New Beneficial Ownership Reporting Requirements
Early 2021, we prepared an article entitled New Beneficial Ownership Reporting Requirements Comin Soon… providing information about the recently passed Corporate Transparency Act of 2019 (the CTA). After much anticipation, on 29 September 2022, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued its Final Rule implementing the CTA’s requirements for the reporting of beneficial ownership and company applicant information. The reporting rule is one of three rulemakings planned to implement the CTA.
Purpose Corporate Transparency Act
Generally speaking and as a quick recap, the purposes for enacting the CTA was to protect U.S. national security, strengthen the integrity and transparency of the U.S. financial systems and curb illicit activities and money laundering. The rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners—the persons who ultimately own or control the company, to FinCEN.
The first thing you will need to know is that the rule becomes effective on 1 January 2024. That means that there is no immediate action that you need to take.
Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports. Reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information. These changes will create an additional burden on your company’s compliance.
What Entities are considered Reporting Companies?
The rule establishes two broad types of reporting companies; domestic and foreign. A domestic reporting company is any corporation, limited liability company (LLC), or other entity that may be, or is, established by filing documents with a secretary of state or a similar agency. A foreign reporting company is an entity established under the laws of a foreign country that is also registered to do business in any of the states of the United States. The final rule includes 23 statutory exemptions to a reporting company, however many of the exempted companies are excepted because they are already subject to federal and state regulations requiring the disclosure of their ultimate beneficial owners.
Unless your company is a bank, insurance company, or a tax-exempt organization the exemptions likely do not apply to your company. For a full list of exemptions, you may consult the Federal Register. As evidenced by the following two exemptions, the rule is cast broadly enough to capture as many companies as possible:
- Large Operating Companies. Under the CTA and the Final Rule, an entity falls into this category, and therefore is not a reporting company, if it: (1) employs more than 20 employees on a full-time basis in the United States; (2) filed in the previous year federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of other entities owned by the entity and through which the entity operates; and (3) has an operating presence at a physical office within the United States.
- Inactive Companies. Under the CTA and the Final Rule, an entity falls into this category, and therefore is not a reporting company, if it: (1) was in existence on or before January 1, 2020 ( i.e., the date of enactment of the CTA); (2) is not engaged in active business; (3) is not owned by a foreign person, whether directly or indirectly, wholly or partially (which makes this not applicable to most of TABS Inc.’s clients); (4) has not experienced any change in ownership in the preceding 12-month period, (5) has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period, and (6) does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.
Who is a Beneficial Owner?
Under the Final Rule, a beneficial owner includes more than just an individual who, directly or indirectly has an ownership interest in the company. In fact, a beneficial owner is defined as an individual who either (1) exercises substantial control over a reporting company or (2) owns or controls at least 25 percent of the ownership interest of the reporting company. Clearly who is deemed to have ‘substantial control’ over a company is not as clear as who may control at least 25 percent of the ownership interest. As such, the Final Rule defines substantial control with the basic goal of requiring a reporting company to identify the key individuals who stand behind the reporting company to direct its actions. Generally speaking, the Final Rule includes individuals who (1) are senior officers, (2) have authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body), (3) directs, determines or has substantial influence over important matters of the reporting company, including, for example, the reorganization, dissolution or merger of the reporting company, the selection or termination of business lines or ventures of the reporting company and the amendment of any governance documents of the reporting company, or (4) has any other form of substantial control over the reporting company, as persons with ‘substantial control’.
The Final Rule however also provides some exceptions, for instance, officers with more ministerial functions (e.g. Secretary or Treasurer) with little control over the company are exempt from the definition of a Beneficial Owner however the President CEO, COO, and General Counsel will generally be considered to be senior officers with substantial control.
In addition to Beneficial Owner information, the Final Rule requires Company Applicant information to be disclosed. The term company applicant, in the case of a domestic reporting company, as an individual who files the document that forms the entity. In the case of a foreign reporting company, it defined company applicant as an individual who files the document that first registers the entity to do business in the United States. This definition was further limited by the Final Rule to include only the individual who directly files the document to create or register the reporting company and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing. This definition is designed to identify the individual who is responsible for the creation of a reporting company through the filing of formation documents and the individual that directly submits the formation documents if that function is performed by a different person, but it reduces potential burdens by limiting the definition of company applicant to only one or two individuals.
What information needs to be reported?
The Final Rule requires the following information of the reporting company to be reported to:
- Full legal name;
- Any trade name;
- Current address;
- Jurisdiction of Formation
- IRS Taxpayer Identification Number or tax identification number issued by a foreign jurisdiction and the name of that jurisdiction.
Additionally, the reporting company must collect and remit for each beneficial owner the individual’s:
- Full legal name;
- Date of birth;
- Current residential or in some limited cases a business address; and
- a unique identifying number from an acceptable identification document (and the image of such document) or the individual’s FinCEN identifier.
Failure to comply with the Corporate Transparency Act reporting requirements as set forth in the Final Rules can lead to civil and criminal penalties, including a maximum civil penalty of $500 per day (capped at $10,000) and imprisonment for up to two years.
As noted above, the Final Rule released on 29 September 2022 is one of three rule makings that is anticipated by FinCEN in connection with the CTA. According to the press release issued by FinCEN, it “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. “
“FinCEN continues to develop the infrastructure to administer these requirements in accordance with the strict security and confidentiality requirements of the CTA, including the information technology system that will be used to store beneficial ownership information: the Beneficial Ownership Secure System (BOSS).”
To prepare for reporting under the Corporate Transparency Act, companies need to develop policies and procedures to determine their reporting obligations and to identify beneficial owners, company applicants, and third parties who may need to be included in such reporting. Companies will also need to determine how to obtain and maintain the information that is required to be reported without violating any right to privacy statutes or laws (e.g. GDPR).
If you have any questions regarding the CTA and its reporting requirements please do not hesitate to reach out to the Compliance Department or the BizDev Department at TABS Inc.