FinCEN Publishes Final Rule on Beneficial Ownership Reporting Requirements

The Financial Crimes Enforcement Network (FinCEN) of the Treasury Department published on Sept. 30, 2022, final regulations on beneficial ownership information (BOI) reporting requirements intended to enhance the agency’s ability to protect the U.S. financial system from money laundering, terrorist financing and other illicit activity.^[1] The rule will go into effect on Jan. 1, 2024. It describes who must file a BOI report, what information must be contained in the report and when the report is due. The final rule largely tracks the language of the corresponding Notice of Proposed Rulemaking released in December 2021.^[2]

These new regulations are intended to strengthen the integrity of the U.S. financial system by making it harder to use shell companies to launder money and hide assets, reflecting FinCEN’s concern that “[r]ecent geopolitical events have reinforced the point that abuse of corporate entities, including shell or front companies, by illicit actors and corrupt officials presents a direct threat to the U.S. national security and the U.S. and international financial systems.”^[3] FinCEN intends to use the information collected through this rule to create a national database to target money laundering and other financial crimes carried out through shell companies.^[4] Given the sensitivity of the information collected, FinCEN is subject to strict confidentiality, security and access restrictions on the data and is authorized to disclose reported BOI only in limited circumstances to certain governmental authorities and financial institutions.^[5] If the reporting company gives consent, FinCEN may also disclose the company’s BOI to financial institutions, to facilitate the institution’s compliance with customer due diligence requirements.^[6]

Key Elements of the Final Rule

The rule defines two types of reporting companies: domestic and foreign, both including corporations, limited liability companies, and any entity formed or registered with a secretary of state or similar office.^[7] Pursuant to the Corporate Transparency Act, 23 types of entities, including certain trusts, are exempt from the definition of “reporting company.” Many of the exempt entities are already subject to substantial federal and/or state regulation or must already provide their BOI to a regulatory authority.^[8]

Exempt entities include companies that (i) employ more than 20 full-time employees in the United States, (ii) have an operating presence at a physical office in the United States, and (iii) have filed a federal income tax or information return for the previous year showing more than $5 million in gross receipts or sales, not including from foreign sources.^[9] Other of the exempt entities include governmental authorities, banks, tax-exempt entities, issuers of securities registered under Section 12 of the Exchange Act, insurance companies, and certain investment companies and financial advisers.^[10]

Eligible reporting companies must identify the beneficial owners of the entity as well as the “company applicant.” Under the rule, a beneficial owner is any individual who either exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. The rule sets forth guidance for what “substantial control” means, including anyone serving as a senior officer or anyone who is able to make important decisions on behalf of the company.^[11] In crafting the rule, FinCEN drafted a broad and flexible definition of “beneficial owner” in an attempt to close loopholes that allow corporate structuring to obscure owners or decision-makers.^[12]

“Company applicant” is defined as the individual who files the document to create the entity or registers the entity in the United States, and the individual who is primarily responsible for directing or controlling the filing of the relevant document if more than one individual is involved in the filing.^[13] Companies existing or registered before Jan. 1, 2024 (the effective date), however, are not required to identify and report on their company applicants.^[14]

Reporting companies must file BOI reports with FinCEN that identify each beneficial owner by name, birthdate, address and a unique identifying number from a passport, driver’s license or similar identification document, and include a photocopy of the identification document. Reporting companies created after the effective date must provide this same information for company applicants.^[15] Once an individual provides this information, he or she may be issued a “FinCEN identifier” to be used in place of the enumerated identification information.^[16]

Reporting companies created or registered before the effective date must file initial BOI reports by Jan. 1, 2025. Reporting companies created or registered after the effective date will have 30 days to file their initial reports. Any changes or corrections to the BOI reports must be made within 30 days from when the company becomes aware of any inaccurate information.^[17]

Although this rule does not take effect for over a year, the Corporate Transparency Act, with its focus on BOI, is already having an impact across industries. For example, some lenders are already adding representations and covenants relating to the Corporate Transparency Act to their real estate loan documents. In the coming months, FinCEN will publish additional guidance to assist in complying with the rule, tailored to a variety of stakeholders such as reporting companies, secretaries of state, and small entities specifically.^[18]

This final rule on beneficial ownership reporting is one of three rulemakings FinCEN has planned to implement in connection with the Corporate Transparency Act. It will release additional rulemakings to (i) establish rules for who may access the BOI and for what purposes, and what safeguards will be enacted to secure the information, and (ii) revise FinCEN’s customer due diligence rule. FinCEN will publish the BOI reporting forms in the Federal Register for public comment prior to the rule’s effective date.^[19]

^{[1] Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498 (Sept. 30, 2022) (Final Rule).}

^{[2] Kramer Levin published a client alert on the Notice of Proposed Rulemaking on Dec. 15, 2021.}

^{[3] Beneficial Ownership Information Reporting Rule Fact Sheet, FinCEN (Sept. 29, 2022) (Fact Sheet).}

^{[4] FinCEN has been developing the Beneficial Ownership Secure System to receive, store and maintain BOI data. See Final Rule at 59508-09.}

^{[5] Final Rule at 59507 (“Federal agencies, for example, may only obtain access to BOI when it will be used in furtherance of a national security, intelligence, or law enforcement activity. For state, local, and Tribal law enforcement agencies, a court of competent jurisdiction must authorize the agency to seek BOI as part of a criminal or civil investigation.” (internal quotation omitted)).}

^{[6] Final Rule at 59507.}

^{[7] Final Rule at 59593.}

^{[8] Final Rule at 59539, 59593-94.}

^{[9] Final Rule at 59594.}

^{[10] Final Rule at 59593-94.}

^{[11] Final Rule at 59594.}

^{[12] See Fact Sheet; Final Rule at 59525-26 (“FinCEN believes that the definition of substantial control in the final rule strikes the appropriate overall balance: it is based on established legal principles and usages of this term in a range of contexts ... and provides specificity that should assist with compliance, while at the same time being flexible enough to account for the wide variety of ways that individuals can exercise substantial control over an entity.”).}

^{[13] Final Rule at 59596.}

^{[14] See Fact Sheet.}

^{[15] Final Rule at 59592.}

^{[16] Final Rule at 59593.}

^{[17] Final Rule at 59591-92.}

^{[18] See Fact Sheet.}

^{[19] See Fact Sheet.}