The Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued its final rules implementing the beneficial ownership reporting requirements pursuant to the bipartisan Corporate Transparency Act (“CTA”).  The rule requires most companies, limited liability and other entities that are registered to do business in the United States to report to FinCEN information about their beneficial owners.

The long-awaited rules are intended to stop criminal actors, including kleptocrats, drug traffickers, human traffickers and white collar criminals who would use anonymous shell companies to facilitate illegal activities and hide illegal proceeds. 

The final rules generally track the proposed regulations. The final rules, which are effective in January 2024, retain the broad definition of a beneficial owner, and require submission of information to FinCEN that will be used to create a national database to help target financial criminals.  The database will be made available  to law enforcement, the intelligence community, regulators and financial institutions.

The final rules maintain the exemption for companies with more than 20 full-time employees and more than $5 million in gross receipts.  Businesses in heavily-regulated industries, for example, are exempted from the regulations.

The rule identifies two types of reporting companies — foreign and domestic, and extends to limited liability partnerships, business trusts and most limited partnerships that are required to file with a state secretary to form the organization.

Under the new regulations, a beneficial owner is defined as any individual who meets one or more criteria — first, if the individual owns or controls at least 25 percent of the ownership of the company; and/or, second, if the individual exercises “substantial control” over the reporting company.

In defining “substantial control,” the rule focuses on certain positions (i.e., senior executives) and a range of activities that could constitute substantial control of a reporting company, as well as a catch-all to capture any other form of substantial control over the business. 

Specifically, the new rule applies to each person who: (a) serves as a senior officer of the reporting company; (b) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); (c) directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding: (1) the nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company; (2) the reorganization, dissolution, or merger of the reporting company; (3) major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company; (4) the selection or termination of business lines or ventures, or geographic focus, of the reporting company; (5) compensation schemes and incentive programs for senior officers; (6) the entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; (7) amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or (d) has any other form of substantial control over the reporting company.

A company required to file a Beneficial Ownership Report (“BOI”) report to report four specific pieces of information about each of its beneficial owners: birthdate, address, and a unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of the document).  The individual will then be assigned a FinCEN identifier.

Reporting companies created before January 1, 2021, will have one year to file thier reports.  Companies created after January 1, 2024, will have 30 days from creation to file their initial reports.  After the initial registration, companies will have 30 days to report changes to the information in prior reports.

FinCEN has additional rulemakings to complete implementation of the CTA.  First, FinCEN has to establish rules for who may access BOI information and for what purposes; second, FinCEN has to revise its customer due diligence rule following the promulgation of the BOI reporting final rule.

FinCEN continues to develop the infrastructure to administer security and confidentiality requirements of the CTA, including the Beneficial Ownership Secure System (“BOSS”).

FinCEN plans to develop compliance and guidance documents to assist reporting companies in complying with this rule.