FinCEN reporting Requirements

Possible Penalties

Specifically, the CTA instructs that violations can include civil penalties of up to $500 a day the violation is not corrected, and criminal penalties of up to $10,000. Violators are also subject to imprisonment for up to 2 years. These penalties are imposable on any person who willfully provides—or attempts to provide—false or fraudulent beneficial ownership information to FinCEN. Willful failure to report the same is also grounds for liability.

Beneficial Owners

The rule defines a “beneficial owner” as any individual who, directly or indirectly, either exercises “substantial control” over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company.

“Substantial control” includes individuals who:

• Serve as a senior officer of the reporting company (holding or exercising authority of president, CFO, general counsel, CEO, COO, or any other officer who performs a similar function)
• Have authority over appointing or removing senior officers or a majority of the board
• Have substantial influence over important decisions of the company
• Have any other form of substantial control over the reporting company

The few limited exceptions to beneficial owners are  (i) minor children, (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual, (iii) an employee of a reporting company, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee, provided that such person is not a senior officer of the reporting company, (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance, and (v) a creditor of a reporting company.

Reporting Companies

This rule imposes requirements on “domestic reporting companies” and “foreign reporting companies”. Those definitions seem to be broad. For example, “domestic reporting company” means any entity that is a corporation, a limited liability company, or created by the filing of a document with a secretary of state or similar office, or registered to do business in any state by the filing of a document with the secretary of state or similar office.

The final rule creates 23 explicit exceptions to what qualifies as a reporting company, including but not limited to, the following, which are defined in more detail in the rule:

• Large operating companies
• Inactive entities
• Certain pooled investment vehicles
• Subsidiaries (controlled or wholly owned by an exempt entity, subject to exceptions)
• Certain investment companies and investment advisers
• Certain venture capital fund advisers
• Public utilities
• Insurance companies or state-licensed insurance producers
• Banks and credit unions
• SEC reporting issuers
• Money services businesses registered with FinCEN
• U.S. governmental authorities
• Tax-exempt entities or certain entities that assist them

FinCEN retains the power to create new exemptions. If a company falls under either definition and does not meet one of the exemptions in 31 U.S.C. 5336(a)(11)(B)(i)-(xxiii), it will have to file a report with FinCEN identifying and providing information about the company’s beneficial owners and company applicants. An overview of that information is in the link below.

Reporting Timeframe

The Final Rule will require companies in existence before January 1, 2024, to file a report no later than January 1, 2025 (a year’s time). Companies formed or registered after January 1, 2024, will have to file a report within 30 days of the date formation or registration becomes effective under applicable state and/or federal law. Reporting companies must update the reports if there are changes concerning the reporting company and its beneficial owners and to correct inaccurately filed information. The final rule similarly contemplates 30 days as the reporting timeframe for updated and corrected reports.

The intent is to curtail the “deliberate misuse of legal entities, including limited liability companies and other corporate vehicles, trusts, partnerships . . . for facilitating money laundering and other illicit financial activity in the U.S. financial system.”

Ultimately, this is a significant expansion of the information that companies must disclose under the CTA. Companies may fall under one of the important exceptions to the reporting requirements. It will be important that companies follow up with their counsel to determine if they are subject to these requirements, and if so, prepare internal policies and procedures which allow them to comply with the reporting and identification obligations in the rule, to avoid the possibility of penalties. Corporate acquisitions will also want to ensure that target companies comply with their reporting obligations—or otherwise consider this in evaluating risk.