FinCEN Finalizes Rule to Require Many Domestic and Foreign Entities to Report Beneficial Ownership Information to U.S. Government

Background

The CTA, enacted into law on January 1, 2021, as part of the Anti-Money Laundering Act of 2020, is designed to combat the use of shell companies by persons seeking to evade anti-money-laundering and economic sanctions laws. Specifically, the CTA amended the Bank Secrecy Act to (i) require certain U.S.-domiciled or -registered entities, including foreign entities that operate in the U.S., to report the identities of their beneficial owners to FinCEN and (ii) require FinCEN to establish and maintain a secure, nonpublic database of this beneficial ownership information that may be accessed by, among other parties, law enforcement or certain financial institutions for customer due diligence (CDD).

The issuance of the Final Rule completes the first of three phases of implementing the requirements of Section 6403 of the CTA. FinCEN expects to issue two additional rulemakings as follows: (i) a rulemaking to implement the statute’s protocols for access to and disclosure of beneficial ownership information and (ii) a rulemaking to revise the existing CDD requirements for financial institutions at 31 C.F.R. § 1010.230 (CDD Rule). Regarding the former, the supplementary information to the Final Rule notes that FinCEN has been developing the database in which information will be received, stored, and maintained, referred to as the Beneficial Ownership Secure System, or BOSS. The two future rulemakings will provide the processes that will be most valuable to financial institutions, namely the protocols FinCEN will use to verify the accuracy of the information reported by reporting companies and how financial institutions may access and use reported information to fulfill their diligence obligations under the CDD Rule.

The CTA imposes criminal and civil penalties for any person who willfully provides, or attempts to provide, false or fraudulent beneficial ownership information to FinCEN or willfully fails to report complete or updated beneficial ownership information to FinCEN. In light of these penalties, reporting companies should identify the relevant timeframe within which they must submit reports and start planning for the submissions. For example, they should consider what information about the company will be required and the beneficial owners whose information will need to be included. Moreover, given the significance of the information collection, financial institutions should begin to think about how they will use the information once they have access to it, recognizing that the two forthcoming rulemakings discussed above will affect that consideration.

Companies That Are Required to File Reports

The Final Rule will require a reporting company to file a report with FinCEN including the information discussed below. A “reporting company” is defined in the same manner as in the NPRM to mean a domestic or foreign reporting company, as follows:

• A “domestic reporting company” means any entity that is (i) a corporation, (ii) a limited liability company, or (iii) 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.
• A “foreign reporting company” means any entity that is (i) a corporation, limited liability company, or other entity (ii) formed under the law of a foreign country and (iii) 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 under the law of a state or Indian tribe.

The Final Rule adopts 23 categories of exemptions from the definition of “reporting company” from the CTA for entities already generally subject to substantial federal or state regulation under which beneficial ownership may be known.

FinCEN will continue to consider potential exemptions, including the extent to which certain entities may already report their beneficial owners to the federal government through means other than the CTA and will continue to consider suggestions for additional exemptions. 

Beneficial Owners of a Reporting Company

Consistent with the NPRM, a “beneficial owner” under the Final Rule is defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.

Substantial Control Over a Reporting Company

“Substantial control” over a reporting company includes an individual who

• serves as a senior officer of the reporting company (any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function)³
• has authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body)
• directs, determines, or has substantial influence over important decisions made by the reporting company
• has any other form of substantial control over the reporting company

The Final Rule adopts from the NPRM both the specific examples of important decisions made by the reporting company and the examples of ways in which an individual may directly or indirectly exercise substantial control over a reporting company.

Ownership Interests in a Reporting Company

With regard to ownership, the Final Rule includes a detailed definition of “ownership interest,” which is largely the same as the definition in the NPRM. The Final Rule also states how an individual may own or control an ownership interest of a reporting company, including through joint ownership with one or more other persons of an undivided interest in such ownership or through control of such ownership interest owned by another individual. Finally, the Final Rule clarifies from the NPRM that an individual’s ownership in an entity is determined at the present, on a fully diluted basis, and, as the case may be, based on the individual’s share of the capital and profit interests in the entity or based on the individual’s share of the voting power or value of ownership interests in the entity.

Exclusions

The Final Rule excludes from the definition of “beneficial owner” (i) a minor child, (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual, (iii) an employee of a reporting company, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee, provided that such person is not a senior officer of the reporting company, (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance, and (v) a creditor of a reporting company.

Company Applicants of a Reporting Company

A “company applicant” is defined to mean

• for a domestic reporting company, the individual who files the document that creates the domestic reporting company under state or tribal law
• for a foreign reporting company, any individual who files the document that first registers the foreign reporting company under state or tribal law
• in the case of either a domestic reporting company or a foreign reporting company, the individual primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document

Reports Required to Be Filed With the U.S. Government by Domestic and Foreign Entities

Each reporting company will be required to file an initial report with information on the reporting company and every individual (i) who is a beneficial owner of such reporting company and (ii) who is a company applicant with respect to such reporting company (with a modified rule for a reporting company created or registered before January 1, 2024), on the following timelines:

• a domestic reporting company created on or after January 1, 2024, within 30 calendar days of the date on which it receives actual notice that its creation has become effective or the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created
• any entity that becomes a foreign reporting company on or after January 1, 2024, within 30 calendar days of the earlier of the date on which it receives actual notice that it has been registered to do business or the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the foreign reporting company has been registered to do business
• any domestic reporting company created before January 1, 2024, and any entity that became a foreign reporting company before January 1, 2024, no later than January 1, 2025
• any entity that no longer meets the criteria for an exemption, within 30 calendar days after the date that it no longer meets the criteria for any such exemption

The Final Rule also contains requirements to update a report if there are changes concerning the reporting company or its beneficial owners, and to correct inaccurately filed information, within 30 calendar days after the date on which the change occurs or the reporting company becomes aware or has reason to know of any inaccuracy, as applicable.

Special reporting rules apply to (i) a reporting company owned by an exempt entity, (ii) a minor child, and (iii) a foreign pooled investment vehicle.

¹ 87 Fed. Reg. 59,498 (Sept. 30, 2022), available at: https://www.govinfo.gov/content/pkg/FR-2022-09-30/pdf/2022-21020.pdf.

² The NPRM is available at https://www.govinfo.gov/content/pkg/FR-2021-12-08/pdf/2021-26548.pdf. The Sidley Alert discussing the NPRM is available at https://www.sidley.com/en/insights/newsupdates/2021/12/fincen-proposed-rule-will-require-domestic-foreign-entities-report-beneficial-ownership-info-us-govt.

³ The Final Rule removed the offices of treasurer and secretary from the list of senior officers because individuals in those roles exercise ministerial or advisory functions with very little control of a company.