FinCEN Issues Final Rule Requiring Certain US and Non-US Legal Entities to Report Beneficial Ownership Information
On September 30, 2022, the US Financial Crimes Enforcement Network (“FinCEN”) published its final beneficial ownership information rule (the “BOI Rule”). The BOI Rule addresses who will be required to file beneficial owner information with the Corporate Transparency Act (“CTA”) Registry, who will be exempt from filing, what must be filed and when the required reports must be made.
The final rule largely tracks the December 2021 proposal but incorporates some modifications to address industry concerns and otherwise clarifies certain provisions. However, the final rule retains many of the most burdensome requirements, and it remains uncertain how FinCEN will monitor and enforce such a wide-ranging regime.
The final rule will become effective on January 1, 2024, but pre-existing legal entities will have an additional year to come into compliance with it (i.e., January 1, 2025). FinCEN will also consider guidance or FAQs to respond to any additional particular factual circumstances that may arise.
In this Legal Update, we provide background regarding the BOI Rule, discuss some of the key changes from the December 2021 proposal and note the BOI Rule’s implications for financial institutions. For a more detailed discussion of the structure and elements of the rule, please see our Legal Update on the December 2021 proposal.
I. Background
The BOI Rule implements registration and reporting requirements of the CTA, which was enacted into law as part of the National Defense Authorization Act (“NDAA”) on January 1, 2021.1 The CTA and FinCEN’s implementing regulations fit within a broader Biden administration strategy to combat financial crimes.2 The CTA requires a broad array of legal entities, both domestic and foreign, to register with FinCEN and disclose their ultimate beneficial owners. On April 5, 2021, FinCEN published an Advanced Notice of Proposed Rulemaking (“ANPRM”), which was the first step in the rulemaking process.3 On December 8, 2021, FinCEN published the Notice of Proposed Rulemaking (“NPRM” or “Proposed Rule”) as the next step toward the implementation of the CTA.4 On September 30, 2022, FinCEN released the BOI Rule.
II. From the Proposed Rule to the BOI Rule: Summary of Changes
We highlight some of the key differences between the NPRM and the BOI Rule.
Substantial Control
Individuals who exercise “substantial control” over a legal entity are considered beneficial owners for purposes of the BOI Rule. The BOI Rule adopts the definition of “substantial control” largely as proposed but makes some important modifications.5 One significant change FinCEN made with respect to the indicators of “substantial control” is that FinCEN replaced the phrase “important matters affecting” the reporting company with “important decisions made by” the reporting company.6 FinCEN adopted this change to address the uncertainty identified by commenters that external events, actions of customers or suppliers, or other actions beyond a reporting company’s control could “affect” a reporting company.7
FinCEN also omitted the terms “secretary” and “treasurer” from the definition of “senior officer,” as it agreed with commenters that the roles of corporate secretary and treasurer tended to entail ministerial functions with little control over the company.8 Additionally, the BOI Rule inserts the clause “including as a trustee of a trust or similar arrangement” into the introductory discussion of how an individual may directly or indirectly exercise substantial control.9
Ownership or Control of Ownership Interests
The BOI Rule substantially adopts the proposed rule’s language concerning what it means to “[own] or control not less than 25 percent of the ownership interests of the entity.” The final rule streamlines the specific types of relationships through which ownership/control of ownership interests may occur, such as “through another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual.”10 Finally, the BOI Rule adds a paragraph clarifying that individuals may own or control a reporting company through their ownership or control of intermediary entities.11
Company Applicant
The BOI Rule diverts from the proposed rule by making a distinction between existing and newly-formed companies. The BOI Rule provides that if a company was formed prior to the effective date of the rule, then it has no requirement to report company applicants. These reporting companies will only need to report the fact that they were created or registered prior to the effective date of the rule and the information required for reporting companies and beneficial owners. This means that, unlike in the proposed rule, long-established reporting companies will not be required to obtain information for any company applicant – whether living or deceased.
Exempt Entities
The CTA sets forth exemptions from the reporting requirements for certain domestic and foreign legal entities.12 The BOI Rule does not significantly diverge from the language of the CTA and adopted most of the language in the NPRM regarding the 23 categories of exempt entities.13 However, the BOI Rule made a few changes to the exemptions, and we highlight some of those changes and clarifications below:
- Money Services Business Exemption. To reduce the risk of confusion, FinCEN renamed the “money transmitting business” exemption to “money services business.”14 The purpose of this change is to clarify that the exemption also applies to “money services businesses” registered under 31 C.F.R. § 1022.380, which is the FinCEN regulation implementing the money transmitting business registration requirement of 31 U.S.C. 5330.
- “Large Operating Companies” Exemption. The BOI Rule adopted the NPRM’s definition of a “large operating company” without any changes.15 However, in responding to comments on this exemption, FinCEN specifically declined to permit companies to consolidate employee headcount across affiliated entities for purposes of meeting the 20 full-time employees threshold requirement. FinCEN also declined to expand the minimum $5 million revenue requirement to include non-U.S. sources.16 Additionally, the BOI Rule revised the definition of “operating presence at a physical office within the United States.” Previously, the NPRM stated that the place of residence of any individual would not qualify as an operating presence at a physical office. Under the BOI Rule, an individual’s U.S. residence may qualify for purposes of the exemption.17
- Subsidiary Exemption. FinCEN continues to interpret the subsidiary exemption as requiring an entity to be owned entirely by one or more specified exempt entities in order to qualify for this exemption, which may preclude entities subject to director qualifying share requirements from qualifying.18 Additionally, FinCEN declined to expand the exemption to include holding companies owning only CTA-exempt entities.19
- “Pooled Investment Vehicles” Exemption. The BOI Rule adds a clarifying modification to the definition of a “pooled investment vehicle” by adding that a pooled investment vehicle “[i]s identified by its legal name by the applicable investment adviser in its Form ADV… or will be so identified in the next annual updating amendment Form ADV required to be filed by the applicable investment adviser pursuant to rule 204-1 under the Investment Advisers Act of 1940” (new text emphasized).20 This clause was added to address concerns about how the timeframe between the creation of a pooled investment vehicle and its identification on the SEC’s Form ADV may exceed the beneficial ownership reporting deadline, which is 30 days for new reporting companies created or registered on or after the BOI Rule. Commenters contended that it would be unreasonable to apply the general disclosure deadline to an entity in the process of becoming exempt only because it had not concluded all of the requisite steps within this timeframe, and FinCEN adopted this modification.21 With respect to legal entities wholly owned by exempted pooled investment vehicles, FinCEN clarifies that whether these wholly owned legal entities are exempt from the reporting requirements of the CTA depends on whether they themselves meet the criteria of an exemption.22
Information to be Reported
The final BOI Rule adopts without modification the NPRM’s discussion of the information required to be reported. For a complete discussion of this issue, please review our previous Legal Update.
Timing of Reports and Updates
The effective date of the rule is January 1, 2024.23 For domestic and foreign reporting companies created or registered on or after the final regulation, the reporting company must file with FinCEN 30 calendar days after formation or registration, rather than the 14 days proposed in the NPRM.24 Entities formed or registered before the effective date of the final regulations are required to file its initial report no later than one year after the effective date of the regulation, i.e., January 1, 2025.25 The BOI Rule also aligns the reporting of updates or reporting of inaccuracies with the 30 calendar day timeframe.26
Penalties for Violations
In the BOI Rule, FinCEN confirms that “any person” committing a reporting violation would include any individual, reporting company or other entity and that it is unlawful for such person to directly or indirectly provide false information in a report or application.27 The BOI Rule changed the proposed rule’s language stating that a person fails to report “if such person directs or controls another person to not report or is in substantial control of a reporting company when it fails to report.” The BOI Rule now clarifies that a person “fails to report” beneficial ownership information if the “person either causes the failure, or is a senior officer of the entity at the time of the failure.”28 FinCEN hopes that this update clarifies who could be liable for a reporting company’s failure to file, and rests the obligation to report “with those in charge of an entity.”29
III. Implications for Financial Institutions
The CTA requires that FinCEN revise its existing beneficial ownership rules for financial institutions.30 While the final rule does not address the existing CDD Rule, FinCEN is expected to initiate a separate rulemaking amending the CDD Rule within one year of the effective date of the finalization of the BOI Rule.31 Once issued, we expect the revised CDD Rule to be harmonized with the BOI Rule.
In the interim, financial institutions will benefit from information maintained in the CTA Registry, as FinCEN “may disclose beneficial ownership information reported” pursuant to the CTA upon receipt of “a request made by a financial institution subject to customer due diligence requirements, with consent of the reporting company, to facilitate the compliance of the financial institution with customer due diligence requirements under applicable law.”32 Financial institutions that anticipate making requests for legal entity customers should consider whether or how to update customer agreements and related documentation to provide for this consent.
The final BOI Rule does not, however, address whether or how FinCEN intends to verify the BOI it collects, nor how a financial institution should reconcile discrepancies between BOI it collects from its customers and information reported by its customers to FinCEN. We encourage financial institutions to engage with FinCEN on these (and other) issues, which, if left unresolved, could prove burdensome for the industry.
1 See Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59,498 (Sept. 30, 2022) (to be codified at 31 C.F.R. pt. 1010), https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements.
2 See United States Strategy on Countering Corruption (whitehouse.gov). We discuss this initiative in a recent Legal Update.
3 Please see our previous Legal Update for more information regarding the ANPRM.
4 Please see our previous Legal Update for more information regarding the NPRM. This NPRM is the first of three sets of rulemakings to implement the CTA. The first rulemaking, which we discuss in this Legal Update, implements the beneficial ownership information reporting requirements; the second will implement the CTA’s rules for access to and disclosures of beneficial ownership information; and the third will review and revise the existing Customer Due Diligence (“CDD”) Rule for consistency and alignment with the CTA requirements.
9 Id. at 59,529. While the phrase “trust or similar arrangement” was used in the NPRM as an example of how individuals may directly or indirectly own or control an ownership interest of a reporting company, the BOI Rule adds the phrase “including as a trustee of a trust or similar arrangement” to the substantial control section to clarify that individuals may also exercise substantial control over a reporting company as a trustee. See 86 Fed. Reg. 69,920, 69,973 (Dec. 8, 2021).
13 These are the 23 exempt entities: SEC-reporting issuers, domestic governmental authorities, banks, domestic credit unions, depository institution holding companies, FinCEN-registered money transmitting businesses, SEC-registered broker-dealers, securities exchange or clearing agencies, other Securities Exchange Act of 1934 entities, registered investment companies and advisers, venture capital fund advisers, insurance companies, state licensed insurance producers, Commodity Exchange Act registered entities, certain accounting firms, public utilities, financial market utilities, certain pooled investment vehicles, tax exempt entities, entities assisting tax exempt entities, large operating companies, subsidiaries of certain exempt entities and inactive businesses.
31 31 U.SC. § 5336(a)(3), added by CTA Section 6403(d)(1).
32 31 U.SC. § 5336(a)(3), added by CTA Section 6403(c)(2)(B)(iii).
