Earlier this year we posted about the reporting requirements of the Corporate Transparency Act (CTA or the “Act”) and the Financial Crimes Enforcement Network’s (FinCEN) proposed regulations implementing the Act.   As part of the National Defense Authorization Act of 2021, Congress passed the CTA in early 2021.  The primary purpose of the CTA is to curb illegal activities, such as money laundering, tax fraud, human and drug trafficking, terrorism financing, and other serious crimes carried out by anonymous shell companies. To do so, the CTA requires all business entities formed and registered in the United States to report “beneficial ownership information” (BOI) to FinCEN.  In December of 2021, FinCEN issued a Notice of Proposed Rule Making (NPRM) implementing the BOI reporting provisions of the CTA.  Just last month, on September 29, 2022, FinCEN issued a final rule establishing the BOI reporting requirement of the CTA. 

Who is Subject to the Reporting Requirements?

The final rule is largely as proposed.  Under the rule, any “reporting company” must file a BOI report with FinCEN.  FinCEN has identified both domestic and foreign companies as reporting companies. The final rule defines a "domestic reporting company" as "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" means 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."  In light of these definitions, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships are expected to submit BOI reports, considering that these entities are generally created by a filing with a secretary of state or similar office. 

The final rule also sets out several exemptions to the definition of a reporting company. Many of these exemptions are for entities that are already subject to heavy federal and/or state regulation, such as banks, credit unions, and depository institution holding companies; broker-dealers and investment advisers; investment companies; pooled investment vehicles; and registered money transmitting businesses.  The final rule also broadly excludes "large operating companies," which are defined as entities that: (1) employ more than 20 full-time employees in the U.S.; (2) have an operating presence at a physical office in the U.S.; and (3) have filed a federal income tax or information return in the United States demonstrating more than $5 million in gross receipts or sales.  

Also worth noting, the final rule exempts insurance companies.  In defining the term “insurance company,” FinCEN has adopted the definition of insurance company from the Investment Company Act of 1940.  That Act defines insurance company as:

[A] company which is organized as an insurance company, whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies, and which is subject to supervision by the insurance commissioner or a similar official or agency of a State; or any receiver or similar official or any liquidating agent for such a company, in his capacity as such.

Interestingly, of the two comments received on this exemption, one criticized that language for potentially applying to captive insurance companies.  The commenter that disapproved of the fact that the insurance company exemption might apply to captive insurance companies was critical of captive insurance arrangements and argued that such companies are “high-risk entities.” The commenter pointed to enforcement actions taken by the IRS against “abusive micro-captive” insurance arrangements. While FinCEN acknowledged these concerns, it emphasized that the scope of this exemption was specified by Congress in the CTA.

FinCEN has not indicated whether or to what extent certain captive insurance companies, which it has recognized can vary significantly in structure and size, might be able to properly claim this exemption. FinCEN noted in the rule’s commentary that it “may further consider captive insurance companies in connection with the study of exempt entities required under CTA section 6502(c).”  For now, FinCEN has adopted the final rule without any change to the language of the exemption for insurance companies.

Beneficial Owners and Company Applicants

The CTA requires these reporting companies to file certain identifying information about themselves, as well as information on both "beneficial owners" and "company applicants."  The final rule defines "beneficial owner" as "any individual who, directly or indirectly,” either exercises “substantial control” over a reporting company or owns or controls at least 25 percent of the “ownership interests” of such reporting company. "Substantial control" is defined broadly to include a reporting company's senior officers and those individuals who have authority regarding the appointment or removal of a senior officer or members of the board of directors, as well as those individuals who have substantial influence over other important matters affecting the reporting company.  As a catchall, the term also includes any individual who has any other form of substantial control over the reporting company.  "Ownership interest" is defined to include direct and indirect ownership interests, and includes equity, capital, and profit interests.

"Company applicant" means 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.  FinCEN has modified this rule to limit the definition of "company applicant" to only one or two individuals.

FinCEN BOI Reports

Under the final rule, a reporting company's initial report must include: (1) the full name of the reporting company; (2) any trade name or "doing business as" name; (3) the business street address; (4) jurisdiction of formation (for foreign reporting companies, the jurisdiction where the company is registered); and (5) the reporting company's Taxpayer Identification Number (TIN) (including the reporting company's Employer Identification Number (EIN)).

Moreover, the rule requires that the initial report include the following information about each beneficial owner and company applicant: (1) the full legal name of the individual; (2) the individual's date of birth; (3) the individual's current address; (4) a unique identifying number from a non-expired government issued identification document; and (5) an image of the non-expired government issued identification document that includes the unique identifying number and a photograph of the individual.

Timing

The final rule becomes effective on January 1, 2024.  The deadline for filing reports depends on when the reporting company was created or registered.   Reporting companies created or registered before January 1, 2024, will have one year to file their initial reports, while reporting companies created or registered after January 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 in earlier reports. Notably, the final rule no longer requires reporting companies created or registered before January 1, 2024, to submit BOI for company applicants. Such reporting companies will only have to submit information required for reporting companies and beneficial owners.

Non-Compliance

The CTA also establishes both criminal and civil penalties for non-compliance.  In particular, any person who provides false information, or fails to report complete or updated information, is subject to a civil penalty of not more than $500 for each day that the violation continues (up to $10,000), imprisonment for not more than two years, or both.

Next Steps

FinCEN intends to engage in additional rulemakings to establish who may access BOI and for what purposes.  FinCEN is also developing an information technology system, known as the Beneficial Ownership Secure System, to store and protect BOI.  It plans to publish the reporting forms used to comply with the reporting requirements and is developing guidance to assist companies in complying with obligations under the final rule.