FinCEN Issues Final Corporate Transparency Act Beneficial Ownership Reporting Rules

The Corporate Transparency Act (the “Act”) was enacted on January 1, 2021 as part of the Defense Authorization Act for Fiscal Year 2021. The Act established a new directive for the Financial Crimes Enforcement Network (“FinCEN”) to develop standardized reporting, maintenance, and disclosure of beneficial ownership information. Congress intends the Act to strengthen existing mechanisms that protect U.S. national security and guard against money laundering, sanction evasion maneuvers, terrorism financing, and other forms of illicit finance.

The Act applies to all corporations, limited liability companies, state partnerships or other similar entities that are either created through a U.S. state filing, or formed under the law of a foreign country and registered to do business in the U.S. 

The Act requires such companies to report to FinCEN the identities of all company “beneficial owners,” who are the natural persons holding at least 25% of the company’s equity interests or who otherwise have substantial control over the company. Reporting companies must also identify the “company applicant,” who is the natural person who filed the company’s formation documents. However, certain types of U.S. businesses are exempt from these new FinCEN reporting requirements:

• Categorical reporting exemptions are established for banks or bank holding companies, federal or state credit unions, governmental entities, entities which have publicly traded securities or are otherwise registered with and have regular reporting requirements to FinCEN, FINRA, or the SEC, insurance companies, public accounting firms, public utilities, pooled investment vehicles, 501(c) recognized tax-exempt entities, tax-exempt political organizations or 4927(a)  trusts, and any U.S. entity formed to hold governance rights over any of these entities meeting certain additional requirements.
• Qualified reporting exemptions are established for large operating companies, which must have a physical office within the U.S., more than 20 U.S.-based full-time employees, and more than $5 million in gross receipts or sales made in the U.S. as reported on prior year Federal income tax returns.

FinCEN may disclose reported beneficial ownership information upon request from federal law enforcement, national security or intelligence agencies, a non-federal law enforcement agency with court authorization, a federal agency coordinating with foreign agencies under specified requirements, and to financial institutions with company consent.

If a company fails to report to FinCEN as required under the Act, its beneficial owners and senior officers can be held individually liable and may be subject to both civil and criminal penalties for willful reporting violations.

On September 30, 2022, FinCEN issued its final regulations for beneficial ownership and company applicant reporting (the “Beneficial Ownership Reporting Rules”). The Beneficial Ownership Reporting Rules build upon and clarify the proposed regulations first issued by FinCEN late last year.  The Beneficial Ownership Reporting Rules will become effective as of January 1, 2024.

• Unless a reporting exemption applies, all companies formed or registered to do business in the U.S. after January 1, 2024 must report to FinCEN the identities of the company applicant(s) and all beneficial owners.
• Unless a reporting exemption applies, all existing companies formed or registered to do business in the U.S. before January 1, 2024 will have until January 1, 2025 to report the company’s current beneficial owners. However, in a departure from the proposed regulations, existing reporting companies will not need to identify the original company applicant. The proposed regulatory requirement would have placed an extraordinary burden on existing reporting companies to track down the person who filed the company’s formation documents years or decades prior. FinCEN recognized that such company applicants may not have any meaningful role in a reporting company’s current operations and that this information would not have been of substantial value for purposes of the Act.
• Unless a reporting exemption applies, after January 1, 2025, all companies formed or registered to do business in the U.S. must report to FinCEN any changes to company beneficial ownership within 30 days of such a change becoming effective.

The Beneficial Ownership Reporting Rules retain the same categorical and qualified reporting exemptions described above. In its regulatory commentary, FinCEN affirmed that exempt entities will not be required to take further affirmative actions to report or claim an exemption. The Beneficial Ownership Reporting Rules clarify reporting requirements for various types of entities which may be created under state law, parent entities, subsidiary entities, convertible equity interest holdings, and creditors, among others. FinCEN has indicated that further guidance and FAQs will follow with respect to numerous aspects of the Beneficial Ownership Reporting Rules before the effective date of this regulation.

To further discuss how the Act and the Beneficial Ownership Reporting Rules may impact your business, contact your regular Honigman attorney.