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12 • 2022

Our FinCen Game Plan

Nearly every private company will soon need to provide information to the Feds regarding its beneficial owners.  With nearly 40,000 entities enrolled in our entity management system and an encrypted database of nearly all information required by the new reporting requirements, our firm intends to become the leader in FinCen reporting.  We are investing in technology (including AI to comply with the Photo ID part of the new law) and making other infrastructure investments to build an efficient system for filing and compliance.  In this article, we will explain the law.  To learn more about our tools, plans, and technology, please visit eminutes.com/fincen.

The new law and the regulations

We have previously written about[1] Congress’s passage of the Corporate Transparency Act (“CTA”) early in 2021 as part of the annual National Defense Authorization Act.[2] Congress passed the CTA based on its “sense” that a “clear, federal standard for incorporation practices” is required to prevent “malign actors” from concealing their ownership of business entities to engage in money laundering, because “most or all States do not require information about the beneficial owners of the” business entities formed under state law.[3] To that end, the CTA requires private corporations, limited liability companies, and other business entities formed under state or tribal law to report to the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury certain information about each beneficial owner of the entity, as well as each person who actually files the application to form the entity or register it to do business in a U.S. jurisdiction.[4]

However, the new reporting requirements are tied to the effective date of final regulations issued by FinCEN to implement the CTA, which was to have occurred no later than January 1, 2022.[5] Although that date has come and gone without final regulations, they are coming. FinCEN issued an Advance Notice of Proposed Rulemaking on April 5, 2021,[6] followed by a Notice of Proposed Rulemaking, which included proposed regulations, on December 8, 2021.[7] Once the regulations are finalized and FinCEN has the necessary infrastructure in place,[8] which is anticipated to occur sometime this year or no later than the beginning of 2023, reporting companies created or registered before the effective date of the final regulations would have one year to file their initial reports, while reporting companies created or registered after the effective date would have only 14 days after formation or registration to file.[9] As such, we will be gathering the required information for all companies we have formed and will form so that our records are updated and complete and we will be in a position to help those companies comply with the impending rules once they are finalized.

Who will have to report

FinCEN is proposing a massive data-gathering regime encompassing nearly every private business entity formed or registered to do business in the United States.[10] Reports concerning beneficial ownership information of such entities will have to be filed by every “reporting company.”[11] The term “reporting company” is defined to include both a “domestic reporting company”—any corporation, limited liability company, or other entity that is created by the “filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe”—and a “foreign reporting company”—any corporation, LLC, or other entity formed under the law of a foreign country and registered to do business in any State or tribal jurisdiction by the filing of such a document.[12] FinCEN expects that these definitions will include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in additions to corporations and LLCs, because such entities are typically created by a filing with a secretary of state or similar office.[13] Therefore, while there are many exemptions to the definition of “reporting company”[14]—including public companies and banks—for the most part all private entities will have to report.

What will have to be reported

Reporting companies will be required to file information about (1) the “beneficial owners” of the entity, and (2) the individuals (“company applicants”) who have filed an application with state or tribal authorities to form the entity or register it to do business.[15] The term “beneficial owner” is broadly defined in the proposed regulations to include any individual who, directly or indirectly, either exercises “substantial control” over the reporting company or controls at least 25 percent of its ownership interests.[16] “Substantial control” is likewise broadly defined to include: service as a “senior officer” of the entity (including, but not limited to, the president, secretary, treasurer, chief executive officer, chief financial officer, chief operating officer, and general counsel); authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body); and direction or substantial influence over “important matters” affecting the company, such as the nature, scope, and attributes of its business.[17]

For each beneficial owner and company applicant, the reporting company will have to provide to FinCEN the individual’s full legal name, date of birth, complete current address, and a unique identifying number from a current U.S. or foreign passport or State driver’s license or other identification document issued by a State, local government, or Indian tribe.[18] The reporting company will also have to provide an image of the identification document that “includes both the unique identifying number and photograph in sufficient quality to be legible or recognizable.”[19] All of this information will have to be kept up-to-date with FinCEN, so that any time there is a change in who is a beneficial owner or in any of the information as to an existing beneficial owner or company applicant (such as a change of address or even a new driver’s license or passport, which must be “non-expired”), the reporting company will have to file an updated report within 30 days of the date when the change occurs.[20]

Compliance with the new requirements

Compliance with the new reporting requirements will be essential. Under the CTA and the proposed regulations, it will be unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, or to willfully fail to report complete or updated beneficial ownership information, to FinCEN.[21] The potential penalties are substantial: a civil penalty of up to $500 for each day that the violation continues or has not been remedied, and a fine of up to $10,000 or imprisonment for up to two years, or both.[22]

No time like the present for information gathering

It is probably going to take FinCEN up to a year or more to finalize the regulations and get the necessary infrastructure in place. While the final regulations may look a little different than what FinCEN has proposed, we now have a very good idea what is going to have to be filed with FinCEN once the system is up and running. As such, it is not too early to start gathering all of the required information so that reporting companies can comply with their new obligations as soon as possible after the new regulations become final.

[1] See eMinutes, “Who Can Access Information About Real Estate Transactions That Must Be Reported to FinCEN?” (Jan. 8, 2022); eMinutes, “Delaware LLC Remains Best Way for Celebrities to Preserve Anonymity Even After the Corporate Transparency Act” (Jan. 20, 2021).

[2] National Defense Authorization Act, Pub. L. No. 116-283, §§ 6401 to 6403, 134 Stat. 3388 (2021). The CTA is codified at 31 U.S.C. § 5336.

[3] Pub. L. No. 116-283, § 6402(2)-(5); see also FinCEN, Fact Sheet: Beneficial Ownership Information Reporting Notice of Proposed Rulemaking (NPRM) (Dec. 7, 2021) (“Few jurisdictions in the United States require legal entities to disclose information about their beneficial owners[.]”) [hereinafter “FinCEN Fact Sheet”]. In truth, many states, with the notable exception of Delaware, currently require information about the owners of business entities formed under state law.

[4] 31 U.S.C. § 5336(b)(1).

[5] Id. § 5336(b)(5).

[6] FinCEN, Beneficial Ownership Information Reporting Requirements, 86 FR 17,557 (Apr. 5, 2021).

[7] FinCEN, Beneficial Ownership Information Reporting Requirements, 86 FR 69,920 (Dec. 8, 2021). The final regulations will be codified at 31 C.F.R. § 1010.380. The proposed regulations concerning reporting of beneficial ownership information constitute only one of three rulemakings FinCEN has planned to implement the CTA. The other two will (1) establish rules for who may access beneficial ownership information filed with FinCEN and for what safeguards will be required to ensure that the information is secured and protected, and (2) revise FinCEN’s customer due diligence rule. FinCEN Fact Sheet, supra note 3.

[8] See infra note 10.

[9] See 31 C.F.R. § 1010.380(a)(1) (proposed). Updated reports will also have to be filed within 30 days of the date when there is a change with respect to any information previously submitted to FinCEN, while corrected reports will have to be filed within 14 days after the date when the reporting company becomes aware or has reason to know that any previously submitted information was inaccurate when filed. See id. § 1010.380(a)(2), (3) (proposed).

[10] FinCEN indicates that it will be gathering beneficial ownership information from the “millions” of business entities that are formed in the United States every year, as well as the countless number of entities that are already in existence. FinCEN Fact sheet, supra note 3. FinCEN recognizes that administering the new regulations will result in “potential costs” to the agency, including information technology (IT) development and ongoing annual maintenance, not to mention processing the many millions of filings that will be submitted to FinCEN every year. In what appears to be a vast understatement, FinCEN estimates that IT development will cost only about $33 million, with an additional $31 million per year required to maintain the new systems and the underlying FinCEN technology being leveraged to support the new capabilities. 86 Fed. Reg. 69,948. In the same breath, however, FinCEN concedes that “the requirement to include scanned images of acceptable identification documents will increase the cost of system development and implementation.” Id. at n.163. Since scanned images are, in fact, a requirement under the proposed regulations, see 31 C.F.R. § 1010.380(b)(1)(ii)(E) (proposed), it is unclear why FinCEN’s estimated cost of developing and operating the system is not higher to begin with.

[11] See 31 C.F.R. § 1010.380(a)(1) (proposed).

[12] Id. § 1010.380(c)(1) (proposed).

[13] FinCEN Fact sheet, supra note 3.

[14] 31 C.F.R. § 1010.380(c)(2) (proposed).

[15] Id. § 1010.380(b)(1)(ii) (proposed).

[16] Id. § 1010.380(d) (proposed).

[17] Id. § 1010.380(d)(1), (f)(8) (proposed).

[18] Id. § 1010.380(b)(ii)(A)-(D) (proposed).

[19] Id. § 1010.380(b)(ii)(E) (proposed).

[20] See 31 C.F.R. § 1010.380(a)(2) (proposed).

[21] See 31 U.S.C. § 5336(h)(1); 31 C.F.R. § 1010.380(g)(1) (proposed).

[22] 31 U.S.C. § 5336(h)(3)(A).