companies to disclose ownership information directly to a government agency.

Widely considered to be a crackdown on shell companies, Section 6403 of the CTA, a separately named Act within the AMLA, introduces new disclosure requirements, under which “reporting companies” must disclose their “beneficial owners” and “company applicants” to FinCEN.

Paired with this new disclosure requirement is the establishment of a beneficial ownership registry, also maintained by FinCEN. This new registry furnishes law enforcement with added capabilities to lift the shroud of anonymity underlying the true ownership of certain business entities. The new registry also raises privacy concerns, especially for the many legitimate businesses which will nonetheless be tasked with complying with the new disclosure requirements.

A “beneficial owner” is one who either “exercises substantial control over the entity” or who “owns or controls not less than 25 percent of the ownership interests of the entity.”

The “company applicant” is the individual who files the document that forms the entity for a domestic reporting company or the individual who files the document that registers the entity to do business in the United States for foreign reporting companies. Where more than one individual is responsible for the applicable filing, the company applicant is the individual who is primarily responsible for directing or controlling the filing.

The key issue for businesses is determining whether they are a “reporting company” required to disclose their beneficial owner(s) and company applicant. A “reporting company” is defined broadly to include a “corporation, limited liability company, or other similar entity” registered under state law, or, formed under the laws of a foreign country and registered to do business in the United States.

However, the CTA includes 23 categories of entities that are exempted from the new reporting requirement, the most significant of which include:

  • Publicly traded companies;
  • Banks, bank holding companies, and credit unions;
  • Securities brokers or dealers;
  • Investment companies and advisors;
  • Insurance companies;
  • Public accounting firms; and
  • 501(c) and political organizations

The rationale for these exemptions is that these types of companies typically already disclose beneficial ownership information pursuant to other state and federal laws.

There is another, more general exemption geared towards rooting out suspected shell companies. An entity is exempt from the reporting requirement if it:

  1. Employs more than 20 full-time employees;
  2. Files taxes demonstrating more than $5,000,000 in gross receipts or sales; and
  3. Has an operating presence at a physical office in the United States.

If an entity does not fall within a statutory exemption, the entity is a “reporting company”.

FinCEN Issues Final Rule Implementing CTA BOI Reporting Requirement

The CTA mandated that FinCEN promulgate implementing regulations on the beneficial ownership provisions. FinCEN issued an advance notice of proposed rulemaking (ANPR) in April 2021 seeking public comments on the CTA BOI disclosure requirements. On September 29, 2022, after the close of public comments, FinCEN issued a final rule implementing the BOI reporting requirement of the CTA (Final Rule).[2]

The Final Rule is very detailed and includes many exceptions from reporting. The Final Rule requires certain domestic and foreign entities to submit specified ownership interests to FinCEN and will go into effect on January 1, 2024.[3] Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered on or after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.

Under the Final Rule, a reporting company’s an initial report to FinCen will need to disclose the following information for the reporting company itself, each of its beneficial owners and, for entities formed on or after January 1, 2024, its company applicant. A reporting company that was formed prior to January 1, 2024 does not need to provide information regarding its company applicant.

Reporting Company:

  1. the full legal name and any trade name or “doing business as” name of the reporting company;
  2. A complete current address consisting of (a) in the case of a reporting company with a principal place of business in the United States, the street address of such principal place of business or (b) in all other cases, the street address of the primary location in the United States where the reporting company conducts business;
  3. the state or Tribal jurisdiction of formation of the reporting company (or for a foreign reporting company, the state or Tribal jurisdiction where such company first registers); and
  4. the Internal Revenue Service Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) of the reporting company, or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction.

Each Beneficial Owner and Company Applicant:

  1. the full legal name of the individual;
  2. the date of birth for the individual;
  3. A complete current address consisting of (a) in the case of a company applicant who forms or registers an entity in the course of such company applicant’s business, the street address of such business or (b) in all other cases, the individual’s residential street address;
  4. a unique identifying number and the issuing jurisdiction from one of the following documents (a) a non-expired photo identification document issued to the individual by the United States government, state, local government or Indian tribe (e.g., a passport or driver’s license) or (ii) a non-expired passport issued by a foreign government if the individual does not possess any of the foregoing documents; and
  5. an image of the identification document described above.

In addition to filing the initial report discussed above, the Final Rule requires reporting companies to file updated reports within 30 days of a change in the information previously reported to FinCen or the date that a reporting company becomes aware, or has reason to know, that previously reported information is inaccurate.

FinCEN will undertake additional rulemaking to establish who may access BOI and for what purposes. In addition, FinCEN is developing a “Beneficial Ownership Secure System” to implement the confidentiality requirements of the CTA. FinCEN will likely release notices relating to such proposed regulations in the near future.

Potential Implications for Companies

Violations of the CTA, including failing to report BOI or reporting false or fraudulent information, can lead to civil or criminal penalties. Civil penalties can be up to $500 for each day the violation continues. Criminal penalties include fines up to $10,000 and/or imprisonment for up to two years.[4] These severe penalties mean that companies will need to carefully consider the Final Rule’s detailed definitions and exemptions before deciding whether or not to report to FinCEN.

Conclusion

The new reporting requirements implemented under the CTA and the Final Rule will likely present significant compliance hurdles for our clients. In particular, certain industries (e.g. real estate) have become accustomed to forming a multitude of private non-operating entities for liability segregation among other business reasons. Such entities will be required to comply with the new reporting obligations.

Companies that will not be exempt from the new reporting requirements should begin assessing their reporting obligations and identifying their “beneficial owners”. Policies and procedures should also be implemented to track changes to information that will be provided on the BOI reports to ensure that updated reports are filed timely.

Please contact us if you have any questions about the CTA or the Final Rule.

About the Author:

Vince Farhat is the chair of JMBM’s White Collar Defense and Investigations practice. He previously served as an Assistant United States Attorney in the Major Frauds Section of the U.S. Attorney’s Office for the Central District of California. While in Major Frauds, Vince served as the Criminal Healthcare Fraud Coordinator for the U.S. Attorney’s Office and oversaw the investigative activities of the U.S. Department of Justice Medicare Fraud Strike Force for the Central District.

 

[1]  Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 at 59581 (Sept. 30, 2022)

[2]  https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet

[3]  https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements)

[4]  31 U.S.C. 5336(h)(3)(A)