As discussed in detail below, the NPRM would require each reporting company to file with FinCEN reports with information on the reporting company itself, every individual who is a beneficial owner of such reporting company, and every individual who is a company applicant with respect to such reporting company. In addition to the topics discussed herein, FinCEN includes a list of 40 multipart questions for the public to consider in offering comments on the NPRM. Comments must be submitted by February 7, 2022.
The CTA, enacted into law on January 1, 2021, as part of the Anti-Money Laundering Act of 2020, is designed to combat the use of shell companies by persons seeking to evade anti-money-laundering and economic sanctions laws. Specifically, the CTA amended the Bank Secrecy Act to (i) require certain U.S. domiciled or registered entities, including foreign entities that operate in the U.S., to report the identities of their beneficial owners to FinCEN and (ii) require FinCEN to establish and maintain a secure, nonpublic database of this beneficial ownership information that may be accessed by, among other parties, law enforcement or certain financial institutions for customer due diligence (CDD).
In April 2021, FinCEN issued an advance notice of proposed rulemaking soliciting comment on questions regarding the implementation of the beneficial owner disclosure program established by the CTA.2 FinCEN intends to issue three sets of rulemakings to implement the requirements of Section 6403 of the CTA: (i) a rulemaking to implement the beneficial ownership information reporting requirements; (ii) a rulemaking to implement the statute’s protocols for access to and disclosure of beneficial ownership information; and (iii) a rulemaking to revise the existing CDD requirements for financial institutions at 31 C.F.R. § 1010.230 (CDD Rule). The NPRM addresses only the first rulemaking, and FinCEN will solicit public comment on the other aspects of Section 6403 of the CTA in the future. Notably, the future rulemakings will provide the processes that will be most valuable to financial institutions, namely the protocols FinCEN will use to verify the accuracy of the information reported by reporting companies and how financial institutions may access and use reported information to fulfil their diligence obligations under the CDD Rule.
Which Reporting Companies Will Be Required to Report Their Beneficial Owners and Company Applicants to the U.S. Government?
The NPRM would apply to a “reporting company,” which means a domestic or foreign reporting company to be defined as follows:
- a “domestic reporting company” means any entity that is (i) a corporation, (ii) limited liability company, or (iii) other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe
- a “foreign reporting company” means any entity that is (i) a corporation, limited liability company, or other entity (ii) formed under the law of a foreign country and (iii) 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
The NPRM would adopt the following 23 categories of exemptions from the definition of “reporting company” from the CTA — for entities already generally subject to substantial federal or state regulation under which beneficial ownership may be known — (i) Securities and Exchange Commission reporting issuers, (ii) governmental authorities, (iii) banks, (iv) credit unions, (v) bank holding companies and savings and loan holding companies, (vi) money transmitting businesses, (vii) brokers or dealers in securities, (viii) securities exchanges or clearing agencies, (ix) other Securities and Exchange Act registered entities, (x) investment companies or investment advisers, (xi) venture capital fund advisers, (xii) insurance companies, (xiii) state-licensed insurance providers, (xiv) Commodity Exchange Act registered entities, (xv) accounting firms, (xvi) public utilities, (xvii) financial market utilities, (xviii) pooled investment vehicles, (xix) tax-exempt entities, (xx) entities assisting a tax-exempt entity, (xxi) large operating companies,3 (xxii) subsidiaries of certain exempt entities, and (xxiii) inactive entities. The CTA also authorizes FinCEN to exempt, by regulation, additional entities for which collecting beneficial ownership information would neither serve the public interest nor be highly useful in national security, intelligence, law enforcement, or other similar efforts. The NPRM would propose clarifications for some categories of exempt entities for which the statutory language is ambiguous. However, notably, the NPRM does not propose any new categories of exempt entities and instead states that FinCEN will continue to consider whether any additional exemptions would be appropriate.
Who Are Considered Beneficial Owners of a Reporting Company?
A “beneficial owner” would be defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.
What Is Substantial Control Over a Reporting Company?
“Substantial control” over a reporting company would include
- service as a senior officer of the reporting company (any individual holding the position or exercising the authority of a president, secretary, treasurer, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function)
- authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body)
- direction, determination, decision of, or substantial influence over important matters affecting the reporting company
- any other form of substantial control over the reporting company
The NPRM includes specific examples of the direction, determination, decision of, or substantial influence over important matters affecting the reporting company. Moreover, it also includes examples of ways in which an individual may directly or indirectly exercise substantial control over a reporting company.
The NPRM excludes from the definition of “beneficial owner” (i) a minor child, (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual, (iii) an employee of a reporting company, acting solely as an employee and not as a senior officer, (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance, and (v) a creditor of a reporting company.
What Constitutes an Ownership Interest in a Reporting Company?
With regard to ownership, the NPRM includes a detailed definition of “ownership interest”:
- any equity, stock, or similar instrument, certificate of interest or participation in any profit sharing agreement, preorganization certificate or subscription, transferable share, voting trust certificate or certificate of deposit for an equity security, interest in a joint venture, or certificate of interest in a business trust, without regard to whether any such instrument is transferable, is classified as stock or anything similar, or represents voting or nonvoting shares;
- any capital or profit interest in a limited liability company or partnership, including limited and general partnership interests;
- any proprietorship interest;
- any instrument convertible, with or without consideration, into one of the foregoing types of instruments, any future on any such instrument, or any warrant or right to purchase, sell, or subscribe to any such share or interest, regardless of whether characterized as debt; or
- any put, call, straddle, or other option or privilege of buying or selling any of the foregoing types of items without being bound to do so.
The NPRM also states how an individual may own or control an ownership interest of a reporting company, including through joint ownership with one or more other persons of an undivided interest in such ownership or through control of such ownership interest owned by another individual. In determining whether an individual owns or controls 25% of the ownership interests of a reporting company, the ownership interests of the reporting company would include all ownership interests of any class or type, and the percentage of such ownership interests that an individual owns or controls would be determined by aggregating all of the individual’s ownership interests in comparison to the undiluted ownership interests of the company.
Who Is Considered a Company Applicant of a Reporting Company?
A “company applicant” would be defined to mean
- for a domestic reporting company, any individual who files the document that creates the domestic reporting company under state or tribal law, including any individual who directs or controls the filing of such document by another person
- for a foreign reporting company, any individual who files the document that first registers the foreign reporting company under state or tribal law, including any individual who directs or controls the filing of such document by another person
Note that this definition includes any individual who directs or controls the filing of such a document, which is designed to ensure that the reporting company provides information on individuals who are responsible for the decision to form a reporting company. FinCEN believes that this additional information will be useful to law enforcement and that FinCEN will be better positioned to investigate the submission of inaccurate information if it is able to identify both the individual who submitted the report and the person who directed or controlled that activity.
A company applicant will remain the same for all time after the entity is created, in contrast to individuals who are beneficial owners, who will cease to be beneficial owners upon death. Accordingly, FinCEN has included a special reporting rule for company applicants who are deceased.
Reports Required to Be Filed With the U.S. Government by Domestic and Foreign Entities
Each reporting company would be required to file an initial report with information on the reporting company and every individual (i) who is a beneficial owner of such reporting company and (ii) who is a company applicant with respect to such reporting company, on the following timelines:
- a domestic reporting company formed on or after the effective date of the final rule (effective date), within 14 calendar days of the date it was formed as specified by a secretary of state or similar office
- any entity that becomes a foreign reporting company on or after the effective date, within 14 calendar days of the date it first becomes a foreign reporting company
- any domestic reporting company created before the effective date and any entity that became a foreign reporting company before the effective date, within one year after the effective date4
- any entity that no longer meets the criteria for an exemption, within 30 calendar days after the date that it no longer meets the criteria for any such exemption5
The NPRM also contains requirements to file a report to correct inaccurately filed information within 14 calendar days after the date the reporting company becomes aware or has reason to know that any required information contained in any report filed with FinCEN was inaccurate when filed and remains inaccurate and to update a report within 30 calendar days after the date on which there is any change with respect to any information previously submitted to FinCEN, including with respect to who is a beneficial owner of a reporting company and any change with respect to information reported for any particular beneficial owner or applicant.
An initial report of a reporting company would have to include the following information for the reporting company:
- the full name of the reporting company
- any trade name or “doing business as” name of the reporting company
- the business street address of the reporting company
- the state or tribal jurisdiction of formation of the reporting company (or for a foreign reporting company, state or tribal jurisdiction where such company first registers)
- the taxpayer identification number (TIN) of the reporting company (or alternative number where a reporting company has not yet been issued a TIN)
An initial report of a reporting company would also have to include for every individual who is a beneficial owner of such reporting company and every individual who is a company applicant with respect to such reporting company
- the full legal name of the individual
- the date of birth of the individual
- the complete current address, which would be the business street address of a business or the residential street address that the individual uses for tax residency purposes
- a unique identifying number from a nonexpired government-issued identification document
- an image of the document from which the number was obtained, which includes both the number and photograph in sufficient quality to be legible or recognizable
Additionally, a reporting company may include in its report the TIN of any beneficial owner or company applicant, provided that (i) the reporting company notifies each such beneficial owner or company applicant and (ii) obtains consent from each such beneficial owner or company applicant on a form prescribed by FinCEN.
Special reporting rules would apply to (i) a reporting company owned by an exempt entity, (ii) a minor child, (iii) a foreign pooled investment vehicle, and (iv) a deceased company applicant (e.g., for a company that was formed a century ago).
By statute, the beneficial ownership reporting regulations issued by FinCEN were to be promulgated by January 1, 2022, and become effective on the date prescribed by FinCEN. Given that comments to the NPRM are due by February 7, 2022, and, thereafter, FinCEN would consider the comments and issue a final rule, this creates a conflict between the timeline in the statute and the current timeline. FinCEN did not expressly address this conflict in the NPRM other than to remark that the CTA authorizes FinCEN to determine the effective date, that FinCEN has not proposed an effective date in the NPRM, and that it seeks views on the timing of the effective date and factors to be considered.
1 86 Fed. Reg. 69,920 (Dec. 8, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-12-08/pdf/2021-26548.pdf.
2 See 86 Fed. Reg. 17,557 (Apr. 5, 2021).
3 This exemption would apply to any entity that (i) employs more than 20 full-time employees in the United States, (ii) has an operating presence at a physical office within the United States, and (iii) filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales, excluding gross receipts or sales from sources outside the United States (and for an entity that is part of an affiliated group of corporations that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group).
4 The CTA itself provides that this time period be no later than two years after the effective date, but FinCEN chose a shorter time period to ensure that the information is highly useful to law enforcement as soon as possible while also minimizing burdens on reporting companies and secretaries of state and similar offices.
5 An individual or a reporting company would be able to obtain a unique identifying number from FinCEN, known as a “FinCEN identifier,” by submitting to FinCEN an application containing the information that would have been required to be submitted in an initial report about the individual as a beneficial owner or company applicant or about the reporting company. If an individual or reporting company has obtained a FinCEN identifier, the FinCEN identifier could be provided in lieu of the information required in the initial report.
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