On December 7, 2021, the Financial Crimes Enforcement Network (“FinCEN”), an agency within the Treasury Department, issued proposed regulations to implement reporting requirements pursuant to the Corporate Transparency Act (“CTA”). Under the proposed regulations, certain entities must report beneficial owner and company applicant information to FinCEN and keep such information up to date. The purpose of the beneficial ownership information reporting requirement is to help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity. These reporting requirements will likely affect a large number of legal entities doing business in the United States, and the penalties for failing to timely file with FinCEN can be quite severe.
Who Must File a Report?
Entities that must file a report are defined as “reporting companies” and are categorized as either domestic or foreign reporting companies.
Domestic Reporting Companies
Domestic reporting companies include corporations, limited liability companies, and other entities that are created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian Tribe.
Foreign Reporting Companies
Similarly, foreign reporting companies include any entity that is a corporation, limited liability company, or other entity that is formed under the law of a foreign country and that is registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian Tribe.
Twenty-three specific types of entities are excluded from the definition of “reporting company,” which are generally entities that are already subject to federal or state regulation where beneficial ownership may be known. Such exempt entities include, among others, banks, credit unions, certain issuers of securities, investment advisors, insurance companies, and large operating companies. Large operating companies are defined as companies that employ more than 20 employees on a full-time basis in the U.S., have filed U.S. federal income tax returns in the previous year showing more than $5 million in aggregate gross receipts or sales, and maintain an operating presence at a physical location within the United States.
What Information Must be Provided?
Reporting companies will be required to submit to FinCEN the following information with respect to each beneficial owner and company applicant(s): (1) full legal name; (2) date of birth; (3) current residential or business street address, and (4) a unique identifying number from an acceptable identification document or FinCEN identifier.
Reporting companies will also be required to report information about itself, including its name, any d/b/a names, its business street address, its jurisdiction of formation or registration, and a unique identification number.
A beneficial owner is defined as any individual who (i) exercise substantial control over the entity, or (ii) owns or controls 25% or more of the ownership interests of the entity.
The regulations set forth three factors that indicate substantial control: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors or similar body of a reporting company; and (3) direction, determination, or decision of, or substantial influence over, important matters of a reporting company. However, substantial control can also take additional forms not specifically listed.
There are five exceptions to the definition of beneficial owner: (1) a minor child; (2) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (3) an employee of a reporting company, acting solely as an employee and not as senior officer, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee; (4) an individual whose only interest in the reporting company is a future interest through a right of inheritance; and (5) a creditor of a reporting company.
A company applicant is defined as any individual who files a document that creates a domestic reporting company or who first registers a foreign reporting company with a secretary of state or similar office in the United States.
When is the Report Due?
Reporting companies formed or registered before the effective date of the regulations must file the beneficial owner and company applicant information with FinCEN within 1 year after the effective date of the regulations.
Reporting companies formed after the effective date of the regulations must file a report within 14 calendar days of the date it was formed as specified by a secretary of state or similar office.
Currently, there is no proposed effective date for the regulations.
How to Update Information?
Reporting companies will be required to update and/or correct information submitted to FinCEN in prior reports. If information has changed after filing, the reporting company must update the information with FinCEN within 30 calendar days. If inaccurate information was inadvertently submitted to FinCEN, the reporting company must correct such inaccurately filed information within 14 calendar days after the date on which the reporting company becomes aware or has reason to know that any required information contained in any report was inaccurate when filed and remains inaccurate.
What are the Penalties for Not Timely Filing?
Persons who willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FinCEN, or who willfully fail to report complete or updated beneficial ownership information to FinCEN can be liable for a civil penalty of up to $500 for each day the violation continues, and may be fined up to $10,000 and/or imprisoned for up to two years for a criminal violation.
The comment period for the proposed regulations closed on February 7, 2022. The timing of the final regulations and any further regulations to implement the CTA is uncertain at this time. However, individuals who may be considered beneficial owners or company applicants should start to gather the required information now and be ready to submit to FinCEN when the effective date of the regulations is finalized.
If you would like guidance on how to comply with the CTA and the final regulations when promulgated, contact our office at (408) 478- 4100 and ask to speak with a corporate attorney to determine if your legal entity needs to file a report with FinCEN and what you need to do to make a timely filing.
This blog is written as of April 21, 2022. Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.
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