No More Anonymous Companies: The Corporate Transparency Act and its Beneficial Ownership Information Reporting
By Kathleen Grohman Burton and Sean K. Griffee | Related Practices: Business and Real Estate
The Corporate Transparency Act (“CTA”) became effective on January 1, 2021 as part of the broader Anti-Money Laundering Act of 2020. One portion of the CTA affecting many privately held corporations, limited liability companies, and limited liability partnerships is the beneficial ownership information (“BOI”) reporting requirements, codified at 31 U.S.C.A. § 5336. You can read the text of the CTA here:
https://www.congress.gov/bill/116th-congress/house-bill/2513/text
The CTA is designed to prevent wrongdoers from utilizing United States shell companies for criminal purposes and to assist law enforcement in detecting and investigating the use of entities registered in the United States in connection with terrorism and money laundering by requiring companies to disclose their beneficial ownership.
The CTA authorizes the Financial Crimes Enforcement Network (“FinCEN”) bureau of the United States Department of Treasury to issue regulations for implementation of the BOI reporting requirements. Although the CTA became law on January 1, 2021, companies are not required to comply with the BOI reporting requirements of the CTA until the effective date of the final FinCEN regulations. FinCEN published a notice of proposed rulemaking for the BOI reporting requirements on December 7, 2021 and the public comment period ended on February 7, 2022, but FinCEN is still considering re-opening the comment period. You can read FinCEN’s proposed regulations here:
FinCEN plans to issue a second notice of proposed rulemaking for issues related to access and disclosure of BOI, which may occur in late 2022. It is likely that neither set of proposed regulations will become final until the second set of proposed regulations has received public comment.
Which Companies Must Report?
The BOI reporting requirements apply to “reporting companies” as defined in 31 U.S.C.A. 5336(11). “Reporting companies” are any entity that is formed by filing a document with the secretary of state or equivalent office of any United States state or Indian tribe, including foreign companies that are registered to do business in the United States. This includes corporations, limited liability companies, and most other forms of entity, unless the entity is excepted from the definition of “reporting company.”
Certain types of companies are specifically exempted from the reporting requirements. The exempted companies are already subject to significant oversight and therefore are presumed not to be commonly used to facilitate crime. Some examples of the entities that are enumerated in the exceptions to the definition of “reporting companies” are certain banks, accounting firms, venture capital fund advisors, domestic credit unions, insurers, investment advisers, governmental agencies, non-profit entities, or other companies registered under SEC rules.
The biggest exception is for large companies, specifically companies that (i) employ more than 20 employees on a full-time basis in the United States, (ii) reported more than $5,000,000 in gross receipts or sales (including receipts by the company’s subsidiaries and operating entities) in the previous year’s federal income tax returns, and (iii) has an operating presence at a physical office within the United States. Under the proposed regulations, an entity with an operating presence at a physical office within the United States would “be one for which the physical office is owned or leased by the entity, is not a residence, and is not shared space (beyond being shared with affiliated entities)—in short, a genuine working office of the entity.” Proposed 31 CFR 1010.380(c)(1). This effectively means that small companies are generally required to report, but large companies are not required to report.
Wholly owned subsidiaries of exempt entities are also exempt from reporting.
What Must be Disclosed?
The proposed regulations require each reporting company to report its name, any alternative names through which the company is engaging in business (“d/b/a names”), its business street address, its jurisdiction of formation or registration, as well as a unique identification number. Reporting companies may submit their taxpayer identification number (TIN) / Employer Identification Number (EIN) – or if a TIN / EIN is not yet issued, a Dun & Bradstreet Data Universal Numbering System (DUNS) number or a Legal Entity Identifier (LEI).
The report must identify each “beneficial owner” as well as “company applicants” by full legal name, date of birth, street address, and a unique identifying number. 31 U.S.C.A. 5336(b)(2)(A).
The unique identifying number will usually be a passport or driver’s license number. The proposed rules specify that the reporting company must provide a scanned copy of the identification document from which the unique identifying number of the beneficial owner or company applicant is obtained, in connection with reporting that unique number. Individuals or entities can apply for a FinCEN number for ease of meeting the BOI reporting requirements, which is discussed in more detail below.
1. Beneficial Owners
“Beneficial owners” are individuals who exercise substantial control over the entity or who own or control at least 25% of the ownership interest of the entity.
The proposed regulations describe three specific indicators of “substantial control”: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any officer or majority of the board of directors (or similar body) of a reporting company; and (3) direction, determination or decision of, or substantial influence over, important matters of a reporting company, including, for example, the sale, lease or transfer of any principal assets of the company, the entry into or termination of significant contracts, major expenditures and investments by the company and compensation schemes for senior officers. Proposed 31 CFR 1010.380(d)(1). Additionally, the proposed regulations include a vague and circular catch-all provision defining “substantial control” to include “[a]ny other form of substantial control over the reporting company.” Id.
The proposed regulations also broadly define “ownership interest,” to include both equity in the reporting company and other forms of interests, such as profits interests in entities taxed as partnerships, convertible notes, warrants, options and privileges to acquire equity, capital or other interests in a reporting company. An “ownership interest” also includes any ownership interest by another person that an individual has the ability to control. With this definition, FinCEN is broadening the concept of who might have an “ownership interest” by using language in the proposed rule reminding reporting companies that ownership interests can be owned or controlled directly or indirectly or “through a variety of means” such as a trust or similar arrangement. The proposed regulations indicate that percentage of ownership is determined by aggregating all an individual’s ownership interests relative to all of the undiluted ownership interests of the company.
The following are not “beneficial owners” and so generally do not have to report: minors (as long as parent or legal guardians report), individuals acting as a custodian or agent on behalf of another individual, employees who do not have an ownership interest, individuals whose only interest in the company is through inheritance, and creditors.
2. Company Applicant
The “company applicant” is the person who files the document that forms the entity for domestic companies, and, for foreign reporting companies, the company applicant is the individual who files the document that first registers the entity to do business in the United States. A “company applicant” also “includes anyone who directs or controls the filing of the document by another.” Proposed 31 CFR 1010.380(b)(1)(i).
FinCEN proposes a “bifurcated approach” for company applicants. Those who provide a business service as a corporate or formation agent such as law firms would need to report their business address. The proposed regulations noted that such applicants are “of particular interest” to FinCEN, and that monitoring these services might allow law enforcement and other government agencies to identify patterns that may indicate individuals are “engaged in the business of creating legal entities for the purpose of obscuring the beneficiaries of transactions or the owners of valuable assets.” For all other company applicants, the reporting company will be required to report the residential street address that the individual uses for tax residency purposes.
The proposed regulations would require individual beneficial owners and company applicants who do not act as formation agents to report their residential address for tax residency purposes, as that information would be considered “useful for establishing the unambiguous identity of an identified beneficial owner.”
3. FinCEN Identifier
Proposed 31 CFR 1010.380(b)(5) sets forth rules that relate to obtaining and using a FinCEN identifier. An individual may obtain a FinCEN identifier by providing FinCEN with the information that the individual would otherwise have to provide to a reporting company if the individual were a beneficial owner or applicant of the reporting company; an entity can obtain a FinCEN identifier from FinCEN when it submits a filing as a reporting company or any time thereafter.
This means that an individual or legal entity must still disclose information to FinCEN, but once an individual or legal entity has a FinCEN identifier, the individual or legal entity can provide the identifier to a reporting company in lieu of the personal details otherwise required. For instance, an individual can provide his or her FinCEN identifier to the reporting company, and the reporting company can provide the FinCEN identifier to FinCEN in lieu of any information the reporting company would otherwise have to report about the individual. Similarly, an entity can provide the FinCEN identifier to the reporting company, and the reporting company can provide the FinCEN identifier to FinCEN in lieu of any information the reporting company would otherwise have to report about that entity's beneficial owners if they qualified as beneficial owners of the reporting company through their interests in the entity. In such circumstances, the underlying information associated with a FinCEN identifier would still be available to FinCEN.
4. Confidentiality of BOI
The information reported to FinCEN will be confidential and disclosed only to the United Stated Department of the Treasury, to a governmental law enforcement or regulatory agency in response to an appropriate request (including foreign countries who are allowed to request such information pursuant to treaties with the United States), and financial institutions subject to due diligence requirements.
When does reporting occur?
Once the proposed FinCEN regulations go into effect, companies will be required to report as part of the incorporation process. Under the proposed regulations, companies formed or registered on or after the effective date of the regulations must file initial reports within 14 calendar days of the date the company was formed as specified by a secretary of state, or, if a foreign reporting company, the date it first became a foreign reporting company.
Proposed 31 CFR 1010.380(a)(1)(iii) requires any domestic reporting company created before the effective date of the regulation and any entity that became a foreign reporting company before the effective date of the regulation to file a report not later than one year after the effective date of the regulations. FinCEN has indicated that it intends to work with secretaries of state or similar offices and to leverage other communication channels to ensure that reporting companies in existence prior to the effective date of the regulations receive timely notice of and guidance on their BOI reporting obligations.
FinCEN proposes to provide reporting companies with 14 calendar days to correct any inaccurate information filed with FinCEN from the date on which the inaccuracy is discovered and 30 calendar days to update with FinCEN information that has changed after filing.
What are the penalties for failure to report?
A person that willfully fails to report the required BOI is liable for a penalty of up to $500 per day that the violation continues, to a maximum of $10,000 and/or up to two years in prison. There are also penalties for any person who knowingly discloses or uses BOI obtained by the person from FinCEN. The penalties are up to $500 per day that the violation continues, to a maximum of $250,000 and/or up to 5 years in prison. These penalties are increased if the violation is in conjunction with other illegal activity.
