On December 7, 2021, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), published a proposed rule to implement the Corporate Transparency Act (CTA), which was enacted as part of the Anti-Money Laundering Act of 2020 within the National Defense Authorization Act for Fiscal Year 2021. The proposed rule is intended to implement the CTA’s beneficial ownership reporting provisions, but does not yet have the force and effect of law. In short, the proposed rule would require certain business organizations and entities to report affirmatively information to FinCEN about the beneficial owners and controllers of such organizations and the individuals who have filed an application with state or tribal authorities to form the entity or register it to do business. Below we summarize a number of the proposed rule’s key provisions, for which interested persons may submit public comments before February 7, 2022.
Who is Required to Report?
The proposed rule applies to so-called “reporting companies” organized in the US and, in certain cases, outside the US. According to FinCEN, the proposed rule would “significantly enhance the ability to protect the US financial system from illicit use, and provide essential information to law enforcement and others help prevent corrupt actors, terrorists, and proliferators from hiding money or other property in the United States.”
With respect to US-organized entities, the proposed rule defines “reporting company” to mean a corporation, limited liability company (LLC), or any other entity created by filing a document with the secretary of state of any state or a similar office of a state or tribal authority. According to a FinCEN fact sheet, the agency “expects that these definitions would include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and LLCs, because such entities appear typically to be created by a filing with a secretary of state or similar office.”
Foreign reporting companies proposed to be covered include any entity formed under the laws of a foreign country and registered to do business in any US state or tribal jurisdiction.
The proposed rule, in keeping with the CTA, identifies 23 types of entities that are exempt from the rule, including publicly traded companies; private companies meeting certain requirements with respect to number of employees, revenue, and physical presence in the United States; and certain trusts (e.g., that do not file a document with a secretary of state such as a statutory trust). Many types of financial institutions already subject to FinCEN regulation are also exempt from the requirements. These exemptions are similar (but not identical) to the types of entities, partnerships, and trusts already exempt from FinCEN’s Customer Due Diligence Rule (“CDD Rule”) for certain covered US financial institutions.
Who Must be Included in a Report?
Under the proposed rule, reporting companies must report “beneficial owners,” which includes any individual who (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company.
With regard to “substantial control,” the term is defined broadly to include: (1) senior officers of the reporting company; (2) individuals with authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body); (3) individuals able to direct, determine, or decide, or with substantial influence over, important matters affecting the reporting company; and (4) “any other form of substantial control over the reporting company.” Individuals may exercise substantial control in a direct or indirect fashion (e.g. through control over one or more intermediary entities that, collectively or separately, exercises control over the reporting company). Each individual who meets the definition of “substantial control” must be included in the report. Notably, this approach to a control test in the proposed rule differs from and would require more information to be reported than under FinCEN’s CDD Rule, which requires certain covered US financial institutions to identify just one individual who exercises a significant degree of control over a legal entity customer.
With regard to ownership interests, the proposed rule captures equity in the reporting company as well as other types of interests, such as capital or profit interests and convertible interests, warrants, rights, or other options or privileges to acquire equity, capital, or other interests. In the context of trusts, the proposed rule provides that reportable ownership interests include those of a trustee; a beneficiary who is the sole recipient of the trust’s income and principal or has a right to withdraw substantially all of the assets from the trust; and a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust. The CDD Rule, by contrast, contains a narrower definition of ownership interests that captures only equity interests, and deems assets in trusts to be owned by their trustees.
The proposed rule would exempt certain individuals, including, minor children; individuals whose only interest is through a right of future inheritance; a creditor of the reporting company; an individual acting as nominee, intermediary, custodian, or agent on behalf of another individual; and employees (other than senior officers) who exercise substantial control solely due to their employment status.
Under the proposed rule, reporting companies must also report “company applicants,” which, for domestic reporting companies, is defined to include the individual who files the document that forms the entity and, for foreign reporting companies, is defined to mean the individual who files the document that first registers the entity to do business in the United States. To ensure that this portion of the reporting requirement is not circumvented through the use of agents, the term “company applicant” also includes any individual who directs or controls the filing of the formation/registration document.
What Information Must be Provided on Reporting Companies, Beneficial Owners, and Company Applicants?
The proposed rule requires a reporting company to provide certain identifying information about the company itself and to provide four enumerated pieces of information regarding beneficial owners and company applicants. Specifically, the reporting company must provide the following for each individual: name, birthdate, address, and a unique identifying number from an acceptable identification document. The reporting company must also provide an image of the individual’s identification document, showing both the unique identifying number and the individual’s photograph.
Notably, the proposed rule allows reporting companies and individuals to obtain “FinCEN identifiers.” Individuals and entities with FinCEN identifiers may use that number for future FinCEN reports, rather than providing the full suite of required information in each report. Individuals may obtain a FinCEN identifier by submitting an application to FinCEN containing the information that a company would otherwise be required to provide with respect to a beneficial owner or a company applicant. Reporting companies may obtain FinCEN identifiers by submitting an application with or after an initial report.
When Must Reports be Filed?
Under the proposed rule, domestic reporting companies created prior to the effective date of the final rule would have a year to file an initial report to FinCEN. Reporting companies registered after the effective date would have 14 days after their formation to file. The same deadlines also apply to existing and newly registered foreign reporting companies. Reporting companies have 30 days to file updates to previously filed reports (an update is required if there is any change in the previously reported information) and 14 days to correct inaccuracies in prior reports.
Many of these deadlines are considerably shorter than the maximum timeframes allowable under the CTA, reflecting FinCEN’s intention to maintain information that is accurate and useful for law enforcement and other purposes.
FinCEN is accepting comments on the proposed rule until February 7, 2022. After FinCEN receives and reviews public comments, it will issue a final rule and establish an effective date for the reporting requirements, although it is not clear when this will occur. Important elements of the reporting framework – such as the format and mechanism for filing the required information – are still under development at FinCEN. FinCEN also indicated it intends to issue two additional rulemakings related to the CTA: one to establish rules for who may access reported information and in what circumstances, and another to update the CDD Rule (as required by the CTA) to account for financial institutions’ access to beneficial ownership information reported to FinCEN under the proposed rule.
For additional information regarding this proposed rule or assistance in preparing or submitting comments, please contact a member of Steptoe’s Anti-Money Laundering Practice.