FinCEN announces proposed rule to implement the reporting requirements of the Corporate Transparency Act
On January 1, 2021, Congress passed the Corporate Transparency Act (CTA), requiring “reporting companies” to file a report with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) containing personal identifying information about the company’s beneficial owners and applicants.
The information collected will be kept in a private database maintained by FinCEN with access limited to federal agencies, state agencies with a court order, and financial institutions with the consent of the company.
The details for how this reporting obligation will be implemented were left for FinCEN to provide through rulemaking. In April, FinCEN issued an Advance Notice of Proposed Rulemaking, seeking comments on how to implement the CTA. FinCEN has now drafted a proposed rule, which deals mainly with who has to file a report, when it has to be filed, and what information has to be reported. On December 7, FinCEN issued a Notice of Proposed Rulemaking, setting forth its proposed rule. Below is a summary of what the proposed rule provides.
1. What is a “reporting company”?
A domestic reporting company is defined as any entity that is a corporation, limited liability company, or other entity that 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.
A foreign reporting company is defined as any entity that is a corporation, limited liability company, or other entity formed under the law of a foreign country and that is registered to do business in any state or tribal jurisdiction by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe.
2. What entities are exempt from the definition of “reporting company”?
There are 23 exemptions. Most are for companies that are already subject to substantial federal or state regulation under which their beneficial ownership may already be known. This includes, among others, entities that file reports with the SEC, banks, credit unions, depository institutions, investment advisors, securities brokers and dealers, tax-exempt entities, insurance companies, and accounting firms.
There is also an exemption for a “large operating company”. This is defined as any entity that (1) employs more than 20 full-time employees in the U.S., (2) has an operating presence at a physical office within the U.S., and (3) filed a federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales.
3. What reports are reporting companies required to file with FinCEN and when must they be filed?
An initial report must be filed within 14 calendar days of the date a domestic reporting company is formed and within 14 calendar days of the date a foreign reporting company first registers to do business in the United States.
An updated report must be filed within 30 calendar days of the date when there is any change in the information previously submitted to FinCEN.
A corrected report must be filed within 14 calendar days of the reporting company becoming aware that previously submitted information was inaccurate when the report was filed.
4. What does a company do upon a change in its status as a reporting company or an exempt entity?
A company that did not file an initial report because it was exempt must file an initial report within 30 calendar days of the date it no longer qualifies for an exemption. A reporting company that becomes exempt after filing an initial report is required to file an updated report within 30 days. Its report must indicate that it is no longer a reporting company.
5. What information is required to be set forth in the initial report?
Information must be provided about the reporting company, its beneficial owners, and its company applicants.
Information about the reporting company:
- its full name
- any trade or d/b/a names
- business street address
- jurisdiction of formation of a domestic company and of the first state of registration for a foreign company
- IRS taxpayer identification number (or if not issued yet, DUNS number or Legal Entity Identifier)
Information about each of the individuals who are the company’s beneficial owners and applicants:
- full legal name
- date of birth
- current address (The current address of an individual who acts as a company applicant in the course of the individual’s business can provide a business street address. In all other cases the individual’s residential street address as used for tax residency purposes must be provided.)
- unique identifying number from a non-expired passport, government-issued ID document, or driver’s license
- an image of the document containing the unique identifying number which must show the number and a photograph of the individual.
6. What is a FinCEN identifier, how is it obtained, and how is it used?
A FinCEN identifier is a unique number issued by FinCEN to individuals and reporting companies. An individual may submit an application for a FinCEN identifier that contains all of the information that otherwise has to be set forth in the initial report about that individual. An individual who has obtained a FinCEN identifier may provide it to the reporting company and the reporting company can include the FinCEN identifier in lieu of the information otherwise required.
A reporting company can also submit an application for a FinCEN identifier containing all the information required about it on its initial report. The application may be submitted at or after the time it submits its initial report and the company can use the FinCEN identifier in a report in lieu of providing the information otherwise required.
Each FinCEN identifier is specific to the individual or company and only one FinCEN identifier can be obtained.
An individual or entity must file an updated or corrected report to update or correct any information previously submitted in an application for a FinCEN identifier. (Within 30 days for an update and 14 days for a correction).
7. Who is considered to be a “beneficial owner”?
A beneficial owner is defined as any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company. The terms “substantial control” and “ownership interest” are defined and standards for determining whether an individual owns or controls 25 percent of the ownership interests are set forth.
“Substantial control” is defined to include (i) service as a senior officer, (ii) authority over the appointment or removal of senior officers or a majority or dominant minority of the board, and (iii) direction, determination, or decision of, or substantial influence over, important matters affecting the reporting company.
The proposed rule exempts from the definition of beneficial owner (i) a minor child, (ii) a nominee, intermediary, custodian, or agent of another individual, (iii) an employee acting solely as an employee, (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance, and (v) a creditor of the reporting company.
8. What is a “company applicant”?
For a domestic reporting company a “company applicant” means any individual who files the document that creates the reporting company, including any individual who directs or controls the filing of such document by another person.
For a foreign reporting company, a “company applicant” means any individual who files the document that first registers the reporting company, including any individual who directs or controls the filing of such document by another person.
9. What is a reporting violation?
It is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information or to willfully fail to report complete or updated beneficial ownership information. A person provides or attempts to provide beneficial ownership information or fails to report complete or updated information to FinCEN if such person does so directly or indirectly. The term ‘‘beneficial ownership information’’ includes any information provided to FinCEN under this rule.
This proposed rule is one of three rulemakings planned to implement the CTA. There will also be a rulemaking to establish rules for who may access the information, for what purposes, and what safeguards will be required to secure and protect the information, and a rulemaking to revise FinCEN’s customer due diligence rule. In addition, FinCEN is still developing reporting protocols and relevant forms, and is not proposing a final format or mechanism of reporting at this time.
Beneficial ownership reporting will begin upon the effective date of the final rule. FinCEN did not propose an effective date in this proposed rule. However, once the effective date is set, companies formed or registered on or after the effective date will have to file the initial report within 14 calendar days of the date of formation or registration. Preexisting companies will have to file the initial report within one year of the effective date.
This article has discussed some, but not all, of the provisions of the proposed rule. Interested persons should review the proposed rule, which was published in the Federal Register here: Beneficial Ownership Information Reporting Requirements.
FinCEN indicated in its Notice of Proposed Rulemaking that it is seeking comments on any and all aspects of the proposed reporting rule. The comment period is open until February 7, 2022.