FinCEN Publishes Final Rule on Beneficial Ownership Disclosure Requirements

Authors: Michael T. Gershberg, Gregory Bernstein

On September 30, 2022 the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a final rule (“Final Rule”) implementing the expanded beneficial ownership disclosure requirements of the Corporate Transparency Act (“CTA”), which was included as part of the Anti-Money Laundering Act of 2020. The Final Rule, which largely adopts the Proposed Rule issued in December 2021 (“Proposed Rule”), specifies which new and existing entities must report beneficial ownership information to FinCEN, what information must be reported, and when reports are due. The Final Rule will take effect on January 1, 2024, although reporting companies in existence at that time will have an additional year to file any required beneficial ownership information.

The Final Rule furthers one of the main objectives of the CTA, which aimed to strengthen the U.S. anti-money laundering system, including through the creation of a centralized government database of beneficial ownership information for certain legal entities. The processes established by the Final Rule partially shifts responsibility from financial institutions to a wider range of private companies and the federal government to provide and collect beneficial ownership information. In a fact sheet published by FinCEN, the agency noted that the Final Rule is one of three rulemakings planned to implement the CTA. FinCEN will engage in additional rulemakings to (1) establish rules for accessing the database of beneficial ownership information, and (2) revise FinCEN’s customer due diligence (CDD) rule in light of FinCEN’s new role in collecting beneficial ownership information. As of now, however, the CDD rule remains in effect unchanged.

In a statement, Treasury Secretary Janet Yellen stated that the Final Rule “is a major step forward in giving law enforcement, national security agencies, and other partners the information they need to crack down on criminals, corrupt individuals, and other bad actors who seek to take advantage of America’s financial system for illicit purposes.”

This memo summarizes the framework and main requirements of the Final Rule.

Reporting Company Definition and Exemptions

The general structure of the Final Rule is that “reporting companies” must provide certain beneficial ownership information to FinCEN. Reporting companies include (i) a “domestic reporting company”—i.e., any corporation, a limited liability company, or other entity that is created by the filing of a document with a secretary of state or similar office, and (ii) a “foreign reporting company”—i.e., any foreign-organized corporation, limited liability company, or other entity 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.  While the Final Rule does not explicitly mention limited partnerships, FinCEN noted in the Proposed Rule that it expected the definition of “reporting company” would cover most limited partnerships.

This broad definition of reporting company is made narrower through 23 exemptions, many of which also exist in the CDD rule. Many categories of exempt entities are regulated entities such as banks, credit unions, depositary institutions, investment advisors, and securities brokers and dealers, which are already subject to certain disclosure required by their respective regulators. Other exempt entities include public companies, governmental authorities, and tax-exempt entities. In response to comments received on the Proposed Rule, FinCEN clarified that sole proprietorships, trusts, and general partnerships that are not created through the filing of a document with a secretary of state or similar office would not be considered reporting companies. In cases where such an entity registers for a business license or similar permit, such registration would not generally “create” the entity, and thus would not result in it being treated as a reporting company.

One new and important category of exempt entity is the “large operating company,” which is defined as any entity that (i) employs more than 20 employees on a full-time basis in the United States, (ii) has an operating presence at a physical office in the United States, and (iii) had at least $5 million in gross receipts or sales in the previous year. Additionally, pooled investment vehicles such as private investment funds are exempt if operated or advised by an exempt regulated entity. Under the Final Rule, direct and indirect subsidiaries of most exempt entities are themselves exempt. However, subsidiaries of pooled investment vehicles are not exempt unless they, in their own right, meet the criteria for an exemption. Additional detail concerning pooled investment vehicles is provided below.

Beneficial Owner Definition

Under the Final Rule, a reporting company must disclose certain information on all of its “beneficial owners.” The term “beneficial owner” is defined as an individual who, directly or indirectly, exercises substantial control over the reporting company, or who owns or controls at least 25% percent of the ownership interest of the reporting company. “Substantial control” is defined broadly and includes:

1. serving as a senior officer,
2. having authority over the appointment or removal of any senior officer or a majority of the board of directors,
3. directing, determining, or having substantial influence over, important decisions made by the reporting company, or
4. having any other form of substantial control over the reporting company.

In providing additional context regarding the concept of substantial control, the Final Rule noted that an individual, including as a trustee of a trust, may also, directly or indirectly, exercise substantial control over a reporting company through:

1. board representation;
2. ownership or control of a majority of the voting power;
3. rights associated with any financing arrangement;
4. control over one or more intermediate entities that exercise substantial control over a reporting company;
5. formal or informal business or financial relationships with other persons acting as a nominee; or
6. any other contract, arrangement, understanding, or relationship.

The Final Rule also adopts a broad definition of “ownership interest,” noting that this includes equity, stock, any capital or profit interest, and convertible instruments, as well as warrants and rights to purchase, sell, or subscribe to any of the foregoing. Since beneficial owners may be covered if they own or control at least 25% ownership interests, the analysis may be more complicated than under the CDD rule, which focuses solely on equity ownership.

These definitions of substantial control and ownership interest are more detailed and more expansive than those under the CDD rule. One key difference is that the Final Rule covers all control persons of a reporting company, while the CDD rule only requires disclosure of one control person. Therefore, a given reporting company may have to assess and report many beneficial owners under the control prong, in addition to up to the four beneficial owners under the ownership prong.

Additionally, for an ownership interest held by a trust, the Final Rule treats the following individuals as the beneficial owners: (i) a trustee or other individual with the authority to dispose of trust assets; (ii) a beneficiary who is the sole permissible recipient of income and principal from the trust or who has the right to demand a distribution of or withdraw substantially all of the assets of the trust; or (iii) a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.

Company Applicants

In addition to requiring information on beneficial owners, the Final Rule requires new reporting companies to submit information on each “company applicant,” which is the individual who files the document that creates the domestic reporting company or that first registers the foreign reporting company. In each case, the company applicant is the individual who is primarily responsible for directing or controlling the filing of such document if more than one individual is involved in the filing. FinCEN explained that this language is intended to be less burdensome than the Proposed Rule by limiting the definition of company applicant to only one or two individuals. Another notable change from the Proposed Rule is that reporting companies in existence on the effective date (January 1, 2024) do not need to report a company applicant, and new reporting companies do not need to update company applicant information.

What Information Must be Reported

An initial report to FinCEN must include the following information:

1. full name of the reporting company
2. any trade names or D/B/A names
3. a complete current address of the reporting company’s principal place of business or, if the principal place of business is located outside of the United States, the primary location in the United States where the reporting company conducts business
4. jurisdiction of formation
5. IRS Taxpayer Identification Number or, for a foreign reporting company that has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction
6. for each beneficial owner and company applicant:
7. 1. full legal name
   2. date of birth
   3. complete current address
   4. unique identifying number from a non-expired U.S. or foreign passport, non-expired identity document issued by a state, local, or tribal government, or non-expired driver’s license
   5. image of the document from which the unique identifying number was taken

The Final Rule allows reporting companies and individual beneficial owners to obtain “FinCEN identifiers” by completing an application with the information listed above. Once the FinCEN identifiers have been issued, reporting companies may provide the FinCEN identifier for any company or individual beneficial owners in lieu of the full set of beneficial ownership information in future reports. This option can simplify the reporting process and increase privacy for beneficial owners that may otherwise be required to disclose information often, such as private investment fund personnel. FinCEN will provide further information on the FinCEN identifier application process in the future.

In the Final Rule FinCEN clarified that, consistent with its mandate under the CTA, it has begun developing the Beneficial Ownership Secure System (“BOSS”) that will be used to receive, store, and maintain beneficial ownership information. Recognizing that a fully operational BOSS is key to implementing the Final Rule, FinCEN is “working expeditiously” to get the system online and expects that it will be ready to receive reports from authorized users by the January 1, 2024 effective date. As previously mentioned, FinCEN intends to engage in a separate rulemaking prior to January 1, 2024 governing access to the BOSS.

When Reports are Due

The Final Rule requires all reporting companies to file an initial report with FinCEN within 30 calendar days after the date of formation (for domestic companies) or the date of becoming a foreign reporting company. This is a change from the Proposed Rule, which had set this deadline at 14 days. All reporting companies that were created or became a foreign reporting company prior to January 1, 2024 must file an initial report within one year of that effective date.

Reporting companies must also affirmatively file updated reports within 30 calendar days of any change in the information previously reported to FinCEN, including any change with respect to the information reported for each beneficial owner. This affirmative update requirement goes well beyond the requirements of the CDD rule, and could apply to many changes in directors, management, or shareholders.

Special Rules for Pooled Investment Vehicles

While subsidiaries of pooled investment vehicles are not themselves exempt, the Final Rule clarifies that reporting companies that are owned by exempt entities shall report the name of the exempt entity in lieu of personal data for any beneficial owner that exists by virtue of the exempt entity’s ownership. Accordingly, reporting companies owned by pooled investment vehicles would not be required to provide the information on any individuals at the pooled investment vehicle that are considered beneficial owners of the reporting company only by virtue of the vehicle’s ownership of the reporting company. This is unchanged from the Proposed Rule, in which FinCEN noted that this provision “is intended to avoid a situation in which an entity that is exempt from the beneficial ownership reporting requirement is nonetheless required to disclose its beneficial owners as a result of its ownership of a reporting company.” In the Final Rule, however, FinCEN noted that this special rule applies only to beneficial owners who have a direct or indirect ownership in the reporting company by virtue of an exempt entity’s ownership of the reporting company; it does not apply to beneficial owners who exercise substantial control of a reporting company through an exempt entity.

Similar to the current CDD rule, foreign pooled investment vehicles are not exempt. However, they would only be required to report to FinCEN beneficial ownership information for one individual who exercises substantial control over the entity. Notably, the Final Rule only requires beneficial ownership information for the sole individual who “has the greatest authority over the strategic management of the entity.”

Key Takeaways

The Final Rule creates the framework for the first nationwide system for collecting and tracking company beneficial ownership information. It expands the obligation for collecting beneficial ownership information from financial institutions subject to the Bank Secrecy Act to individual reporting companies. Corporations, limited partnerships, limited liability companies, and many other entities that are currently only required to disclose significant beneficial ownership information to their banks or other counterparties will now be required to provide this information for the first time to the U.S. Government. Reporting companies that fail to provide required information, or that provide false information, can be subject to penalties under the Bank Secrecy Act.