Article

FinCEN beneficial ownership reporting regulations

10th May 2023

On 29 September 2022, the U.S. Department of the Treasury’s Financial Enforcement Network (FinCEN) issued a final rule implementing the Corporate Transparency Act’s (CTA) beneficial ownership information (BOI) reporting provisions.

Set to take effect on 1 January 2024, the rule will require reporting companies to report certain information regarding their beneficial owners.

The regulation positions the U.S. as the latest country to participate in the globalised initiative to tackle anonymous financial structures that enable illicit financial flows. This trend has emerged as an international response to widespread corruption and illegal activities, exemplified by the release of the Panama Papers and Paradise Papers in 2016 and 2017 respectively.

Prevention is key

The rule’s objective is to aid in the prevention of money laundering, terrorist financing, corruption, tax fraud, and other illicit activity. The implementation of these regulations will help safeguard the U.S. financial system, making it increasingly challenging for bad actors to conceal their financial activities through entities with opaque ownership structures, like shell companies.

In the past, shell companies have allowed bad actors to execute financial transactions while disguising the involvement of their true beneficial owners. This rule will enable the appropriate authorities to hinder such criminal entities from concealing funds or other assets within the U.S.

The rule requires companies covered by this (“Reporting Companies”), to file reports with FinCEN that identify two categories of individuals:

  • The beneficial owners of an entity
  • The company applicants of the entity.

“Beneficial Owner” means any individual who, directly or indirectly, either:

  • Exercises substantial control over a Reporting Company
  • Owns or controls at least 25% of the ownership interests of a Reporting Company.

“Company Applicant” means either:

  • 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 in the U.S
  • The individual who is primarily responsible for directing or controlling the filing of the relevant document by another.

Note that entities in existence or registered at the time of the effective date of the rule are not required to identify and report on their company applicants.

Reporting Companies

A Reporting Company is defined as any entity that is a corporation, LLC, or other similar entity which is created by the filing of a document with a secretary of state or similar office under the law of a State or Indian tribe.

This includes foreign entities that are formed under the laws of a foreign country, and that are registered to do business in the United States through filing a document as above.

FinCEN expects that the definition will include most limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships.

Exemptions

The rule identifies 23 types of entities that are exempt from the definition of a “Reporting Company” and the reporting provisions. These include:

  • Governmental authorities
  • Banks, credit unions and money services businesses
  • Investment advisors
  • Registered broker dealers
  • Exchanges
  • Clearing agencies
  • Insurance companies
  • Accounting firms
  • Tax exempt entities
  • Subsidiaries of certain exempt entities
  • Accounting firms
  • Large operating companies.

Noteworthy corporate exemptions

Large operating companies, defined as large companies that meet the following criteria:

  • Employs more than 20 full-time employees in the U.S.
  • Filed U.S. federal income tax returns demonstrating more than $5m in gross receipts or sales, excluding gross receipts or sales from sources outside the U.S.
  • Have an operating presence at a physical office within the U.S.

Publicly traded companies that are issuers of securities under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise required to file supplementary and periodic information under Section 15(d) of the Exchange Act.

What information must be reported?

Information on the Reporting Company:

  • Full legal name: including any trade name or “doing business as” name
  • Business address
  • Jurisdiction of formation and registration
  • Company Identification Number: IRS TIN – or where the company has not been issued a TIN, either a Dun & Bradstreet Data Universal Numbering System (DUNS) Number or a Legal Identifier (LEI)

Information on beneficial owners and company applicants to report

  • Name, date of birth, and address
  • Identifying number from an identification document.

What does this mean for you?

The final rule is a step towards the implementation of the BOI reporting regulations. Companies should familiarise themselves with the requirements and any changes to the rule before its effective date of  1 January 2024. The regulations may impact entities and shareholders alike, and individuals should seek guidance on how to navigate the requirements and deadlines upon implementation.

Written by Daniel J. Blanchard and Sebas Estrada of Morse Law. If you would like to contact Morse Law or discuss this article please contact Nicolas Groffman or Natalie Minott – contact details below.