Corporate Transparency Act Update—FinCEN Issues Proposed Rule
In our previous article, we reported that on January 1, 2021, Congress passed the Corporate Transparency Act (the “CTA”) which required the Financial Crimes Enforcement Network (“FinCEN”) to issue a proposed rule on beneficial ownership disclosure and reporting. The CTA drastically expands current beneficial ownership reporting obligations in order to combat the illicit use of shell companies and to shift the burden of identifying beneficial owners of such companies from financial institutions to the government itself.
On December 7, 2021, FinCEN issued its proposed rule (the “Proposed Rule”) on the beneficial ownership disclosure requirements of the CTA. Comments on the Proposed Rule are due by February 7, 2022.
The Proposed Rule describes who must file a beneficial ownership information report, what information must be reported and when a report is due. The Proposed Rule is the first of three rulemakings that FinCEN plans to implement related to the CTA. FinCEN will separately address the protocols for access to and disclosure of the beneficial ownership information filed with FinCEN.
The CTA requires certain reporting companies and “other similar entities” to file a report with FinCEN that provides the full legal name, date of birth, current address, and unique identification number of the business’s beneficial owners. The Proposed Rule interprets “other similar entities” broadly to include any entity that is created by the filing of a document with a secretary of state or similar office. Consequently, limited liability partnerships, business trusts and most limited partnerships will qualify as reporting companies. The CTA permitted FinCEN to exempt certain entities from registration in addition to the 23 statutory exemptions already cited in the act, which include U.S. public companies, companies with substantial physical operations in the United States, among others. The Proposed Rule declined to exempt any additional entities.
The CTA defines beneficial owner as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interest of such reporting company.” The Proposed Rule further defined what “substantial control” and “ownership interest” mean with respect to beneficial owner definition. FinCEN has taken a broad approach to “ownership interest” to include both equity and other types of interest, such as capital or profit interests, convertible instruments, warrants, and other options or privileges that enable an individual to acquire equity or capital in a reporting company. For “substantial control,” FinCEN identified three prongs that determine if an individual has substantial control: (i) if the individual serves as a senior officer of the reporting company; (ii) if the individual has authority regarding the appointment or removal of any senior officer or dominant majority of the board (or similar body) of the reporting company; and/or (iii) if the individual exercises substantial influence, direction of, or decision over important matters of a reporting company. Reporting companies are required to disclose all individuals with “substantial control” and at least one beneficial owner must be disclosed who has “substantial control” regardless of whether they satisfy the ownership prong.
The CTA includes civil and criminal penalties for the willful failure to provide accurate beneficial ownership information to FinCEN. Civil penalties include up to $500 for each day a violation continues or has not been remedied and a criminal penalty of up to $10,000 in fines and/or up to two years imprisonment. Notably, the Proposed Rule provides for the possibility of individual liability for reporting violations. FinCEN has proposed that individuals involved in the reporting process can be held liable if they willfully cause false or fraudulent information to be filed, if they willfully direct or control another person not to file a report when required, or if they are in substantial control of a reporting company when it fails to report complete or updated beneficial ownership information.
Reporting companies must file their beneficial ownership information within one year of the final rule’s effective date. Because FinCEN has missed the statutory deadline of January 1, 2022, and since there is no timeline for the remaining two rules to be issued, it is unlikely that reporting companies will have to file beneficial ownership information until 2023.
KMK will continue to monitor the FinCEN rulemaking process and the final beneficial ownership rules. For more information or assistance, please contact a member of the KMK Law Business Representation & Transactions or Real Estate Groups.