The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) released a Notice of Proposed Rulemaking in December 2021 with proposed regulations which require beneficial ownership information (BOI) reporting by US limited partnerships, LLCs, corporations, and other entities. The proposed regulations are promulgated under the Corporate Transparency Act (the CTA) passed by Congress as part of the Anti-Money Laundering Act of 2020. These new reporting requirements will affect many international family structures utilizing entities formed in or registered to do business in the US. This note summarises the reporting requirements; however, final forms and instructions are not yet available from FinCEN. Reporting will be required only after the regulations are finalized, possibly later in 2022, and requires new entities, formed after the effective date, to file reports within 14 days and existing entities to file within a year.
Privately held corporations, LLCs, LLPs and limited partnerships formed in the US or registered to do business in the US will be required to report individual ownership of over 25% equity interests and any controlling ownership. Joint ownership, trust ownership and general partnership ownership is not reported and only individuals who are partners, trust beneficiaries, trustees or trust grantors are reported. In addition, individuals filing or giving instructions to file entity formation documents must be identified. Reports must include an individual’s name and residential address and a unique identifying number from identification documentation. The information will be made available to government agencies and financial institutions undertaking customer due diligence.
Which Entities Must File a Report
The proposed regulations identify two types of entities which must report BOI to FinCEN (called ‘reporting companies’): domestic and foreign. A domestic reporting company is any entity that is ‘created by the filing of a document with a secretary of state or a similar office under the law of a [US] State or Indian Tribe.’ Similarly, a foreign reporting company is any entity ‘formed under the law of a foreign country and registered to do business in the US by the filing of a document with a secretary of state or a similar office under the laws of a [US] State or Indian Tribe.’
Under this standard, limited partnerships, limited liability companies, and corporations are reporting companies. On the other hand, personal trusts and general partnerships are not reporting companies because they are not required to file registration documents with a secretary of state.
The proposed regulations provide numerous exemptions to the reporting requirements for the following entities: SEC registered issuers of securities, broker/dealers, investment companies, exchanges and clearing agencies, and fund advisers; banks, bank holding companies, money dealers and credit unions; registered investment advisers; commodities traders; insurance companies and related producers; financial market utilities; accounting firms; pooled investment vehicles; tax exempt organizations; public utilities; government entities; US owned dormant entities; and large operating companies with over 20 full time US employees, a US office and US turnover in excess of $5M.
Who Must be Identified in the Report
Reporting companies must report certain personally identifying BOI details to FinCEN for both ‘beneficial owners’ and company ‘applicants.’
Under the CTA, a beneficial owner is any individual who, directly or indirectly, ‘exercises substantial control over the entity’ or ‘owns or controls not less than 25 percent of the ownership interests of the entity.’ The proposed regulations further define ‘substantial control’ and ‘ownership interest.’
The proposed regulations identify three indicators of substantial control: service as a senior officer; authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors; or direction of or substantial influence over important matters of the business. Nevertheless, the proposed regulations note ‘substantial control can take additional forms not specifically listed.’ To this end, the proposed regulations include a ‘catchall provision’ that applies to ‘any other form of substantial control.’ Similarly, the proposed regulations provide a broad concept of ownership interests.
Ownership interests include any equity, profit sharing, membership interest, partnership interest, proprietorship interest, instrument convertible to such interest, or option to purchase such interest. It does not matter whether the ownership interest is held directly or indirectly, for example, through a trust. In determining whether an individual owns 25 percent or more of the entity, all ownership interests of any class or type are considered. There is no attribution of ownership, for example, between parent and child or between siblings; however, control of the ownership of another person is specifically counted as ownership.
The proposed regulations provide five exceptions to who is considered a beneficial owner by definition. First, a minor child is not a beneficial owner provided the BOI details of the child’s parent or guardian were reported pursuant to the proposed regulations. Second, an individual acting as nominee, intermediary, custodian, or agent on behalf of another individual is not a beneficial owner. Third, an employee (but not a senior officer) is not a beneficial owner simply by virtue of employment. Fourth, an individual whose only interest in the reporting company is a future interest through a right of inheritance, or presumably as a potential trust beneficiary, is not a beneficial owner. Finally, a creditor of the reporting company is not a beneficial owner.
Only individual owners are reportable and so a reporting company that in turn is owned by another company, whether or not a reporting company, would only report the ultimate individual owners. The definition of control is sufficiently broad to include, for example, the CEO of an upper tier company in a group structure, even if that individual does not own 25% of the equity of the group. The regulations are clear that more than one person can control a reporting company, and reports must be made for each such person.
If a trust owns or controls at least 25% of a reporting company, the reporting company must report the BOI details of the individual trustee, but not a corporate trustee. Additionally, it is possible that the reporting company may need to report the BOI details of the beneficiary, settlor, or another party with control powers related to the trust. If a trust holds a reporting company, the individual trustee and any other individual ‘with the authority to dispose of trust assets’ is deemed to have an ownership interest in the underlying reporting company. Additionally, a beneficiary who is the ‘sole permissible recipient of income and principal’ or has a withdrawal right over the trust is deemed to have an ownership interest. Finally, the settlor of a revocable trust holding an equity interest in a reporting company is deemed to have an ownership interest in the underlying reporting company.
Where a reporting company is owned by a trust with a corporate trustee, consideration will need to be given to reporting BOI information about individuals, directors and managers of the trust company who direct, determine or decide “important matters” relating to the reporting company, as distinct from managers who execute “day-to-day managerial decisions” with respect to a part of a reporting company’s assets or employees. The same analysis will need to be applied to any intermediate companies owning controlling interests in a reporting company. The exception for employees who are not senior officers or directors is only applicable to employees of the reporting company. Accordingly, if a trust company is itself a reporting company, then only directors and senior officers need be identified and employee managers are excepted. However, if the trust company is not a reporting company, perhaps because it is a financial services or foreign company, and it owns a reporting company then there is no carve out for employee managers and the facts and circumstances control test must be applied. This is an area where comments are requested and where it is anticipated that comments will be offered.
Likewise, if a general partnership owns a reporting company, the reporting company may need to report the BOI details of the partners. Though a general partnership is not a reporting company itself, the proposed regulations provide that a ‘capital or profit interest’ in a general partnership constitutes an ownership interest. This means, effectively, beneficial ownership cannot be sheltered by use of an intermediary general partnership. For example, if a general partnership owns 100% of a reporting company, an individual 25% partner would own 25 percent or more of the reporting company. The reporting company must report the individual’s BOI details to FinCEN.
For domestic reporting companies, the company applicant is any individual who files the document that forms the entity. For foreign reporting companies, the company applicant is any individual who files the document that first registers the entity to do business in the US. A company applicant also includes any individual ‘who directs or controls the filing of the document by another.’ Therefore, the formation agent would report the individual for whom they act.
What Must be Included in the Reports
The proposed regulations require the filing of certain reports containing key identifiers of the reporting company, beneficial owners, and company applicants. FinCEN will publish forms and instructions detailing exactly how such reports shall be filed. The CTA provides that information collected by FinCEN must be maintained in a confidential, secure, and nonpublic database. However, the CTA does authorize FinCEN to disclose the information to certain domestic government agencies, foreign government agencies, and financial institutions for customer due diligence purposes. Therefore, it can be expected that any financial institution with whom a reporting company does business will have access to this BOI information, and it is important that this information is accurate and consistent with other filings.
Every reporting company must file an ‘initial report’ with FinCEN. The initial report must provide certain key identifying information for the reporting company, each beneficial owner, and each company applicant. The initial report must include the following information regarding the reporting company: its full name; any trade names; its business address; the state it was formed in or is registered in; and its IRS Taxpayer Identification Number (TIN) or certain enumerated alternatives. The initial report must include the following information regarding each beneficial owner and company applicant: his or her full legal name; his or her date of birth; his or her current address (personal address for a beneficial owner and business address for a company applicant); a unique identifying number from his or her passport, ID card, or driver’s license; and a copy of the identifying document, including in the copy both the identifying number and the individual’s photograph. Additionally, the initial report may voluntarily include the TIN of a beneficial owner or company applicant if he or she so consents.
Special rules apply to the reporting of BOI details of certain enumerated classes of beneficial owners. For tax-exempt entities, only the name of the tax-exempt entity need be reported. For minor children, the BOI details of the child’s parent or guardian must be reported along with an indication that such information relates to the child’s parent or guardian. For a deceased company applicant, the report must mention the applicant’s death and the reporting company must provide what BOI details it actually knows (see below for requirements in the event of a beneficial owner’s death). For foreign pooled investment vehicles, the BOI details of the individual who exercises substantial control over the vehicle or, where more than one individual exercise substantial control over the vehicle, only the individual with the greatest authority over strategic management must be reported.
For reporting companies (both domestic and foreign) in existence before the effective date of the final regulations promulgated under the CTA, a reporting company must file its initial report not later than one year after the effective date. For domestic reporting companies formed on or after the effective date of the final regulations promulgated under the CTA, a domestic reporting company must file its initial report within 14 calendar days of formation. For foreign reporting companies formed on or after the effective date, a foreign reporting company must file its initial report within 14 days of becoming a foreign reporting company (i.e., being formed in a foreign jurisdiction and registering to with a secretary of state to do business in the US). If an entity which was formerly exempt from reporting under the CTA fails to satisfy the exemption criteria, then such entity must file its initial report within 30 calendar days of losing its exemption.
An individual or reporting company may apply for a unique ‘FinCEN identifier’ by submitting an application to FinCEN which contains all of the information regarding the applicant as required in the initial report. Subsequently, the reporting company may use such FinCEN identifiers in lieu of the information required in the initial report. An individual or reporting company must file an updated or corrected report in the manner described below to reflect any changes to or mistakes in the information used to obtain the FinCEN identifier. A FinCEN identifier may be useful for an individual with multiple investments in reporting companies (for example, the director of a trust company) since this will mean that the information need only be provided once.
Updated or Corrected Report
If any required information in an initial report changes, an updated report containing all information necessary to bring the record up to date must be filed with FinCEN. Likewise, if an initial report is inaccurate, a corrected report containing the accurate information must be filed with FinCEN. These rules will require a reporting company to continuously monitor and maintain accurate records of its beneficial owners’ and company applicants’ relevant information. Any changes will need to be reported regularly to FinCEN.
A reporting company must file an updated report within 30 calendar days of the relevant change (including any change with respect to who is a beneficial owner of such reporting company). If a former reporting company qualifies for an exemption to CTA reporting, then such former reporting company must file an updated report within 30 calendar days of satisfying the exemption criteria including a notification that it is no longer a reporting company. If an individual is a beneficial owner by virtue of the 25 percent ownership interest test, then upon such individual’s death a change in beneficial ownership is deemed to occur when the individual’s estate is settled. An updated report must be filed within 30 calendar days of the change. The updated report must remove the deceased former beneficial owner and, to the extent necessary, identify any new beneficial owners.
A reporting company must file a corrected report within 14 calendar days of such reporting company becoming aware or having reason to know of the inaccuracy.
Currently, comments on the proposed rule may be submitted to FinCEN on or before 7 February 2022. Final regulations are anticipated to be published this year. This marks an important step for FinCEN in implementing the CTA; however, the final regulations and forms will need to be looked to for ultimate guidance when they are published later this year. On the effective date the final regulations are published, reporting requirements will take effect and reporting companies will need to comply. It would be prudent for families using entities which will be classified as reporting companies to review their records and ensure all applicable information is known so that reports may be filed on time.