Compliance

On December 8, 2021, the Financial Crimes Enforcement Network (FinCEN) released its highly anticipated Notice of Proposed Rulemaking to implement the beneficial ownership reporting provisions of the Corporate Transparency Act of 2019 (CTA). The new rule outlines key details regarding reporting requirements, deadlines, and exceptions that are anticipated to have a significant impact on tens of millions of U.S. entities who register and seek to operate in the U.S. according to the preamble to the proposed rules. 

Generally, the proposed rule would apply to corporations, limited liability companies, and other entities created by filing formation documents with a secretary of state or similar office of a state or Indian tribe. The entities that would qualify under the new rule also would include most limited partnerships and business trusts. Furthermore, the rule is noted to apply equally to companies formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction. 

Consistent with the existing Customer Due Diligence Rule (CDD Rule), the proposed regulation describes beneficial owners as individuals who directly or indirectly exercise substantial control over a reporting company or who own or control at least 25 percent of the entity’s ownership interest. The rules specify definitions for substantial control—which include acting as a senior officer and having substantial influence over key matters of import to the reporting company—as well as for ownership interest. Five categories of individuals—minors, agents and nominees, non-senior officer employees of reporting companies, individuals whose sole interest in a reporting company is through inheritance, and reporting company creditors—are exempted from the beneficial owner definition. 

The CTA also would exempt the following entities from the proposed rule: 

  • SEC reporting issuers and Exchange Act-registered entities
  • Investment companies and investment advisors
  • Securities brokers and dealers
  • Governmental entities
  • Banks, credit unions, and depository institution holding companies
  • Money-transmitting businesses
  • Clearing agencies
  • Venture capital fund advisors
  • Insurance companies and state-licensed insurance producers
  • Accounting firms
  • Public utilities
  • Financial market utilities
  • Pooled investment vehicles
  • Commodity Exchange Act registered entities
  • Tax-exempt entities and entities assisting tax-exempt entities

Also exempt from the beneficial ownership information reporting requirements would be "large operating companies," defined as entities that employ more than 20 full-time employees in the U.S., have an operating presence in the U.S., and have more than $5 million in annual sales. The definition of exempt entities would include subsidiaries of certain exempt entities and inactive entities. 

As outlined within the CTA, the new proposed ruling would require both domestic and foreign reporting companies to submit to FinCEN a report containing the beneficial owner of the entity being registered as well as key identifying information on the individual applicant registering the entity. Specifically, once the proposed rulemaking is approved, domestic and foreign reporting entities created or registered to do business in the U.S. prior to the final regulation will have one year from the effective date of the regulation to file initial reporting to FinCEN. These reports are required to include the name, date of birth, current address, and unique identification numbers, e.g., passport or driver’s license number, of any beneficial owner and individual applicant registering an entity in the U.S.; FinCEN also has proposed an option that would allow companies to apply for and obtain a “FinCEN identifier” in lieu of providing personal information. Entities that are created or registered on or after the effective date will have 14 days from the date they are created or registered to file their initial report. Furthermore, companies will have a 30-day deadline to file updated reports if any information changes on individuals reported. 

The broader goal of the proposed regulation will be to prevent corporate entities from being abused for illicit purposes including, among other criminal and illicit activities, money laundering, terrorist financing, and tax fraud. The goal can be achieved by collecting and sharing complete and accurate data with law enforcement, the intelligence community, and other key stakeholders via a secured, nonpublic registry. The information can then be used to help law enforcement and other key stakeholders reduce and prevent the ability of bad corporate actors from establishing legal anonymous shell and front companies for the purpose of carrying out various criminal activities such as those mentioned earlier. 

FinCEN has acknowledged that the current proposed rulemaking is specifically focused on implementing the beneficial ownership reporting requirements of the CTA. They also noted that two additional proposed rules would be released in the near future that focus more detail on anticipated revisions to the CDD Rule resulting from the initial rulemaking as well as expanding on details regarding access and disclosure controls for the secured, nonpublic registry that is anticipated to be created and administered by FinCEN. The purpose of the revision to the CDD Rule is to conform the CDD Rule with the CTA. This would reduce redundancies and burdens on financial institutions and their legal entity customers by eventually providing them with access to beneficial ownership information that will be reported to FinCEN. The access will be authorized by the CTA under certain circumstances and with the consent of the financial institutions’ customers.

FinCEN is currently in the process of considering public comments on the initial proposed rulemaking regarding whether information collection is critical for the agency’s performance and whether the estimated burden to collect the information is feasible. The notice of proposed rulemaking also poses 22 additional questions to key stakeholders covering numerous topics, including whether reporting companies would prefer to file with state or tribal governments and whether small businesses would need to retain professional experts to aid compliance. The comment period for the rulemaking is set to close on February 7, 2022.

Early observers and commentators on the new rule proposal acknowledge the potential benefits of the notice and also have acknowledged current logistical concerns of the change in regulations. More specifically, United States Secretary of the Treasury Janet Yellen released the following statement on December 7, 2021:

“The proposed rule for beneficial ownership reporting is a major step toward addressing the gaps in our corporate transparency framework that allow corruption to flourish and illicit funds to flow into the United States. The beneficial ownership rule will help close the loopholes that undermine U.S. national security, bolster economic fairness, and protect the integrity of our financial system.” 

Similarly, Ballard Spahr, LLP released an article on December 20, 2021, that provided additional commentary on the current proposed regulation and anticipated regulations that FinCEN planned to release. The article was primarily focused on breaking down some of the key provisions of the new proposed regulation. However, it did speak to some of the current concerns faced by the new proposal: 

“The NPRM does not propose an effective date but rather seeks comments on the timing of the effective date and any potential factors to be considered. FinCEN seemingly acknowledges that it must balance its desire of identifying the earliest possible effective date (to better advance the goal of the CTA) with the significant challenges to proper and safe implementation, including designing a new IT system. Specifically, the NPRM acknowledges that, prior to the effective date of the regulations, FinCEN first must design and build a new IT system (the Beneficial Ownership Secure System, or ‘BOSS’) to collect and provide access to BOI. Finally, the NPRM references the major issue of BOI verification, and how it will be accomplished, by simply noting that ‘FinCEN continues to evaluate options for verification of information submitted in BOI reports.’”

There are still many questions that have been raised related to the FinCEN proposal, including FinCEN’s definitions and inclusion of trusts and partnerships as well as expanded details on controls for the future beneficial ownership registry which are not outlined in the existing proposal. However, more information is anticipated to be released regarding the new proposed rulemaking soon. 

Review the entire notice here and reach out to your BKD Trusted Advisor™ or submit the Contact Us form below if you have questions.

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