FinCEN Issues Proposed Rules Requiring Certain US And Non-US Legal Entities To Report Beneficial Ownership Information - Financial Services

On December 8, 2021, the US Financial Crimes Enforcement Network ("FinCEN") published a Notice of Proposed Rulemaking ("NPRM") to implement registration and disclosure requirements of the Corporate Transparency Act ("CTA"), which was enacted into law as part of the National Defense Authorization Act ("NDAA") on January 1, 2021.¹

The registration requirements proposed in the NPRM will apply to specified US corporate and other legal entities, as well as specified legal entities formed outside the United States that are registered to do business in the United States. The registration and disclosure requirements may be particularly relevant to banks and investment fund structures that establish legal entities in connection with financings and corporate acquisitions.

I. Background

The CTA requires certain legal entities, including limited liability companies ("LLCs"), to register with FinCEN and disclose their ultimate beneficial owners. On April 5, 2021, FinCEN published an ANPRM, which was the initial step in the rulemaking process and was discussed in detail in a previous Legal Update. The NPRM is the next step toward the implementation of the CTA.²

The NPRM also is part of a broader Biden administration strategy to combat financial crimes. On December 6, 2021, right before FinCEN published the NPRM, the White House released the first-ever "US Strategy on Countering Corruption"³ (the "Strategy"), in which it discusses five pillars that will be deployed by the White House to combat corruption.⁴ In one of the five pillars, the White House explained that it would issue beneficial ownership transparency regulations to counteract opaque corporate structures. This facet of the Strategy overlaps with FinCEN's move to implement the CTA

II. Notice of Proposed Rulemaking

As detailed by FinCEN in the NPRM, closely held corporate entities, particularly shell companies, have been used to conceal the proceeds of crimes, including corruption and terrorist financing. However, currently law enforcement must rely on costly and time-consuming investigative tools to obtain beneficial ownership information for closely held corporate entities.⁵ The implementation of the CTA's provisions, such as the CTA Registry contemplated in the NPRM, is intended to provide law enforcement, regulators and financial institutions with a single, comprehensive source of beneficial ownership information. With this information, law enforcement in particular will be better positioned to identify "linkages between potential illicit actors and business entities."⁶

Following FinCEN's review of 220 public comments received in response to its ANPRM, the NPRM addresses who will be required to file beneficial owner information with the CTA Registry (and who will be exempt from filing), what will need to be filed and when filers will be required to provide the required information. Below we discuss each of these concepts, along with the potential civil and criminal penalties for failure to comply with these reporting obligations, and the implications of the NPRM for financial institutions.

A. WHAT IS A "REPORTING COMPANY"?

The CTA's filing requirements apply to "reporting companies," which include both domestic and foreign companies.⁷ Under the NPRM, a domestic reporting company would include a corporation, LLC or any other entity created by the filing of a document with a secretary of state or similar office, including, in certain circumstances, limited partnerships and business trusts.⁸ A foreign reporting company would include a corporation, LLC or other entity formed under the law of a foreign country that is registered to do business in any jurisdiction within the United States.⁹

Who Are "Exempt Entities"?

The CTA sets forth exemptions from the reporting requirements for certain domestic and foreign legal entities.¹⁰ FinCEN plans to adopt verbatim the statutory language of the CTA, under which 23 categories of entities¹¹ are exempt from the regulation. Generally, the categories of exempt entities cover entities that are heavily regulated and, therefore, have beneficial ownership information that is more readily available to US regulators, such as US banks, US Securities and Exchange Commission ("SEC")-reporting issuers, SEC-registered broker-dealers, SEC-registered investment companies and advisers, FinCEN-registered money transmitting businesses, and insurance companies, among many others. While the proposed rule does not diverge from the language of the CTA, the NPRM proposes clarifications to certain exemption definitions, such as "public utilities," "dormant entities," "large operating companies" and entities covered by what FinCEN calls the "subsidiary exemption." Notwithstanding these clarifications, key questions remain regarding the meaning of certain exemptions, such as how to treat "pooled investment entities."

"Large Operating Companies" Exemption.

Under the NPRM, an entity will be exempt from the reporting requirements if it is a larger operating company, which is defined as an entity that (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.¹² The NPRM clarifies what it means to employ someone on a full-time basis by referencing the US Internal Revenue Service's ("IRS") definition of a "full-time employee." For the tax filing prong, the relevant filing may be a US federal income tax or information return, including a parent company's consolidated return. For the "operating presence at a physical office" prong, the entity must have a physical office that is owned or leased, is not a residence and is not a shared space.

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Footnotes

1 Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69,920 (Dec. 8, 2021) (to be codified 31 C.F.R. pt. 1010). The comment period for the NPRM closes on February 7, 2022.

2 This NPRM is the first of three sets of rulemakings to implement the CTA. The first rulemaking, which we discuss here, 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 CDD Rule for consistency and alignment with the CTA requirements.

3 United States Strategy on Countering Corruption (whitehouse.gov).

4 We discuss this initiative in the recent Legal Update First-Ever US Strategy on Countering Corruption Globally: Key Takeaways for Corporations to Match Enforcement's Increasingly Global, Integrated and Holistic Approach.

5 86 Fed. Reg. at 69,926.

6 86 Fed. Reg. at 69,922.

7 86 Fed. Reg. at 69,938.

8 Id.

9 Id. at 69,939.

10 Corporate Transparency Act, 31 U.S.C. § 5336(a)(11).

11 The 23 entities include the following: 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.

12 86 Fed. Reg. at 69,939-40

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