FinCEN Releases Guidance Materials on the Beneficial Ownership Information for CTA Reporting

On March 24, 2023, the Financial Crimes Enforcement Network (“FinCEN”) published its first set of guidance materials to aid the public, and in particular the small business community, in understanding upcoming beneficial ownership information (“BOI”) reporting requirements imposed under the Corporate Transparency Act (the “Act”) which takes effect on January 1, 2024.  

Background

As background, the Act was enacted into U.S. federal law on January 1, 2020 as a new national beneficial ownership reporting regime for U.S. companies, and non-U.S. companies doing business in the United States. In broad terms, the Act creates a national company beneficial ownership registry accessible only by law enforcement, government agencies and other officials, and requires reporting companies to provide certain identifying information of its beneficial owners and company applicants to FinCEN. The purpose of the Act is to prevent the illicit use of so called “shell companies” to conceal illegal activity or to facilitate money laundering, tax evasion and other criminal activities.  

FinCEN previously indicated its intent to issue three rulemakings planned to implement the Act. The first rulemaking was the final rule that FinCEN issued on September 29, 2022 implementing the BOI reporting provisions of the CTA. We summarized the key aspects of the CTA and the reporting deadlines for reporting companies in our previous article FinCEN Issues Final Rule Implementing Corporate Transparency Act. The second rulemaking was the Notice of Proposed Rulemaking that FinCEN issued on December 15, 2022 which will govern access to and protection of BOI.  Please refer to our previous article Key Updates in the Transparency World for more background on provisions under the Notice of Proposed Rulemaking. The third rulemaking will revise FinCEN’s Customer Due Diligence rules no later than one year after the effective date of the regulations contained in the final rule (i.e., January 1, 2024).  

First Set of Guidance Materials on the BOI Reporting Requirements Under the Act

This first set of guidance materials is available on FinCEN’s BOI reporting webpage (www.fincen.gove/boi). Among other things, the guidance includes a FAQs page which is intended to be explanatory only and does not supplement or modify any obligations imposed by statute or the final rule. Some of the key provisions of the BOI reporting requirements under the Act that are reiterated in the FAQs published by FinCEN are discussed below.

Who is a beneficial owner of a reporting company?  In general, a beneficial owner is any individual who, directly or indirectly, (i) exercises substantial control over the entity or (ii) owns or controls not less than 25% of the ownership interests of the entity. Whether an individual has “substantial control” over a reporting company depends on the power they may exercise over a reporting company. In addition, any senior officer is deemed to have substantial control over a reporting company.  FinCEN provides three examples in the FAQs of how a reporting company determines its beneficial owners:

• Example 1: The reporting company is a limited liability company (LLC). Individual A is the sole owner and president of the company and makes important decisions for the company. No one else owns or controls ownership interests in A’s company or exercises substantial control over A’s company.

The FAQs conclude that A is the beneficial owner of the reporting company in two different ways, assuming no other facts. First, A exercises substantial control over the company because A is a senior officer of the company (i.e., the president) and because A makes important decisions for the company. Second, A is also a beneficial owner because A owns 25 percent or more of the reporting company’s ownership interests.

Because no one else owns or controls ownership interests in A’s LLC or exercises substantial control over it, and assuming there are no other facts to consider, A is the only beneficial owner of this reporting company, and A’s information must be reported to FinCEN.

• Example 2: The reporting company is a corporation. The company’s total outstanding ownership interests are shares of stock. Three people (Individuals A, B, and C) own 50 percent, 40 percent, and 10 percent of the stock, respectively, and one other person (Individual D) acts as the President for the company, but does not own any stock.

Assuming there are no other facts, the FAQs conclude that individuals A, B, and D are all beneficial owners of the company and their information must be reported. Individual C is not a beneficial owner.

Individual A owns 50 percent of the company’s stock and therefore is a beneficial owner because they own 25 percent or more of the company’s ownership interests.

Individual B owns 40 percent of the company’s stock and therefore is a beneficial owner because they own 25 percent or more of the company’s ownership interests.

Individual C is not a company officer and does not directly or indirectly exercise any substantial control over the company.

Individual C also owns 10 percent of your company’s stock, which is less than the 25 percent or greater interest needed to qualify as a beneficial owner by virtue of ownership interests. Individual C is therefore not a beneficial owner of the company.

Individual D is president of the company and is therefore a beneficial owner. As a senior officer of the company, Individual D exercises substantial control, regardless of whether the individual owns or controls 25 percent or more of the company’s ownership interests.

• Example 3: The reporting company is a corporation owned by four individuals who each own 25 percent of the company’s ownership interests (e.g., shares of stock). Four other individuals serve as the reporting company’s CEO, CFO, COO, and general counsel, respectively, none of whom hold any of the company’s ownership interests.

In this example, the FAQs conclude that there are eight beneficial owners. All four of the individuals who each own 25 percent of the company’s ownership interests are beneficial owners of the company by virtue of their holdings in it, even if they exercise no substantial control over it. The CEO, CFO, COO, and general counsel are all senior officers and therefore exercise substantial control over the reporting company, making them beneficial owners as well.

Who is a company applicant of a reporting company? A reporting company is required to report not only its beneficial owners but also any “company applicants.” No more than two people need be identified as company applicants, namely (i) the individual who directly files the document that creates the entity or, in the case of a foreign reporting company, the individual who directly files the document that first registers the entity to do business in the US and (ii) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another. Only reporting companies formed on or after January 1, 2024 are to report its company applicants. FinCEN provides two examples in the FAQs of how a reporting company determines its company applicants: 

• Example 1: Individual A is creating a new company. Individual A prepares the necessary documents to create the company and files them with the relevant state or Tribal office, either in person or using a self-service online portal. No one else is involved in preparing, directing, or making the filing.

The FAQs conclude that Individual A is a company applicant because Individual A directly filed the document that created the company. Because Individual A is the only person involved in the filing, Individual A is the only company applicant. State or Tribal employees who receive and process the company creation or formation documents should not be reported as company applicants.

• Example 2: Individual A is creating a company. Individual A prepares the necessary documents to create the company and directs Individual B to file the documents with the relevant state or Tribal office. Individual B then directly files the documents that create the company.

Individuals A and B are both company applicants according to the FAQs—Individual B directly filed the documents, and Individual A was primarily responsible for directing or controlling the filing. Individual B could, for example, be Individual A’s spouse, business partner, attorney, or accountant; in all cases, Individuals A and B are both company applicants in this scenario.

Some of the other key provisions of the BOI reporting requirements under the Act that are addressed in the FAQs published by FinCEN without any modifications from the final rule include items such as: 

• identifying deadlines for a reporting company to report and/or update its BOI; 
• identifying what companies will be required to report BOI to FinCEN and what companies will be exempt from the reporting requirement; 
• the specific information a reporting company will have to report about itself, its beneficial owners and its company applicants; and 
• who will have access to the secure filing database that will house the BOI of reporting companies.

Next Steps

FinCEN expects to publish additional guidance in the future. Questions may be submitted on FinCEN’s contact web page (www.fincen/contact).

We will continue to monitor developments of the Act and its implementation. We are available to answer your questions in an effort to assist you with compliance with the Act and the final rules.