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The Financial Crimes Enforcement Network (FinCEN) has proposed rules to require certain entities to file reports with FinCEN that identify two categories of individuals: The beneficial owners of the entity; and individuals who have filed an application with specified governmental authorities to form the entity or register it to do business. The proposed regulations would implement Section 6403 of the Corporate Transparency Act (CTA), enacted into law as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), and describe who must file a report, what information must be provided, and when a report is due.

The proposed regulations describe who is a beneficial owner and who is a company applicant. A beneficial owner is any individual who meets at least one of two criteria:

  • exercising substantial control over the reporting company; or
  • owning or controlling at least 25 percent of the ownership interest of the reporting company.

The proposed regulations also describe who is a company applicant. In the case of a domestic reporting company, a company applicant is the individual who files the document that forms the entity. In the case of a foreign reporting company, a company applicant is the individual who files the document that first registers the entity to do business in the United States. The proposed regulations specify that a company applicant includes anyone who directs or controls the filing of the document by another.

Information to be Reported on Beneficial Owners and Company Applicants

The CTA requires each reporting company to submit to FinCEN a report identifying each beneficial owner of the reporting company and each company applicant by:

  • full legal name,
  • date of birth,
  • current residential or business street address, and
  • unique identifying number from an acceptable identification document; or, or, if this information has already been provided to FinCEN, by a FinCEN identifier.

Proposed 31 CFR 1010.380(b)(1)(ii) sets forth the specific items of information that a reporting company must report about each individual beneficial owner and each individual company applicant. The language is drawn nearly verbatim from 31 U.S.C. 5336(b)(2)(A).

The statute requires reporting companies to identify beneficial owners and applicants by their “residential or business street address.” The statutory requirement does not specify when or whether one type of address should be used in preference to another or resolve more specific questions regarding secondary addresses or whether addresses should be domestic, if possible, or can be foreign.  FinCEN believes that the residential street address will be more useful for establishing the unambiguous identity of an identified beneficial owner. The reporting of a residential street address will also likely allow for easier follow-up by law enforcement in the event of investigative need. Accordingly, FinCEN believes that requiring the disclosure of beneficial owners’ residential street address for tax residency purposes is appropriate. FinCEN therefore proposes that the reporting company report the residential address for tax residency purposes of each beneficial owner.

With respect to a company applicant’s address, FinCEN proposes a bifurcated approach. For company applicants that provide a business service as a corporate or formation agent, the reporting company would need to report the business address of any company applicant that files a document in the course of such individual’s business.  For all other company applicants, the reporting company would need to report the residential street address that the individual uses for tax residency purposes.

In addition, the CTA authorizes FinCEN to prescribe procedures and standards governing the reports identifying beneficial owners and applicants “by,” among other things, a “unique identifying number from an acceptable identification document.” Therefore, the proposed rule specifies that the reporting company provide a scanned copy of the identification document from which the unique identifying number of the beneficial owner or company applicant is obtained, in connection with reporting that unique number.

Information to be Reported on Reporting Companies

Proposed 31 CFR 1010.380(b)(1)(i) would require reporting companies to report certain information to identify the reporting company. While the CTA specifies the information required to be reported to “identify each beneficial owner of the applicable reporting company and each applicant with respect to that reporting company,” the CTA does not specify what, if any, information a reporting company must report about itself.

Therefore, to ensure that each reporting company can be identified, the proposed regulations would require each reporting company to report its name, any alternative names through which the company is engaging in business (“d/b/a names”), its business street address, its jurisdiction of formation or registration, as well as a unique identification number.

Specifically, the reporting company would be required to submit a TIN (including an Employer Identification Number (EIN)), or where a reporting company has not yet been issued a TIN, a Dun & Bradstreet Data Universal Numbering System (DUNS) number or a Legal Entity Identifier (LEI).

Beneficial Owners

As noted, the CTA defines a beneficial owner, with respect to a reporting company, as “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise—(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.”

Consistent with the CTA, the proposed rule would require a reporting company to identify any individual who satisfies either of these two components. Based on the breadth of the substantial control component, FinCEN expects that a reporting company would identify at least one beneficial owner under that component regardless of whether (1) any individual satisfies the ownership component, or (2) exclusions to the definition of beneficial owner apply.

Substantial Control

Proposed 31 CFR 1010.380(d)(1) sets forth three specific indicators of substantial control:

  • service as a senior officer of a reporting company;
  • 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
  • direction, determination, or decision of, or substantial influence over, important matters of a reporting company.

The regulation also includes a catch-all provision to make clear that substantial control can take additional forms not specifically listed. Each of these indicators supports the basic goal of requiring a reporting company to identify the individuals who stand behind the reporting company and direct its actions.

Ownership rr Control of Ownership Interests

The other component of the definition of beneficial owner concerns individuals who own or control 25 percent of a reporting company’s ownership interests. The CTA defines a beneficial owner to include “an individual who . . . owns or control not less than 25 percent of the ownership interests of the entity.” Proposed 31 CFR 1010.380(d)(3)(i) provides that “ownership interests,” for the purposes of this rule, would include both equity in the reporting company and other types of interests, such as capital or profit interests (including partnership interests) or convertible instruments, warrants or rights, or other options or privileges to acquire equity, capital, or other interests in a reporting company. Debt instruments are included if they enable the holder to exercise the same rights as one of the specified equity or other interests, including the ability to convert the instrument into one of the specified equity or other interests.

Proposed 31 CFR 1010.380(d)(3)(ii) identifies ways in which an individual may “own or control” interests. It restates statutory language that an individual may own or control an ownership interest directly or indirectly. It also gives a non-exhaustive list of examples to further emphasize that an individual can own or control ownership interests through a variety of means. FinCEN’s proposed approach requires reporting companies to consider all facts and circumstances when making determinations about who owns or controls ownership interests.

Proposed 31 CFR 1010.380(d)(3)(ii)(C) specifies that an individual may directly or indirectly own or control an ownership interest in a reporting company through a trust or similar arrangement. The proposed language aims to make clear that an individual may own or control ownership interests by way of the individual’s position as a grantor or settlor, a beneficiary, a trustee, or another individual with authority to dispose of trust assets. In relation to trust beneficiaries in particular, FinCEN believes that it is appropriate to consider an individual as owning or controlling ownership interests held in trust if the individual is the sole permissible recipient of both income and principal from the trust, or has the right to demand a distribution of, or withdraw substantially all of the assets from, the trust. Other individuals with authority to dispose of trust assets, such as trustees, will also be considered as controlling the ownership interests held in trust, as will grantors or settlors that have retained the right to revoke the trust, or to otherwise withdraw the assets of the trust.

Company Applicant

A reporting company would be required to report identifying information about a company applicant under proposed 31 CFR 1010.380(a)(1). Proposed 31 CFR 1010.380(e) defines a company applicant 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.

The proposed definition of a company applicant would also include any individual who directs or controls the filing of such a document by another person. This additional requirement is designed to ensure that the reporting company provides information on individuals that are responsible for the decision to form a reporting company given that, in many cases, the company applicant may be an employee of a business formation service or law firm, or an associate, agent, or family member who is filing the document on behalf of another individual. In such a case, the individual directing or controlling the formation of a legal entity should not be able to remain anonymous simply by directing another individual to file the requisite paperwork, and must therefore disclose his or her identity to FinCEN along with the individual that made the filing.

Reporting Company

The CTA defines a reporting company as “a corporation, limited liability company, or other similar entity” that is either:

  • 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; or
  • formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.

To facilitate application of the statutory definition of reporting company, proposed 31 CFR 1010.380(c)(1) defines two new terms: “Domestic reporting company” and “foreign reporting company.”

Domestic Reporting Company

Consistent with the CTA’s statutory language, FinCEN proposes to define a domestic reporting company to include:

  • a corporation;
  • a limited liability company; or
  • other entity that is 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.

Because corporate formation is governed by state or Tribal law, and because the CTA does not provide independent definitions of the terms “corporation” and “limited liability company,” FinCEN intends to interpret these terms by reference to the governing law of the domestic jurisdiction in which a reporting company that is a corporation or limited liability company is formed.

In general, FinCEN believes the proposed definition of domestic reporting company would likely include limited liability partnerships, limited liability limited partnerships, business trusts (a/k/a statutory trusts or Massachusetts trusts), and most limited partnerships, in addition to corporations and limited liability companies (LLCs), because such entities appear typically to be created by a filing with a secretary of state or similar office. FinCEN understands that state and Tribal laws may differ on whether certain other types of legal or business forms—such as general partnerships, other types of trusts, and sole proprietorships—are created by a filing, and therefore does not propose to categorically include any particular legal forms other than corporations and limited liability companies within the scope of the definition.

Foreign Reporting Company

Proposed 31 CFR 1010.380(c)(1)(ii) defines a foreign reporting company as 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. Similar to the treatment of the phrase “corporation, limited liability company, or other similar entity” for domestic reporting companies, FinCEN intends to interpret these terms by reference to the requirement to register to do business in the United States by the filing of a document in a state or Tribal jurisdiction.

Exemptions

The CTA specifically excludes from the definition of “reporting company” twenty-three types of entities. The statute also authorizes the Secretary of Treasury to exempt, by regulation, additional entities for which collecting beneficial ownership information (BOI) would neither serve the public interest nor be highly useful in national security, intelligence, law enforcement, or other similar efforts.  In general, FinCEN proposes to adopt verbatim the statutory language granting the twenty-three specified exemptions.

Proposed 31 CFR 1010.380(c)(2)(xxi) clarifies an exemption relating to what the proposed regulations refer to as “large operating companies.” An entity falls into this category, and therefore is not a reporting company, if it:

  • employs more than 20 employees on a full-time basis in the United States”;
  • filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of other entities owned by the entity and through which the entity operates; and
  • has an operating presence at a physical office within the United States.”

Under the proposed regulations, an entity with an “operating presence at a physical office within the United States” would be one for which the physical office is owned or leased by the entity, is not a residence, and is not shared space (beyond being shared with affiliated entities)—in short, a genuine working office of the entity.

In the exemption, FinCEN also proposes to clarify what it means to employ someone on a full-time basis through reference to the Internal Revenue Service definition of “full-time employee” and related determination methods at 26 CFR 54.4980H-1(a)(21) and 54.4980H-3. These regulations generally count as a full-time employee anyone employed an average of at least 30 service hours per week or 130 service hours per month, with adaptations for non-hourly employees.

Regarding the $5,000,000 filing threshold, FinCEN proposes to make clear that the relevant filing may be a federal income tax or information return, and that the $5,000,000 must be reported as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under federal income tax principles. For entities that are part of an affiliated group of corporations within the meaning of 26 U.S.C. 1504 that filed a consolidated return, FinCEN proposes that the applicable amount should be the amount reported on the group’s consolidated return.

Proposed 31 CFR 1010.380(c)(2)(xxii) would clarify the exemption for entities in which “the ownership interests are owned or controlled, directly or indirectly, by 1 or more [specified entity types that do not qualify as reporting companies].” FinCEN is calling this the “subsidiary exemption,” and interprets the definite article “the” in the quoted statutory text as requiring an entity to be owned entirely by one or more specified exempt entities in order to qualify for it.

The last category of exempt entities for which FinCEN proposes to clarify ambiguous statutory language is the exemption for “dormant entities” that meet the criteria provided at 31 U.S.C. 5336(a)(11)(B)(xxiii). Under the CTA, the exemption applies to any entity:

  • In existence for over 1 year;
  • that is not engaged in active business;
  • that is not owned, directly or indirectly, by a foreign person;
  • that has not, in the preceding 12-month period, experienced a change in ownership or sent or received more than $1,000; and
  • that does not otherwise hold assets of any type.

The phrase “in existence for over 1 year” is ambiguous because the CTA did not specify whether it refers to entities in existence for over one year at the time of the CTA’s enactment or to entities in existence for over one year at any time the statute is applied. While other prongs of the exemption use the present tense (“is” not engaged in active business; “does” not hold assets) and such present-tense language generally does not include the past, the first prong notably lacks any verb, much less one in the present tense. Moreover, both the CTA’s text and its legislative history suggest that the exemption was understood to be a “grandfathering” provision for entities in existence before the CTA’s enactment. Another CTA provision expressly refers to entities subject to this exemption as “exempt grandfathered entities.” And in a floor statement made just before the passage of the CTA, Senator Brown explained that “[t]he exemption for dormant companies is intended to function solely as a grandfathering provision that exempts from disclosure only those dormant companies in existence prior to the bill’s enactment.” He added, “No entity created after the date of enactment of the bill is intended to qualify for exemption as a dormant company.” It therefore appears reasonable to FinCEN to interpret the dormant entity exemption as a grandfathering provision applicable only to entities in existence for over one year at the time the CTA was enacted. This interpretation also limits opportunities for bad actors to exploit the exemption by forming exempt shelf companies for later use.

Timing of Reports

Timing of Initial Reports

For newly formed or registered companies, proposed 31 CFR 1010.380(a)(1)(i) specifies that a domestic reporting company formed on or after the effective date of the regulations shall file a report within 14 calendar days of the date it was formed as specified by a secretary of state or similar office. Proposed 31 CFR 1010.380(a)(1)(ii) specifies that any entity that becomes a foreign reporting company on or after the effective date of the regulation shall file a report within 14 calendar days of the date it first became a foreign reporting company.

For entities formed or registered before the effective date of the regulations, the CTA requires filing of beneficial owner and company applicant information “in a timely manner,” but no later than two years after the effective date of the final regulations. Proposed 31 CFR 1010.380(a)(1)(iii) would require any domestic reporting company created before the effective date of the regulation and any entity that became a foreign reporting company before the effective date of the regulation to file a report not later than one year after the effective date of the regulation.

Proposed 31 CFR 1010.380(a)(1)(iv) would require entities that are not reporting companies by virtue of one or more exemptions to file a report within 30 calendar days after the date on which the entity no longer meets any exemption criteria.

Update or Correction of Reports

FinCEN proposes to provide reporting companies with 14 calendar days to correct any inaccurate information filed with FinCEN from the date on which the inaccuracy is discovered and 30 calendar days to update with FinCEN information that has changed after filing. Specifically, proposed 31 CFR 1010.380(a)(3) would require reporting companies to file a report to correct 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 that the reporting company filed with FinCEN was inaccurate when filed and remains inaccurate.

Proposed 31 CFR 1010.380(a)(2)(i) provides that if a reporting company becomes exempt after filing an initial report, this change will be deemed a change requiring an updated report.

Proposed 31 CFR 1010.380(a)(2)(ii) provides that if an individual is a beneficial owner of a reporting company because the individual owns at least 25 percent of the ownership interests of the reporting company, and such beneficial owner dies, a change with respect to the required information will be deemed to occur when the estate of a deceased beneficial owner is settled.

Reporting Violations

The provision at 31 U.S.C. 5336(h)(1) makes it unlawful for any person to “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information . . . to FinCEN” or to “willfully fail to report complete or updated beneficial ownership information to FinCEN.” The CTA further provides for civil and criminal penalties for any person violating that obligation. Such person shall be liable for a civil penalty of up to $500 for each day a violation continues or has not been remedied, and may be fined up to $10,000 and imprisoned for up to two years, or both, for a criminal violation.

The proposed regulations clarify that a person “fails to report” complete or updated beneficial ownership information to FinCEN, within the meaning of section 5336(h)(1), if such person directs or controls another person with respect to any such failure to report, or is in substantial control of a reporting company when it fails to report.

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