This Q&A is an update to our April 6, 2022, client alert and reflects the Final Regulations as adopted by the Financial Crimes Enforcement Network (FinCEN) on September 29, 2022.
Which entities are required to report?
Under the Final Regulations, all non-exempt corporations, limited liability companies and other entities created by filing a document with the secretary of state or similar office under the laws of any State or Indian tribe will be required to report ultimate beneficial ownership and any changes thereto. Foreign entities registered to do business in the United States are also Reporting Companies under the Final Regulations.
The reporting requirements will apply to newly created Reporting Companies and those already in existence on January 1, 2024. Operating companies and holding companies or other passive entities will all be required to report beneficial ownership and any changes to such information, unless an exemption applies.
Which entities are exempt?
The Final Regulations establish several exemptions that shield certain entities from the onerous reporting requirements. Generally, the exemptions include businesses that are already heavily regulated or otherwise subject to significant reporting requirements, such as publicly traded companies or accounting firms.
What information must be reported?
Reporting Companies must provide FinCEN with information about the company itself, its beneficial owners, and company applicants.
- Reporting Companies. A Reporting Company must disclose (1) its full name, (2) any alternate names through which it engages in business; (3) its business address; (4) its jurisdiction; and (5) its Tax Identification Number.
- Beneficial Owners and Company Applicants. As to its beneficial owners and company applicants, a Reporting Company must disclose the following: the owner’s (1) full legal name; (2) date of birth; (3) current residential or business street address; and (4) unique identifying number from an acceptable identification document.
What does it mean to be a Company Applicant?
The term “Company Applicant” refers to the person who filed the entity’s formation documents, as well as any person who directed such person. For example, this may include the legal professional who prepared the formation documents and their supervisors, as well as the person acting as the Company organizer or manager.
However, the Final Regulations (i) remove the requirement that entities created before the effective date of the regulations report Company Applicant information and (ii) limit the definition of Company Applicant to a maximum of two individuals.
Who counts as a “Beneficial Owner”?
The term “Beneficial Owner” includes any individual who directly or indirectly exercises substantial control over the company or owns at least 25 percent of the ownership interests of the company.
For the purpose of establishing beneficial ownership of a Reporting Company, the Final Regulations define the term “substantial control” to include any individual who:
- serves as a specified senior officer of a Reporting Company;
- has authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar governing body) of a Reporting Company;
- has direction, determination or substantial influence over, important matters of a Reporting Company; or
- holds any other form of substantial control over the Reporting Company.
A person may possess substantial control formally or informally, including by way of informal understandings or arrangements.
The Final Regulations offer an expansive definition of “ownership interests”, to include any equity interest, capital or profits interest, and options. It also includes the holder of any debt instrument secured by an ownership interest.
With respect to an interest owned by a trust, the Final Regulations identify the trustee as an individual who will be deemed to control trust assets for the purpose of determining which individuals own or control 25 percent of the ownership interests of the Reporting Company. The Final Regulations also clarify that other individuals with authority to control or dispose of trust assets are considered to own or control the ownership interests in a Reporting Company that are held in trust.
The Final Regulations identify circumstances in which ownership interests held in trust will be considered as owned or controlled by a beneficiary; if the beneficiary is the sole permissible recipient of income and principal from the trust, or if the beneficiary has the right to demand a distribution of, or withdraw substantially all, of the assets in the trust, then the ownership interest will be deemed owned by the beneficiary. Furthermore, trust assets will be considered as owned or controlled by a grantor or settlor who has the right to revoke the trust or withdraw its assets.
By way of example, if there is only one current beneficiary of a trust eligible to receive distributions of income and principal, the beneficiary is a Beneficial Owner under the Final Regulations. The Final Regulations regard the beneficiary as “owning and controlling” the ownership interests held by the trust, irrespective of the beneficiary’s actual control of the trust assets. If a party other than the sole beneficiary is serving as trustee of such trust, the trustee is also considered a Beneficial Owner subject to the CTA’s reporting requirements.
What timelines apply to Reporting Companies?
The timeframe for initial reporting depends on when the Reporting Company was formed. Reporting Companies in existence prior to the effective date of the Final Regulations (January 1, 2024) will have one (1) year from the effective date to provide FinCEN with their initial reports.
Reporting Companies created on or after the effective date must file their initial reports within thirty days of formation.
Regardless of when a Reporting Company was formed, any change to a previously filed report must be reported to FinCEN within thirty days of the changes, and any error in a filing must be corrected within fourteen days of filing.
What are the consequences for noncompliance?
Significant civil and criminal penalties may be imposed for violations of the reporting obligations established under the CTA. A person who willfully fails to report information or reports inaccurate information may be subject to a civil penalty of up to $500 per day for each day a violation continues without being cured and may receive criminal penalties including up to two years of imprisonment and a fine of up to $10,000.
What comes next?
FinCEN will issue additional guidance regarding the application of the Final Regulations. Specifically, FinCEN will issue guidance as to who may access information regarding Reporting Companies and Beneficial Owners.
Reporting Companies under the final rules may prepare by developing procedures for collecting relevant information and protecting it appropriately. Reporting Companies may also prepare for the CTA’s implementation by incorporating language in the bylaws, operating agreements, shareholder agreements and the like to obligate Beneficial Owners to provide the required information, consent to its disclosure, and otherwise update such documents as necessary for compliance.
We will monitor progress and work with clients to ensure compliance with all applicable requirements. If you have questions or concerns about how the CTA and the Final Regulations may impact your business, please contact a member of the Private Wealth team at Husch Blackwell.