News & Insights

In an effort to crack down on illicit finance and increase transparency, the U.S. Treasury Department’s Financial Crime Enforcement Network (FinCEN) recently issued final regulations requiring disclosure of the beneficial ownership of almost all closely held businesses. One of the world’s leading financial intelligence units, FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

The rule will now require most corporations, limited liability companies and other entities created in or registered to do business in the United States to report information about their beneficial owners — the persons who ultimately own or control the company — to FinCEN. Designed to protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system, the rule will help to stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.

The final regulations describe the reporting information that must be provided beginning Jan. 1, 2024 — following are highlights:

I. Who is a Reporting Company?

A reporting company is generally any domestic corporation, limited liability company or other entity created with the filing of a document with the Secretary of State’s office. A foreign reporting company is any foreign organized corporation, a limited liability company or other entity registered to do business within any state. While the final rules do not specifically mention limited partnerships, the comments under the proposed rules generally would treat limited partnerships as reporting companies.

There is a broad group of exemptions which includes banks, credit unions, depository institutions, investment advisors and security broker dealers. In general, most public companies, governmental entities and tax-exempt entities are not reporting companies.

An exemption is established for a large reporting company which is any business that (i) employs more than 20 full time employees (ii) has an operating presence at a physical office in the United States, and (iii) has at least $5 million dollars in gross receipts as sales in the previous year.

II. What Must Be Reported?

A reporting company must disclose its “beneficial owner,” an individual who directly, or indirectly, exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interest in it. “Substantial control” includes (i) serving as a senior officer; (ii) having authority over the appointment or removal of any senior officer of a majority of the board of directors; (iii) directing, determining or having substantial influence over, or decisions made by the reporting company or (iv) any other form of substantial control.

Substantial control may be exercised through: (i) board representation; (ii) ownership or control of the majority of the voting power; (iii) rights associated with the financing arrangement; (iv) control over one or more intermediate entities that exercise substantial control; (v) formal and informal business or financial relationships with persons acting as a nominee or (vi) any contract, arrangement, understanding or relationship.

In determining a 25% ownership interest it includes equity or stock, capital or profits interest, and convertible instruments such as warrants, rights to purchase or sell subscribed to purchase or sell.

With respect to a trust, the regulations treat the following as beneficial owners: (i) a trustee or other individual with the authority to dispose of trust assets; (ii) a beneficiary who is the sole permissible recipient of income and principal from a trust or has the right to demand a distribution of or withdrawal of substantially all of the assets of the trust; or (iii) a grantor or settler who has the right to revoke the trust or otherwise withdraw assets in the trust.

Once a beneficial owner is identified, a report must be filed with FinCEN including the following: (i) the full name of the reporting company and any trade names or dba’s; (ii) the complete current address of the principal place of business or if the principal place of business is located outside the United States the primary location in the United States; (iii) the jurisdiction and formation; (iv) the IRS taxpayer identification number or if one has not been issued, a tax ID number issued by the foreign jurisdiction and the name of the foreign jurisdiction; (v) for each beneficial owner and the company applicant, full legal name, date of birth, current address, unique identifying numbers such as a passport or driver’s license and an image of the document from which the unique identifying number was taken.

The information must be provided by a company “applicant,” the individual who files a document and creates a domestic reporting company or first registers the foreign reporting company.

The reporting company or beneficial owners may obtain a FinCEN identifier by completing an application with this information and once the FinCEN identifier has been issued, the applicant no longer needs to provide that information in every application.

III. When does the reporting start?

Reporting companies created or registered before Jan. 1, 2024 will have until Jan. 1, 2025 to file their initial reports, while reporting companies created or registered after Jan. 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information.

Penalties for noncompliance can include criminal and civil penalties. A person providing false information or failing to complete or update information is subject to a civil penalty of not more than $500 per day and fines not more than $10,000, imprisonment of not more than two years, or both.

According to FinCEN, this final rule represents the culmination of years of bipartisan efforts by Congress, the Treasury, national security agencies, law enforcement and other stakeholders to strengthen the U.S.’s corporate transparency framework.

In the meantime, private companies and their counsel should carefully consider: (i) whether they are exempt or nonexempt; (ii) c agreements which would require investors and shareholders to report and provide updated information; and (iii) maintenance of current organizational charts.

Phil Jelsma is a partner and chair of the tax practice team at Crosbie Gliner Schiffman Southard & Swanson LLP (CGS3). The article was published in the Daily Journal and The Daily Transcript (subscription required).