On September 29, 2022, FinCEN issued final regulations for the implementation of the Corporate Transparency Act (“CTA”), the law requiring disclosure of beneficial ownership information (“BOI”) by business entities. For background on the CTA, please refer to our previous alert available here. Issuance of the final regulations brings to completion a rulemaking process that was almost two years in the making. The final regulations published by FinCEN, which can be found at this link, will be codified as 31 CFR 1010.380.
The effective date of the final regulations is January 1, 2024. This will give FinCEN a little over a year to finalize development of the Beneficial Ownership Secure System (BOSS), the electronic reporting system for BOI. The public will also have time to prepare for the upcoming changes. Entities formed after January 1, 2024, will have 30 days to report beneficial ownership information. This timeframe was increased from 14 days in the proposed regulations. Entities formed prior to January 1, 2024 will have until January 1, 2025 to file a report. BOI changes will have to be reported within 30 days after the change takes place.
Reporting Companies
The final regulations identify two types of reporting companies: domestic and foreign. Domestic reporting companies are all corporations, limited liability companies or other entities formed under the laws of any State or Indian tribe. Foreign reporting companies are corporations, limited liability companies or other entities formed under the laws of a foreign country and registered to do business in any State or Indian territory.
There are significant carve-outs from the definition of “reporting companies.” The supplementary information to the regulations makes it abundantly clear that FinCEN is specifically targeting the use of “shell” companies; that is, entities without operations or employees, which can be used to conceal the identity of an illicit actor. Therefore, the final regulations exempt from BOI reporting, among others, banks and other financial institutions, publicly traded companies, and operating entities with more than 20 employees in the United States and $5 million in gross receipts.
Company Applicants
In addition to the entity identifiers, such as name, address, and tax ID number, the final regulations require a reporting company to disclose two company applicants: the person responsible for directing the filing of the document creating the entity and the person who physically files the document. In previous versions of the regulations, there was no limit on the number of company applicants, but several commenters had expressed concerns on the burden associated with disclosing a significant number of people typically associated with the creation of a new business entity.
If an entity was formed by a law firm, according to FinCEN, the reporting company would have to disclose the name of the attorney in charge of the filing and, if applicable, the name of the paralegal who physically filed the document. FinCEN believes that this information may be useful to law enforcement as they may be able to “draw connections between and among seemingly unrelated reporting companies, beneficial owners, and company applicants.”
Beneficial Ownership Information
BOI reporting is the core of the CTA. Reporting companies must disclose in a report the identity of its beneficial owners, along with the beneficial owners’ dates of birth, street addresses, and passport or other ID numbers, along with a copy of the document.
A “beneficial owner” is defined as an individual who, directly or indirectly, owns or control a 25% ownership interest in the reporting company or exercises “substantial control” over it.
An individual is deemed to exercise “substantial control” if he or she serves as a senior officer or has the power to influence major decisions of the reporting company. The “substantial control” standard adds to the definition of “beneficial owner” individuals who potentially have no ownership interest in the reporting company. For example a general manager who is merely an employee of an entity can be a beneficial owner under the broad, and somewhat misleading, definition adopted in the final regulations.
When an interest in a reporting company is held by a trust, beneficiaries of the trust will need to be disclosed, but only if the beneficiary is (a) the sole permissible recipient of income and principal from the trust, or (b) if the beneficiary has the right to demand a distribution of, or withdraw substantially all, of the assets in the trust.
Access to BOI
The CTA and the final regulations require that BOI be kept confidential. There will be no publicly searchable database. Access will be limited primarily to federal law enforcement agencies. State law enforcement will be able to access BOI only with an order from a court of competent jurisdiction. Foreign law enforcement agencies and judicial authorities may also request access to BOI. The scope and procedures for access to BOI will be the subject of proposed regulations that FinCEN will issue in the coming months.
Penalties
Failure to comply with the BOI reporting requirements of the CTA will result in steep penalties. Reporting companies will be subject to a civil penalty of $500 for each day of noncompliance. Individuals who willfully provide false information or fail to file a report may also be fined up to $10,000 or imprisoned for up to 2 years.
What Comes Next
FinCEN will issue additional regulations in the coming months, particularly as it concerns access to BOI and the BOSS system. FinCEN is also expected to release Frequently Asked Questions, offering guidance on some of the provisions that remain unclear or potentially ambiguous.
The information contained in this document does not constitute legal advice.
