On September 29, 2022, the Financial Crimes Enforcement Network (FinCEN) published final regulations to require certain entities and persons to file ownership reports regarding beneficial ownership and reports on company applicants, thus implementing Section 6403 of the Corporate Transparency Act, which was enacted into law as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021. The information to be reported is intended to help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity.

We last reported on this matter when the proposed regulations were issued on December 8, 2021. The final regulations are substantially the same as the proposal, with some extended reporting dates and clarifying definitions. The final rule is effective January 1, 2024, with reporting companies created or registered before January 1, 2024, having one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Any change in beneficial ownership information previously reported must be reported within 30 days of the change. This rule is one of three rulemakings planned to implement the Corporate Transparency Act, with subsequent rules to establish access to the beneficial ownership information and to revise the FinCEN customer due diligence rules applicable to banks. Until the issuance of the latter rule, banks will continue to be required to collect beneficial ownership information under the 2016 Customer Due Diligence Rule at 31 CFR §1010.230.

Who is required to report beneficial ownership information and company applicant information?

The reporting obligations apply to “reporting companies”: either a domestic reporting company or a foreign reporting company. A “domestic reporting company” is any entity that is a corporation, a limited liability company, or any other entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe. A “foreign reporting company” is a corporation, a limited liability company, or other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. Thus, the definition of a reporting company is extremely broad and covers virtually any entity obligated to file with a secretary of state or similar office to begin its existence, subject to the exemptions set forth below.

A “company applicant” is the individual primarily responsible for directly filing the document that creates the domestic reporting company or that first registers the foreign reporting company.

The final regulations brought forth numerous exemptions to the definition of a reporting company.

1. A securities reporting issuer, defined as an issuer of securities that has a class of securities registered under Section 12 of the Securities Exchange Act of 1934 (the Act) or that files periodic information under Section 15(d) of the Act.

2. A governmental entity established under the laws of the United States, an Indian tribe, a state, or a political subdivision of a state, or under an interstate compact between two or more states, that exercises governmental authority on behalf of such governmental entity.

3. A bank as defined in Section 3 of the Federal Deposit Insurance Act.

4. A credit union as defined in Section 101 of the Federal Credit Union Act.

5. A depository institution holding company as defined in Section 2 of the Bank Holding Company Act of 1956 or a savings and loan holding company as defined in Section 10(a) of the Homeowners Loan Act.

6. A money service businesses registered with FinCEN.

7. A broker/dealer as defined in Section 3 of the Act and registered under Section 15 of the Act.

8. A securities exchange or clearing agency as those terms are defined in the Act and registered under Section 6 or 17A of the Act.

9. Any other entity registered under the Act and not otherwise described, that is registered with the Securities and Exchange Commission (SEC).

10. An investment company or investment advisor as defined under the Investment Company Act of 1940 and registered with the SEC.

11. A venture capital fund advisor defined as an investment advisor as described in Section 203(l) of the Investment Advisors Act of 1940 that files a Form ADV with the SEC.

12. An insurance company as defined in Section 2 of the Investment Company Act of 1940.

13. A state-licensed insurance producer authorized by a state and subject to supervision by the insurance commissioner or similar official or agency of the state and maintaining a physical office within the United States.

14. A Commodity Exchange Act — registered entity as defined in Section 1a of the Commodity Exchange Act.

15. An accounting firm registered in accordance with the Sarbanes-Oxley Act of 2002.

16. A public utility that is regulated and provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.

17. A financial market utility designated by the Financial Stability Oversight Counsel.

18. A pooled investment vehicle that is operated or advised by a bank, a credit union, a broker/dealer, an investment company or investment advisor, or a venture capital fund advisor.

19. A tax-exempt entity described in Section 501(c) of the Internal Revenue Code of 1986 (the Code) and exempt from tax under Section 501(a) of the Code, a political organization as defined in Section 527(e)(1) of the Code, or a trust as defined in paragraph (1) or (2) of Section 4947(a) of the Code.

20. Any entity assisting a tax-exempt entity operating exclusively to provide financial assistance to or hold governance rights over a tax-exempt entity.

21. A large operating company employing more than 20 full-time employees in the United States, having an operating presence in the United States, and filing a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts for sales.

22. Subsidiaries of certain exempt entities that are controlled or wholly owned, directly or indirectly, by one or more entities described above other than a money service business, a pooled investment vehicle, or an entity assisting a tax-exempt entity.

23. An inactive entity that (a) was in existence on or before January 1, 2020; (b) does not engage in active business; (c) is not owned by a foreign person, directly or indirectly; (d) has had no change in ownership within the preceding 12 months; (e) has not sent or received more than $1,000 through a financial account within the preceding 12 months; and (f) does not hold any assets.

Who is a ‘beneficial owner’?

The term “beneficial owner” with respect to a reporting company means an individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company.

An individual is defined as having “substantial control” over a reporting company if the individual (a) serves as a senior officer of the reporting company; (b) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); or (c) directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding (1) the nature, scope, and attributes of the business; (2) the reorganization, dissolution, or merger of the reporting company; (3) major expenditures, incurring of debt, or making of investments; (4) the selection or determination of business lines or ventures or geographic focus of the company; (5) compensation schemes and incentive programs for senior officers; (6) entry into or termination of significant contracts; or (7) amendments of any substantial corporate governance documents of the reporting company, together with a catch-all of any other form of substantial control over the reporting company.

“Direct or indirect exercise of substantial control” is exercised through (a) board representation; (b) ownership or control of a majority of the voting power or voting rights of the reporting company; (c) rights associated with any financing arrangement or interest in the company; (d) control over one or more intermediate entities that separately or collectively exercise substantial control over the reporting company; (e) arrangements or financial or business relationships, whether formal or informal with other individuals or entities acting as nominees; or (f) any other contract, arrangement, understanding, relationship, or otherwise.

An “ownership interest” is broadly defined as (a) any equity, stock, or similar instrument; (b) any capital or profit interest in any entity; (c) any instrument convertible into the preceding instruments; (d) any put, call, straddle, or other option or privilege of buying or selling any of the foregoing; or (e) any other instrument, contract, arrangement, understanding, or relationship used to establish ownership.

“Ownership or control” of an ownership interest may be direct or indirect through any contract, arrangement, understanding, relationship, or otherwise, including (a) joint ownership with one or more other persons of an undivided interest; (b) through another individual acting as a nominee, an intermediary, a custodian, or an agent on behalf of such individual; or (c) through a trustee or beneficiary who possesses the right to demand a distribution or withdrawal of the assets from a trust.

In calculating 25% ownership interests, any option or similar interests of the individual shall be treated as exercised.

“Beneficial owner” does not include (a) a minor child, provided the reporting company reports the required information of a parent or legal guardian of the minor child; (b) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual who is reported; (c) an employee of a reporting company acting solely as an employee; (d) an individual whose only interest in a reporting company is a future interest through a right of inheritance; or (e) a creditor of a reporting company.

What reports are required?

Any domestic reporting company created on or after January 1, 2024, and any entity that becomes a foreign reporting company on or after January 1, 2024, shall file an initial report of beneficial ownership within 30 calendar days of the earlier of the date on which it receives actual notice that it has been created or registered to do business with a secretary of state or similar office. Any domestic reporting company created before January 1, 2024, and any entity that became a foreign reporting company before January 1, 2024, shall file its initial report of beneficial ownership no later than January 1, 2025. Any entity that no longer meets the criteria for any exemption described above shall file a report within 30 calendar days after the date that it no longer meets the criteria for any exemption. If there is any change with respect to required information previously submitted to FinCEN concerning a reporting company or its beneficial owners, the reporting company shall file an updated report within 30 calendar days after the date on which such change occurs. Such report would also include a company meeting the criteria for an exemption.

What does the initial report contain?

The initial report for the reporting company shall include: (a) the full legal name of the reporting company; (b) any trade or d/b/a name of the reporting company; (c) the complete current street address consisting of the principal place of business in the United States; (d) the state, Tribal, or foreign jurisdiction of formation of the reporting company; (e) for a foreign reporting company, the state or Tribal jurisdiction where the company first registered; and (f) the Internal Revenue Service Taxpayer Identification Number (including an Employer Identification Number) of the reporting company.

For every individual who is (a) a beneficial owner of such reporting company and (b) a company applicant with respect to a reporting company, the report shall include (1) the full legal name of the individual; (2) the date of birth of the individual; (3) a complete current address, if for a company applicant who forms or registers the entity, the street address of the business of the company applicant or, in any other case, the individual’s unique street address; (4) the unique identifying number and issuing jurisdiction from one of the following documents: (i) a non-expired passport issued to the individual by the US government; (ii) a non-expired identification document issued to the individual by a state, local government, or Indian tribe; (iii) a non-expired driver’s license issued to the individual by a state; or (iv) a non-expired passport issued by a foreign government to the individual if the individual does not possess any of the foregoing documents. An image of the document from which the unique identifying number was obtained must be retained.

Entities created or registered after January 1, 2024, must report a company applicant. An entity created or registered before January 1, 2024, is not required to report information with respect to any company applicant and reports only the fact that it was created or registered before January 1, 2024. A company applicant is the individual who directly files the document that creates the domestic reporting company or the document that first registers a foreign reporting company, and can be a law firm filing such corporate documentation.

Finally, it is unlawful for any person to willfully provide or attempt to provide false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN, or to willfully fail to report complete or updated beneficial ownership information to FinCEN.

In summary, these beneficial ownership rules will impose an immediate reporting burden on any nonexempt reporting company organized on or after January 1, 2024, including any corporate counsel forming or registering a reporting company. As noted above, unless exempt under one of the 23 exemptions, any entity will be required to file a report with FinCEN, subject to sanctions if there is a failure to file. No sanctions were stated in the regulation for willful failure to report complete or updated beneficial ownership information or willfully providing false or fraudulent information. However, 31 USC 5322 provides that a bank employee willfully violating the Bank Secrecy Act or its implementing regulations is subject to a criminal fine of up to $250,000, five years in prison or both. This statute would apply to reports of beneficial ownership. With respect to financial institutions, the 2016 Customer Due Diligence rules will continue to apply and they must continue to identify and verify beneficial ownership information under 31 CFR 1010.230 until such rule is revised within one year after the effective date of this Report of Beneficial Ownership Rule, which is January 1, 2024.