The Financial Crimes Enforcement Network (“FinCEN”) issued a Notice of Proposed Rulemaking (“NPRM”) on December 7, 2021. This NPRM, found here, was issued in accordance with the Corporate Transparency Act (the “Act”) to implement specific reporting requirements of beneficial ownership information and to clarify some provisions. Entities identified as reporting companies must provide information about their beneficial owners and applicants to FinCEN. The proposed rule provides clarification and additional information regarding the requirements imposed by the  Act. The purpose of the Act is to prevent “money laundering, the financing of terrorism, proliferation financing, serious tax fraud, and other financial crime by requiring nonpublic registration of business entities formed or registered to do business in the United States.” See Corporate Transparency Act, H.R. 6395, 116th Cong. §§ 6402-6404, at § 6403(e)(2)(B)(2020). All information gathered through these requirements will be stored in a database and available to government authorities for law enforcement purposes. 

Under the proposed regulations, there are two types of reporting companies required to file reports with FinCEN. These include domestic reporting companies and foreign reporting companies. Domestic reporting companies include “any entit[ies] that [are] created by the filing of a document with a secretary of state or similar office of a jurisdiction within the United States.” Foreign reporting companies are “any entit[ies] formed under the law of a foreign jurisdiction that [are] registered to do business within the United States.” 86 Fed. Reg. 69920 (proposed Dec. 8, 2021) (to be codified at 31 C.F.R. § 1010.380).

The Act provides exemptions for 23 different categories of businesses. These exemptions include (1) Securities and Exchange Commission reporting issuers; (2) governmental authorities; (3) banks; (4) credit unions; (5) depository institution holding companies; (6) money transmitting businesses; (7) brokers and dealers in securities; (8) securities exchanges and clearing agencies; (9) other Exchange Act registered entities; (10) investment companies and investment advisers; (11) venture capital fund advisers; (12) insurance companies; (13) state licensed insurance producers; (14) Commodity Exchange Act: registered entities; (15) accounting firms; (16) public utilities; (17) financial market utilities; (18) pooled investment vehicles; (19) tax-exempt entities; (20) entities assisting a tax-exempt entity; (21) large operating companies; (22) subsidiaries of certain exempt entities; and (23) inactive entities. See 31 C.F.R. 1010.380(c)(2)(i)-(xxiii). Most notably, there is additional clarification regarding what qualifies as “large operating companies.” An entity is considered a large operating company and is not a reporting company, if it (1) “Employs more than 20 employees on a full-time basis in the United States”; (2) “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 (3) “has an operating presence at a physical office within the United States.” See 31 Fed. Reg. 69930 (discussing proposed 31 CFR 1010.380(c)(2)(xxi)).

If an entity does not meet one of the above mentioned exemptions, it will be required to report the following information regarding the entity and its beneficial owners. The entity is required 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, and a unique identification number. This unique identification number can be a TIN (including an Employer Identification Number (EIN)). See 31 Fed. Reg. 69932 (discussing proposed 31 C.F.R. 1010.380(b)(1)(i)). The proposed rule provides additional information for those reporting companies that have not been issued a TIN. Beneficial Owners and Company Applicants are also required to report information about themselves. Proposed 31 CFR 1010.380(b)(1)(ii) states a reporting company must provide a report about each of its individual beneficial owners and company applicants. The required information includes the name, birthdate, address, and a unique identifying number from an acceptable identification document along with a scanned image of this document. 

Pursuant to these requirements, a “beneficial owner” is an individual who meets one of the following criteria: (1) one who exercises substantial control over the reporting company; or (2) owning or controlling at least 25% of the ownership interest of the reporting company. 31 CFR 1010.380(d)(1) provides three specific indicators of substantial control. These include (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. 31 CFR 1010.380(d)(3)(i) states “ownership interest” includes both equity in the reporting company and other types of interest (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. Further, 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. See 31 Fed. Reg. 69935. 

A company applicant is the individual who files the document that forms the entity. For a foreign reporting company, the company applicant is the individual who files the document that first registers the entity to do business in the United States. The proposed regulations also state that a company applicant includes anyone who directs or controls the filing of the document by another. For company applicants such as business formation services or law firms that provide a business service in the form of filing formation documents, they will need to provide their business address. See 31 Fed. Reg. 69930.

There are different timing requirements to report this information to FinCEN depending on when the reporting company is formed. Domestic and foreign reporting companies created or registered to do business in the United States before the effective date of the final regulations have one year from the effective date of the final regulations to file an initial report with FinCEN. These same reporting companies created on or after the date of the final regulations are required to file an initial report with FinCEN within 14 calendar days of the date on which they are created or registered. If there is any change in a report filed with FinCEN, the reporting company will have 30 calendar days to file an updated report. Finally, if a reporting company filed inaccurate information, it is required to file a corrected report within 14 calendar days of the date it knew, or should have known, that the information was inaccurate. See 31 Fed. Reg. 66920-66921.

Written comments on the proposed rule may be submitted until February 7, 2022. There will be additional rulemakings issued by FinCEN, one relating to the establishment of rules about who may access this information and what safeguards are necessary to ensure the protection of this information. FinCEN is also in the process of developing a beneficial ownership information technology system to assist in administering these new requirements. 

Companies should begin to determine whether or not they qualify as a reporting company under the Act. Reporting companies should start to gather the information required for these reports to FinCEN regarding their beneficial owners and company applicants to ensure they remain compliant with the requirements of the Act.