FinCEN Issues Final Rule Implementing Corporate Transparency Act Requirement – Financial Services

Highlights

• The U.S. Department of the Treasury’s Financial Crimes
  Enforcement Network (FinCEN) issued a final rule on Sept. 29, 2022,
  implementing the beneficial ownership information (BOI) reporting
  requirement of the Corporate Transparency Act (CTA), which was
  passed by Congress as part of the Anti-Money Laundering Act of
  2020. In a nutshell, the final rule requires certain domestic and
  foreign entities to submit specified BOI to FinCEN.




• According to FinCEN, BOI reporting will significantly aid the
  efforts of U.S. government departments and agencies, law
  enforcement, tax authorities and financial institutions to protect
  the U.S. financial system from illicit use that undermines U.S.
  national security and foreign policy interests.




• This Holland & Knight alert discusses key components of the
  final rule issued by FinCEN, including 1) who must file a report,
  2) what information must be provided and 3) when a report is due.
  In doing so, this alert highlights some of the revisions made to
  FinCEN’s Notice of Proposed Rulemaking (NPRM) of Dec. 8, 2021,
  in light of the comments received in response thereto.

The U.S. Department of the Treasury’s Financial Crimes
Enforcement Network (FinCEN) issued a final rule on Sept. 29, 2022, implementing the
beneficial ownership information (BOI) reporting requirement of the
Corporate Transparency Act (CTA), which was passed by Congress as
part of the Anti-Money Laundering Act of 2020. See 31 CFR 1010.380.
The CTA, which requires certain domestic and foreign entities to
submit specified BOI to FinCEN, is designed to protect the U.S.
financial system from illicit financial activity and national
security threats, such as the use of shell companies to launder
money or evade U.S. sanctions. FinCEN expects that the final rule
will help efforts to identify illicit actors and combat their
financial activities. Essentially, the final rule addresses the
lack of a comprehensive federal BOI reporting requirement and
database.

This Holland & Knight alert discusses key components of the
final rule issued by FinCEN, including who must file a report, what
information must be provided and when a report is due. Furthermore,
this alert highlights some of the revisions made to FinCEN’s Notice of Proposed Rulemaking (NPRM) of Dec.
8, 2021, in light of the comments received in response thereto.

Who Must File a Report?

Any entity that meets the definition of a “reporting
company” must file a BOI report with FinCEN. In particular,
FinCEN has identified domestic and foreign companies as reporting
companies. The final rule defines a “domestic reporting
company” to include “a corporation, limited liability
company (LLC), or any 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.”

Similarly, a “foreign reporting company” is defined as
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.” Based on the foregoing
definitions, FinCEN expects limited liability partnerships, limited
liability limited partnerships, business trusts and most limited
partnerships to submit BOI reports, considering such entities are
generally created by a filing with a secretary of state or similar
office. Certain entities are excluded from the definition of a
“reporting company” to the extent that they are not
created by a filing with a secretary of state or similar
office.

Further, the final rule exempts 23 enumerated entities from the
definition of a “reporting company,” including, but not
limited to, governmental authorities, banks, depository institution
holding companies, money services businesses, brokers or dealers in
securities and accounting firms. These exempted entities also
include certain large operating companies that meet certain
employment and/or tax reporting criteria and publicly traded
companies that are issuers of securities that are registered under
Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 78l)
or otherwise required to file supplementary and periodic
information under Section 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78o(d)). While the final rule authorizes the
Secretary of the Treasury to exempt additional entities from the
definition of a “reporting company,” FinCEN has expressed
reluctance to expand the exemptions as doing so would require a
finding that requiring such entities to submit BOI reports would
not serve the public interest and would not be highly useful in
furthering the objectives of the CTA.¹

As a result of the foregoing, it is anticipated that many large
operating companies or publicly traded companies will likely meet
one or more exemptions, but both domestic and foreign commercial
groups that have U.S. subsidiaries will need to evaluate their own
particular circumstances to ensure that they qualify for such
exemptions.

Who Are Beneficial Owners and Company Applicants?

The CTA requires reporting companies to file with FinCEN reports
that identify a company’s “beneficial owners,” as
well as information about “company applicants.” This
alert will address each category of individuals below.

Beneficial Owners

A “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 twenty-five (25) percent of the ownership interests of a
reporting company.” The CTA requires the identification of
each beneficial owner of the respective reporting company. As such,
all individuals that exercise substantial control and own or
control at least 25 percent of the reporting company must be
identified. The final rule provides some color as to the
definitions of “substantial control” and “ownership
interests.”

Substantial Control

Most notably, FinCEN revised the definition of “substantial
control” to ensure that reporting companies identify key
individuals who direct the actions of such entities. Under the
final rule, an individual exercises substantial control over a
reporting company if the individual:

1. serves as a senior officer of the reporting company




2. has authority over the appointment or removal of any senior
   officer or a majority of the board of directors (or similar body)
   of the reporting company




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 reflected above, No. 4 serves as a catch-all provision to
address control that may be exercised in less conventional ways
with respect to emerging entities with varying governance
structures. In other words, this provision is expected to prevent
any efforts to circumvent the final rule.

Ownership or Control of Ownership Interests

The final rule establishes standards for determining whether an
individual has an ownership interest in a reporting company. An
“ownership interest” is defined as any instrument,
contract, arrangement, understanding or mechanism used to establish
ownership, such as any equity, stock, capital or profit interest.
In turn, an individual may directly or indirectly own or control an
ownership interest of a reporting company through any contract,
arrangement, understanding or relationship, including, for example,
joint ownership, certain trust arrangements and acting as an
intermediary, custodian or agent on behalf of another.

The definition of “beneficial owner” does not include
1) minor children, 2) individuals acting as nominees,
intermediaries, custodians or agents, 3) employees acting solely as
employees and not as senior officers, 4) individuals whose only
interest in a reporting company is a future interest through a
right of inheritance, and 5) creditors of a reporting company.

Company Applicants

The final rule requires the identification of company applicants
who are primarily responsible for directing or controlling the
filing of the formation documents for the reporting company. The
“company applicant” is either 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 within the U.S., or 2) the
individual who is primarily responsible for directing or
controlling the filing of the relevant document by another.
Notably, FinCEN modified this rule to limit the definition of
“company applicant” to only one or two individuals.

What Information Must Be Disclosed

The final rule requires a reporting company to submit the
following information to FinCEN for itself: 1) full legal name, 2)
any trade name, 3) current address, 4) the jurisdiction of
formation, and 5) the Internal Revenue Service Taxpayer
Identification Number (TIN) (including an Employer Identification
Number) of the reporting company, or where a foreign reporting
company has not been issued a TIN, a tax identification number
issued by a foreign jurisdiction and the name of such jurisdiction.
Reporting companies with a principal place of business in the U.S.
must provide the street address of such principal place of
business; while reporting companies with a principal place of
business outside of the U.S. must provide the street address of the
primary location in the U.S. where their business is conducted.

Additionally, the final rule requires a reporting company to
submit the following to FinCEN, for each beneficial owner and
company applicant: 1) the individual’s full legal name, 2) date
of birth, 3) current residential or business street address, and 4)
a unique identifying number from an acceptable identification
document (and the image of such document) or the individual’s
FinCEN identifier. The CTA adopts a bifurcated approach for
beneficial owners and company applicants that requires a business
address for company applicants who create or register companies in
the course of their business, while requiring a residential address
for all other individuals (such as beneficial owners).

When Disclosures Must Be Made

The final rule will go into effect on Jan. 1, 2024. Reporting
companies created or registered before Jan. 1, 2024, will have one
year (until Jan. 1, 2025) to file their initial reports, while
reporting companies created or registered after Jan. 1, 2024, will
have 30 days after receiving notice of their creation or
registration 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. Importantly, the final rule no
longer requires reporting companies created or registered prior to
Jan. 1, 2024, to submit BOI for company applicants. Rather, such
reporting companies will only have to submit information required
for reporting companies and beneficial owners.

Future Rulemakings

In light of the final rule discussed herein, FinCEN intends to
engage in additional rulemakings to establish who may access BOI
and for what purposes. In addition, FinCEN is in the process of
developing the Beneficial Ownership Secure System in accordance
with the confidentiality requirements of the CTA. It is expected
that FinCEN will release notices pertaining to such proposed
regulations in the near future.

Footnote

1. The final rule and regulations indicated that while
FinCEN considered comments proposing additional exemptions,
“commenters generally did not provide enough information to
support making those determinations at this time.” FinCEN will
continue to consider potential exemptions, but any additional
exemptions would require approval from the Secretary of the
Treasury, Attorney General and Secretary of Homeland
Security.