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FinCEN Publishes CTA Regulations

FinCEN today published its initial draft regulations to implement the Corporate Transparency Act. Regulators had previously published an advanced notice of public rulemaking to explore issues surround the CTA.

FinCEN expects to publish the proposed regulations in the Federal Register tomorrow. (Updated December 8, 2021: Here is the Federal Register citation.)

The Corporate Transparency Act required FinCEN to implement regulations before December 31, 2021. It looks like the regulators are going to miss that deadline, however. The Notice of Proposed Rulemaking is open for comment until February 7, 2022. Presumably, the implementation date will be later.


Key Elements of CTA Regulations

The Notice of Proposed Rulemaking hopes to stop bad actors from hiding illicit funds behind anonymous shell companies. The proposed regulations obligate companies to file a “Business Owner Information” or “BOI” report. Each BOI report must identify: (1) the beneficial owners of the entity; and (2) the individuals who have filed the document that formed the entity or registered it to do business.


Reporting Companies

The proposed regulations identify two types of reporting companies: domestic and foreign. The rule defines a “domestic reporting company” to include corporations, limited liability companies, or any other entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe. Similarly, it defines a “foreign reporting company” to include a corporation, limited liability company, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction. The proposed rule exempts twenty-three types of entities from the definition of “reporting company.” FinCEN expects that these definitions will include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships. Each of these entities typically are created by a document filed with a secretary of state or similar office. The rule excludes other types of legal entities, including certain trusts, that are not created by the filing of a document with a secretary of state or similar office. FinCEN recognizes that the creation of many trusts does not involve the filing of such a formation document. However, the NPRM seeks comments on state and Indian Tribe laws regarding trusts to improve the scope of the rule.


Beneficial Owners

Under the proposed rule, a beneficial owner would include any individual who (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. The proposed regulation defines “substantial control” and “ownership interest.” The rule also sets forth standards for determining whether an individual beneficially owns or controls 25 percent of a reporting company. In keeping with the CTA, the proposed rule exempts five types of individuals from the definition of “beneficial owner.” The proposed rule sets forth a range of activities that could constitute “substantial control” of a company. This list would capture anyone who is able to make significant decisions on behalf of the entity. FinCEN’s took this approach to close loopholes that might hide owners or decision-makers. FinCEN believes this is a crucial step in unmasking shell companies. Commenters on the ANPRM had noted the problem of defining “substantial control” in the CTA.


Company Applicants

For domestic reporting companies, the proposed rule defines a “company applicant” as the person who files the document that forms the entity. For foreign reporting companies, the “company applicant” is the person who files the document that first registers the entity to do business in the United States. In each case, the rule defines anyone who directs or controls the filing of the relevant document as a “company applicant.”


Beneficial Ownership Information Reports

The proposed rule requires a reporting company to identify itself and report four pieces of information about each beneficial owner and company applicant. Those information items are (1) name, (2) birthdate, (3) address, and (4) a unique identifying number from an acceptable identification document (and the image of such document). If an individual provides his or her BOI to FinCEN, the individual can obtain a “FinCEN identifier.” The individual may use a FinCEN identifier in lieu of other required information about the individual. Also, the proposed regulations allow filers to voluntarily provide a Taxpayer Identification Number (TIN) for a beneficial owner or company applicant.


Timing of FINCE BOI Reports

The BOI report filing deadline depends on when the reporting company was created or registered, and the report type. The timing varies based on whether the report is an initial report, an updated report providing new information, or a report correcting erroneous information from a previous report. Domestic reporting companies created before the rule takes effect would have a year to file their initial reports. Reporting companies created or registered after the effective date would have 14 days after their formation to file. The same deadlines would apply to existing and newly registered foreign reporting companies. Reporting companies would have 30 days to file updates to their previously filed reports. They would have 14 days to correct inaccurate reports after they discover or should have discovered the inaccuracy.

About The Author

Jonathan Wilson is the co-founder of FinCEN Report Company with 31 years of experience in corporate, M&A and securities matters. He is the author of The Corporate Transparency Act Compliance Guide (to be published by Lexis Nexis in the summer of 2023) and the Lexis Practical Guidance Practice Note on the Corporate Transparency Act.