FinCEN Issues New Rule for Beneficial Ownership Reporting

September 30, 2022 – On September 29, 2022, the U.S. Department of the Treasury’s (“Treasury”) Financial Crimes Enforcement Network (“FinCEN”) issued a final rule (the “Rule”) establishing a beneficial ownership information (“BOI”) reporting requirement for certain legal entities created or registered to do business in the United States. The Rule will require most such entities to report BOI (i.e., information about persons who ultimately own or control the entity) to FinCEN. According to FinCEN, the Rule is intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.

The Rule is effective January 1, 2024. A Treasury fact sheet summarizing the Rule is available here.

Background

There is currently no centralized or complete repository of information about who owns and operates legal entities within the United States, and few states or other jurisdictions within the United States require legal entities to disclose beneficial ownership. Congress, Treasury, national security and law enforcement agencies, and other stakeholders (including international working groups) have sought for years to bolster corporate transparency by addressing perceived deficiencies in the U.S. beneficial ownership disclosure regime.

The Corporate Transparency Act (“CTA”), enacted into law as part of the National Defense Authorization Act for Fiscal Year 2021, contains provisions requiring certain entities (“Reporting Companies”, described further below) to report BOI, and requires Treasury to issue regulations on the collection of BOI from these Reporting Companies. The Rule follows a Notice of Proposed Rulemaking (“NPR”) published on December 8, 2021, and reflects FinCEN’s consideration of public comments received in response to the NPR.   

Content of The Rule

The Rule describes who must file a BOI report, what information must be reported, and when a report is due.

Who Must File

Under the Rule, two distinct types of Reporting Companies must file reports with FinCEN: domestic Reporting Companies and foreign Reporting Companies. A domestic Reporting Company includes a corporation, limited liability company (“LLC”), or any 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 is a corporation, LLC, or other entity formed under the law of a foreign country that is 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. However, 23 types of entities are exempt from the definition of “Reporting Company,” including issuers of securities registered under section 12 of the Securities Exchange Act of 1934, qualifying banks, and qualifying tax-exempt entities. According to FinCEN, Reporting Companies will generally include (subject to the applicability of specific exemptions) limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and LLCs, because such entities are generally created by a filing with a secretary of state or similar office. But entities such as general partnerships and sole proprietorships, which are generally not created through the filing of a document with a secretary of state or similar office, would generally not be Reporting Companies under the Rule.

What Information Must Be Reported

The Rule requires Reporting Companies to file reports with FinCEN which identify two categories of individuals: (1) “beneficial owners” and (2) “company applicants”.

The definition of “beneficial owner” includes any individual who, directly or indirectly, either (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. The terms “substantial control” and “ownership interest” are themselves further defined under the Rule. Notably, for the definition of “substantial control,” the Rule sets forth a list of activities intended to capture anyone who is able to make important decisions on behalf of the entity, and close loopholes that allow corporate structuring that obscures owners or decision-makers. The Rule also provides a set of tests for determining if an individual meets the 25 percent ownership interest reporting threshold. Five types of individuals are exempted from the definition of “beneficial owner.”

The definition of “company applicant” covers only two types of individual: (1) the individual who directly files the document that creates the entity (or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States); and (2) the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing. However, the Rule does not require reporting companies existing or registered at the time of the effective date of the Rule to identify and report on their company applicants.

The Rule requires a reporting company to provide:

• certain identifying information about itself, including name and address; and
• for beneficial owners: name, birthdate, address, and unique identifying number and issuing jurisdiction for an acceptable identification document (and the image of such document).

Additionally, the rule requires that Reporting Companies created on or after January 1, 2024, provide the information required regarding beneficial owners for company applicants.

When Reports Are Due

The Rule is effective January 1, 2024. Reporting Companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered on or after January 1, 2024, will have 30 days after receiving notice of their creation or registration from the secretary of state or similar office to file their initial reports. Reporting Companies have 30 days to report changes to the information in their previously filed reports and must correct inaccurate information in previously filed reports within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports.

Next Steps

The reporting rule is one of three required rulemakings to implement the CTA. FinCEN will engage in additional rulemakings to: (1) establish rules for who may access beneficial ownership information, for what purposes, and what safeguards will be required to ensure that the information is secured and protected; and (2) revise FinCEN’s customer due diligence rule. In addition, FinCEN continues to develop the infrastructure to administer these requirements, including an information technology system that will be used to store beneficial ownership information in accordance with the strict security and confidentiality requirements of the CTA.

Finally, FinCEN noted that implementation of the final rule will require additional engagement with stakeholders to ensure a clear understanding of the rule’s requirements and timeframes, including through additional guidance and FAQs, help lines, and other engagement, both directly with affected entities and through state governments and other third parties. FinCEN also intends to work within Treasury and with interagency partners to inform risk assessments, advisories, guidance documents, and other products that relate to the illicit finance risks associated with legal entities.

The Rule represents a substantial change in the U.S. beneficial ownership regime. Persons and entities who may come within the Rule’s scope should familiarize themselves with their compliance obligations to ensure they are prepared for the Rule to come into effect in January 2024.