On September 29, 2022, the Financial Crimes Enforcement Network (FinCEN), issued a Final Rule implementing certain provisions of the Corporate Transparency Act, requiring many domestic and foreign entities to report information to FinCEN about their beneficial owners and company applicants. The Final Rule will go into effect on January 1, 2024. Because the Rule will apply to most entities, it is important to become familiar with the reporting requirements and develop a plan to gather the required information.

Purpose of the Rule

Simply put, the purpose of the new Rule is to prevent and combat illicit actors from using shell and front companies to hide their identities to evade anti-money laundering laws or otherwise illegally access and transact in the United States economy.

What Entities Must File Reports?

Companies that are required to file reports under the Rule are called “reporting companies.” For purposes of the Rule, a “domestic reporting company” is a corporation, a limited liability company, or any other entity that is created by the filing of a document with the secretary of state or any similar office under the law of a state or Indian tribe. A “foreign reporting company” is a corporation, limited liability company, or other entity that is formed under the laws of a foreign country and that is registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian tribe.

The Rule currently lists 23 categories of entities that are exempt from the definition of “reporting company.” However, most entities will not fall under these exemptions, as the exempt entities are generally only those already subject to extensive regulation, where much of their beneficial ownership information is already known.

What Information Must Be Reported?

Reporting companies existing or registered before January 1, 2024 will be required to report the following information for each of their “beneficial owners” (defined in later section):

• Full legal name;
• Date of birth;
• Current residential address;
• Unique identifying number from a non-expired United States passport, state identification document, or state driver’s license; and
• Image of the document showing the unique identifying number.

Reporting companies formed on or after January 1, 2024 must report all of the same information about their beneficial owners. Additionally, those new entities must report the same categories of information about their “company applicant” (defined in later section). If the company applicant forms or registers entities in the course of the company applicant’s business, then the company applicant’s business address, rather than residential address, must be reported.

Both new and existing reporting companies will also be required to report the following information about the entity itself:

• Full legal name;
• Any trade name;
• Current address (the street address of the principal place of business in the United States);
• Jurisdiction of formation; and
• Internal Revenue Service Taxpayer Identification Number (including an Employer Identification Number).

Reporting companies will be required to update their reports if there are changes to their beneficial owners.

Reporting companies and individuals may apply to FinCEN for the issuance of a “FinCEN identifier” number that may, in certain instances, be reported to FinCEN in lieu of the above information. Entities and individuals that receive FinCEN identifiers are required to submit updated information to FinCEN within 30 days of any change in their information.  

What is a Beneficial Owner and a Company Applicant?

            Beneficial Owner

Under the Rule, a “beneficial owner” is any individual who, directly or indirectly, either (a) exercises substantial control over a reporting company, or (b) owns or controls at least 25 percent of the ownership interests of a reporting company.

An individual exercises “substantial control” over a reporting company if the individual:

• Serves as a senior officer of the reporting company;
• Has authority over appointment or removal of any senior officer or a majority of the board of directors of the reporting company;
• Directs, determines, or has substantial influence over important matters of the reporting company; or
• Has any other form of substantial control over the reporting company.

The Rule’s definition of “ownership interests” is more expansive than just equity interests. It includes any instrument, contract, arrangement, understanding, or mechanism used to establish ownership, including equity, stock, capital, or profit interest. Thus, an individual may hold an ownership interest through joint ownership with others; through a nominee, intermediary, custodian, or agent; through certain trust arrangements; or through ownership or control of intermediary entities with ownership interests of the reporting company.

Minor children; individuals acting as nominees, intermediaries, custodians or agents; employees acting solely as employees and not as senior officers; individuals whose only interest in the reporting company is a future interest through an inheritance right; and creditors of the reporting company, are not included in the definition of beneficial owner.

            Company Applicant

Under the Rule a “company applicant” is the individual who either (a) directly files the document that creates the reporting company (or, if a foreign entity, that first registers the reporting company to do business in the United States), or (b) is primarily responsible for directing or controlling the filing of such document by another.

When and How Must Reports Be Made?

Entities existing or registered before January 1, 2024 will have one year from the effective date to complete their reporting requirements. Thus, these entities must file their complete reports with FinCEN by January 1, 2025.

Entities formed or registered on or after January 1, 2024 must file their report with FinCEN within 30 days of the date the formation or registration becomes effective under applicable law.

Updated reports of changes to beneficial owners must be filed within 30 days after the date on which the change occurs.

FinCEN expects that reports will be submitted electronically through a secure online interface, currently being developed. FinCEN is considering whether and how it may accept reports if a company is unable to file through the online interface.

What if a Reporting Company Fails to Make a Timely or Accurate Report?

Willfully reporting inaccurate information or failing to timely make or update a report could result in criminal or civil penalties, including civil penalties of up to $500 per day that the violation is not corrected, and criminal penalties of up to $10,000 and/or imprisonment of up to two years. Potential liability for violations is not limited to reporting companies. Individuals who cause the violation or who are a “senior officer of the entity” at the time of the violation, may also be liable.

What Steps Should Entities Consider Right Now?

Although the Rule does not go into effect until 2024, it is important for entities to begin to understand the upcoming reporting requirements, so they can begin planning a strategy to collect and keep secure the necessary information.

Entities should first consider whether they are a “reporting company” required to make a report. If your entity is already heavily regulated, you should review the exemptions to the definition of “reporting company” to determine if your entity will be required to make a report.

If your entity is a reporting company, you should attempt to determine the beneficial owners. After determining the beneficial owners, your entity should make and execute a plan to collect the necessary information about those beneficial owners.

The time and expense required to determine the beneficial owners and gather the required information will vary greatly depending on the size and complexity of the company. If the nature of your entity will make it difficult to gather beneficial owner information, you should begin developing a plan as soon as possible.

If you have questions about FinCEN’s Final Rule or need advice or assistance developing a plan to meet your reporting requirements, the Business attorneys at Martin Pringle are ready to help.