Executive Summary
On Sept. 29, 2022, the Department of the Treasury issued final regulations implementing the 2021 Corporate Transparency Act. Under the rules, starting in 2024, certain companies will need to report to FinCEN certain information about their owners and the individual(s) registering them. These rules will require companies to adopt processes and procedures to comply with the Act. The regulations are an important step in the US governments’ efforts to promote transparency in line with international norms and combat money laundering, terrorist financing and tax evasion.
In detail
On Sept. 29, 2022 the Department of the Treasury issued final regulations implementing the 2021 Corporate Transparency Act (CTA or the Act), which requires corporations, limited liability companies (LLCs) and other companies organized in or registered to do business in the US to report information about their beneficial owners and the individual(s) registering these companies to Treasury’s Financial Crimes Enforcement Network (FinCEN).With these final regulations, which become effective Jan.1, 2024, the Department of Treasury can move forward with the implementation of the reporting requirement. Most importantly, the final regulations give entities formed on or after Jan. 1, 2024 thirty (30) days (instead of the originally proposed 14 days to file beneficial owner reports and disclose company applicants to FinCEN while entities formed before Jan. 1, 2024 will have an additional year until Jan. 1, 2025 to file their reports on beneficial owners and are not required to disclose information on company applicants.
Reportable data under the final regulations includes the beneficial owner’s name, birthdate, address and unique identifying number. The rules are expected to impact a significant number of US domestic and as well as offshore entities. As such, companies may need to modify their systems and procedures for tracking and documenting beneficial owners and company applicants and should be prepared to collect or report this data to FinCEN under provisions of the Act.
Background
Treasury released proposed rules implementing the beneficial ownership information reporting provisions of the Act on Dec. 7, 2021. On Sept. 29, 2022, final regulations implementing section 6403 of the Act, which was enacted into law as part of anti-money laundering provisions of the National Defense Authorization Act for Fiscal Year 2021 (NDAA). The rules were intended to protect national security and strengthen the integrity and transparency of the US financial system by stopping criminal actors from using anonymous shell companies to hide illicit proceeds. The final regulations describe who must file a report, what information must be provided and when a report is due. The reporting rule is one of three rules planned as part of implementing the Act. FinCEN has indicated that it will provide additional rules or guidance on customer due diligence, who may access beneficial ownership information and for what purpose and what safeguards will be required to ensure that the information is secured and protected.
Pursuant to the Act, newly formed and existing corporations, LLCs, LPs and other registered entities and those persons responsible for their management will be required to submit information about the ownership of such entities to FinCEN. The final rules are the final step for the implementation of the Act, aimed at combating secrecy, money laundering, tax fraud and corruption as well as improving transparency. The rules require certain entities to file reports with FinCEN that identify two categories of individuals: (1) the beneficial owners of the entity, and (2) individuals who have filed an application with specified governmental authorities to create the entity or register it to do business.
Now that the rules have been finalized, any person involved in forming and managing entities in scope for the Act should be prepared to meet these disclosure requirements.The reporting requirement will require entities and responsible parties to implement procedures and report information about their beneficial owners upon the formation of an entity and upon certain changes in ownership, creating an ongoing compliance obligation. Additionally, existing entities will need to file an initial report providing information about their beneficial owners within a year of the rules becoming effective.
Additionally, owners of such entities should understand that FinCEN will be collecting information about their interests in reporting entities. While such information will not be made available to the public, it will be provided to law enforcement agencies, at home and abroad, and, eventually, to financial institutions as needed to carry out their regulatory functions.
Effective date of the rules
Of note, the final regulations provide rules on when companies and their managers must file the information reports. Fortunately, the regulations provide that reporting requirements will not commence until after 2023, giving companies some time to prepare for the reporting and allowing for the Department of the Treasury to create forms.
Generally, the rules become effective on Jan. 1, 2024. Reports for companies formed after Jan. 1, 2024 are due 30 days after receiving notice that its registration has taken effect. For companies formed before Jan. 1, 2024, their reports are due by Jan. 1, 2025, so such companies have one year to comply with the reporting requirement after the rules take effect on Jan. 1, 2024. Whenever there are changes in beneficial ownership that require an updated report, a company has 30 days from the change to file the updated report.
The following discussion addresses the reporting generally, leaving the details for later publication.
Types of companies subject to reporting
Generally, beneficial owner reports are required for companies that are registered in a state. Such companies generally include domestic corporations, LLCs, limited partnerships and similar entities that are created by filing a document with a secretary of state or similar office under the law of a state. Additionally, a foreign entity may be required to file a beneficial owner report if it registers with a state to do business there.
Exceptions
There are several exceptions for certain large operating companies that meet certain thresholds and for companies that are already subject to extensive regulation, such as publicly traded companies, banks and other financial institutions. The threshold for a company to meet the exception for large operating companies is that it must operate in the US, have 20 or more full-time employees and earn more than $5 million in sales.
Information required to be reported
Under the final regulations, a company must report to the Treasury information about its “beneficial owners”. The final regulations define a beneficial owner as any individual who, directly or indirectly, exercises substantial control over the entity or owns 25% or more of the company. The regulations provide extensive rules on how to determine whether the ownership threshold had been met and on the definition of substantial control. Substantial control includes acting as a senior officer, having substantial influence over important matters of the company and having authority over the removal or appointment of senior officers or a dominant majority of the board of directors,
The company must provide identifying information about its beneficial owners, including:
- Full legal name
- Date of birth
- Address
- Identifying number, such as a passport or driver’s license
Additionally, newly formed reporting companies will need to provide the same information about its ‘company applicant’. The final regulations define the company applicant as the person that either (i) files the formation documents or registers the company with the state or country of organization or (ii) is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document. There was some concern that reporting company applicants would create a hardship for longstanding entities for which the company applicant would be hard to locate. In response to this concern, the final regulations eliminate the requirement for companies existing prior to Jan. 1, 2024 to report company applicants.
Conclusion
CTA and its beneficial owner reporting provisions will affect many businesses as well as the underlying individuals being reported as beneficial owners and the professionals that are involved in the formation of these entities. In order to comply with reporting requirements, it is imperative that companies and their advisors evaluate whether their legal entities and beneficial owners are subject to reporting under the Act now and modify their systems and procedures to capture reportable data and prepare for the filing. While there is some time before the reporting requirement becomes effective on Jan. 1, 2024 (or 2025 for pre-existing entities), some complicated ownership structures may require significant analysis to determine which beneficial owners should be included in any report.
