FinCEN Initiative Broadens Reporting Requirements of Beneficial Owners
The Corporate Transparency Act enacted last year (the “CTA”) requires that corporations, limited liability companies, and similar entities report certain information about their beneficial owners, so as to “enhance the national security of the United States by making it more difficult for malign actors to” launder money, finance terrorism, proliferate weapons of mass destruction, engage in human and drug trafficking and commit fraud and other crime harmful to the American people.
Under the CTA, the Financial Crimes Enforcement Network (“FinCEN”) is required to maintain the reported information confidentially, securely and non-publicly. That said, FinCEN is authorized to disclose the information for specific purposes to certain categories of recipients, including federal law enforcement authorities. FinCEN is also required to revise customer due diligence regulations applicable to financial institutions to factor in the beneficial ownership information reporting requirement.
In furtherance of the above, FinCEN has proposed a new rule imposing the reporting requirements on the impacted entities. A fact sheet can be found here.
Although the initial comment period ended on February 7, it is possible that one or more additional comment periods may be opened.
- Following is a brief summary of the proposed rule’s highlights:
- The rule would require “domestic reporting companies” to file a Beneficial Ownership Information (“BOI”) report with FinCEN regarding two categories of individuals:
- A domestic reporting company’s beneficial owners; and
- Individuals who have filed an application with specific governmental or tribal authorities to form the domestic reporting company or register it to do business.
- “Domestic Reporting Company” would be defined to include:
- A corporation;
- A limited liability company; or
- Any other entity created by the filing of a document with a secretary of state or a similar officer the law of a state or Native American Tribe.
- Thus, for all intents and purposes, this would include any U.S. companies established as “incorporated” (i.e., “Inc.”), limited liability companies, limited partnerships, etc.
- Each reporting company will be required to file with FinCEN a report identifying each applicable “beneficial owner” of the company. For purposes of the rule, an applicable “beneficial owner” is any person who:
- Exercises “substantial control” over the company; or
- Owns, or controls at least 25 percent of the ownership interest of, the reporting company.
- A person will be considered to have “substantial control” over the reporting company if they:
- Serve as a senior officer of the company;
- Have authority over the appointment or removal of a senior officer or the dominant majority of the company’s board of directors or similar body; or
- Have direction, determination, decision-making authority or substantial influence over the reporting company’s matters.
- Other forms of “substantial control” may also exist depending on the circumstances even if not specifically listed in the rule.
- Note also that an individual may be deemed a beneficial owner if they have an interest in an entity that, directly or indirectly, holds an interest in the reporting company.
- The proposed rule would exclude creditors of a reporting company unless the creditor exercises substantial control over the entity or owns or controls 25% of its ownership interests.
- The BOI filed by the reporting company with FinCEN regarding each applicable beneficial owner will need to include the person’s:
- Full legal name;
- Date of birth;
- Current residential or business street address; and
- A unique identifying number from an acceptable identification document, or, if this has already been provided to FinCEN, then include the applicable FinCEN identifier.
- Note that if a person is deemed a beneficial owner by virtue of their interest in an entity that has an interest in the reporting company, and that entity has already obtained a FinCEN identifier and provided it to the reporting company, the reporting company may include that identifier in its BOI report in lieu of the information listed above.
- Existing entities will not be impacted by the proposed rule until one year after it takes effect. Entities formed after the effective date will have 14 days after their creation to file their BOI report with FinCEN.
- As proposed, exceptions to the reporting requirement will apply to certain types of entities, including:
- Any entity formed under the laws of the U.S., or any state or political subdivision of a state; that exercises governmental authority on behalf of the U.S. or state or political subdivision.
- Any “bank” as defined for FDIC purposes or in the Investment Company Act of 1940 or the Investment Advisers Act.
- Any SEC-registered broker-dealer.
- Any investment company as defined in the Investment Company Act of 1940 or the Investment Advisers Act.
- Any “pooled investment vehicle” operated or advised by one of the above entities. The rule would define a “pooled investment vehicle” as (i) any investment company as defined in the Investment Company Act of 1940, or (ii) any company that would be an investment company but for certain exclusions provided in the applicable section of the Act. Note that as proposed, standard “exempt reporting advisers” or “private fund advisers” would not be subject to an exception. However, “venture capital advisers” and their pooled investment vehicles would be.
- “Large operating companies,” defined as a company that has more than 20 full-time employees in the U.S., had more than $5,000,000 in gross receipts or sales (as reflected in federal income tax returns filed in the previous year), and has an operational physical office in the U.S.
- “Dormant entities,” as defined in the rule.
Note that the above list is not all-inclusive, and other exceptions may apply. Consult the rule for details on whether an exception might apply in any given situation, as well as for greater detail on those discussed above.
The above is just a brief summary of the highlights of the proposed rule, and there are many other details that should be considered if and when the rule is enacted. Stevens & Lee will continue to closely monitor developments and will keep our clients apprised as things progress.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.