KMK Law Corporate & Securities Blog

On September 29, 2022, the Financial Crimes Enforcement Network (“FinCEN”) issued the highly anticipated final rule, Beneficial Ownership Information Reporting Requirements (the “Final Rule”), implementing the beneficial ownership disclosure requirements of the Corporate Transparency Act (the “CTA”). The CTA drastically expands current beneficial ownership reporting obligations in order to combat the illicit use of shell companies and to shift the burden of identifying beneficial owners of such companies from financial institutions to the government itself.

Under the Final Rule, certain entities will be required to disclose identifying and beneficial ownership information to the U.S. federal government. The Final Rule will take effect on January 1, 2024 and offers a one-year grace period for entities created or registered prior to the effective date. Reporting companies created or registered on or after January 1, 2024 will have 30 days to file their initial reports.

The Final Rule describes who must file a beneficial ownership information report, what information must be reported and when a report is due. The Final Rule is the first of three rulemakings that FinCEN plans to implement related to the CTA. FinCEN will separately address through future rulemaking (i) the requirements for entities to develop protocols for access to, and the sharing of, reported beneficial ownership information, and (ii) amending the Customer Due Diligence (“CDD”) Rule applicable to financial institutions to account for the new requirements of the CTA.

Who Must File a Report?

The Final Rule will require a “reporting company” to file a report with FinCEN including the information covered below. A “reporting company” is defined as follows:

• A “domestic reporting company” means an entity that is (i) a corporation, (ii) a limited liability company, or (iii) 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 an entity that is (i) a corporation, limited liability company, or other entity, (ii) formed under the laws 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 Final Rule includes categories of exempt companies, which include entities that are already generally subject to substantial federal and state regulation under which beneficial ownership information may be known, including public reporting companies, majority-owned subsidiaries of a public reporting company, banks and credit unions, tax-exempt entities, broker-dealers and other similar entities. Also exempt are large operating companies that (1) employ more than 20 full-time employees in the United States, (2) have an operating presence at a physical office within the United States, and (3) filed a federal income tax or return in the United States for the previous year reporting more than $5 million in gross receipts or sales. Certain inactive entities are also exempt provided they were in existence on or before January 1, 2020 and meet other requirements of the rule.

Whose Information Must be Disclosed?

The Final Rule requires reporting companies to disclose information concerning (i) the beneficial owners and (ii) company applications of the reporting companies.

Beneficial Owners

The term “beneficial owner” is defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interest of such reporting company.” Limited exceptions exist including minor children (provided that the beneficial ownership information of a parent or legal guardian is reported), employees (excluding senior officers), and creditors (whose sole interest in a reporting company is as a creditor).

The Final Rule has taken a broad approach to “ownership interest” to include both equity and other types of interest, such as capital or profit interests, convertible instruments, warrants, and other options or privileges that enable an individual to acquire equity or capital in a reporting company. For “substantial control,” there are three prongs that determine if an individual has substantial control: (i) if the individual serves as a senior officer of the reporting company; (ii) if the individual has authority regarding the appointment or removal of any senior officer or dominant majority of the board (or similar body) of the reporting company; and/or (iii) if the individual exercises substantial influence, direction of, or decision over important matters of a reporting company. Reporting companies are required to disclose all individuals with “substantial control” and at least one beneficial owner must be disclosed who has “substantial control” regardless of whether they satisfy the ownership prong.

Company Applicants

The Final Rule defines a “company applicant” as follows:

• For domestic reporting companies, the individual who directly files the document that creates a domestic reporting company, as well as the individual who is primarily responsible for directing or controlling such filing; and
• For foreign reporting companies, the individual who directly files the document that first registers a foreign reporting company, as well as the individual who is primarily responsible for directing or controlling such filing.

The Final Rule requires the reporting of beneficial ownership information for company applicants only for reporting companies created or registered on or after the effective date of the rule (January 1, 2024). These newly created or registered entities will be required to report company applicant information but will not be required to update it as with the beneficial owner information.

What Information Must be Disclosed?

Reporting Companies: Initial reports to FinCEN must include the following information about the reporting company:

• Full legal name and any trade names;
• Address of principal place of business and primarily location;
• Jurisdiction of formation; and
• Taxpayer identification number

Beneficial Owners & Company Applicants: Initial reports to FinCEN must include the following information about each beneficial owner and company applicant:

• Full legal name;
• Date of birth;
• Current residential address (except for company applicants who form or register an entity in the course of the company applicant’s business);
• Unique identifying number for a non-expired U.S. passport, state I.D. or state driver’s license; and
• Image of the document showing the unique identifying number.

The CTA requires reporting companies to file their initial report within 30 days of formation (for entities formed on or after January 1, 2024) and no later than January 1, 2025 for reporting companies formed prior to such date. The Final Rule also requires reporting companies to file updated information and correct any inaccurate information within 30 days of such change or inaccuracy.  

What are the Penalties?

The Final Rule provides for civil and criminal penalties for the willful failure to provide accurate beneficial ownership information to FinCEN. Civil penalties include up to $500 for each day a violation continues or has not been remedied and a criminal penalty of up to $10,000 in fines and/or up to two years imprisonment. Notably, the Final Rule provides for the possibility of individual liability for reporting violations. Individuals involved in the reporting process can be held liable if they willfully cause false or fraudulent information to be filed, if they willfully direct or control another person not to file a report when required, or if they are in substantial control of a reporting company when it fails to report complete or updated beneficial ownership information.

Conclusion

The Final Rules broadly expand the number of entities subject to U.S. federal regulation with respect to beneficial ownership information. The practical result of the Final Rules is that virtually any company created or registered in the United States that is not already subject to federal or state regulation or otherwise required to disclose its beneficial owners to the government, must now do so. In light of the scope of this rule, its retroactive effect for companies formed prior to the effective date, and the penalties, reporting companies should identify the relevant timeframe within which they must comply and begin to compile the required beneficial owner information and prepare the initial reports.