The States of transparency

Effective as of 1 January 2021, the US Congress enacted the National Defense Authorization Act for Fiscal Year 2021 (the NDAA). Consistent with a global trend toward transparency, the NDAA includes provisions under its Corporate Transparency Act (the Act): a mere 22 pages amid nearly 1,500 pages. On 30 September 2022, the Financial Crimes Enforcement Network (FinCEN), which sits within the US Department of the Treasury (the Treasury) and is tasked with enforcement of the Act, published final regulations (the Regulations), effective as of 1 January 2024, to accompany the Act (the Act and the Regulations to be collectively referred to as the Legislation).

The Legislation essentially implements a new ultimate beneficial owner (UBO) reporting regime for many US entities and non-US entities registered to do business in the US (Reporting Companies). It also imposes various requirements upon FinCEN and the Treasury, such as mandating meaningful revisions to the current federal regulatory regime applicable to financial institutions in their anti-money laundering and know-your-customer due-diligence efforts.

Consequently, the Legislation will have broad implications for domestic and international entity groups, fiduciaries, private clients and family offices. With respect to private clients, both US and non-US citizen and resident individuals will fall within the Legislation’s purview.

Reporting company

The Legislation identifies two types of Reporting Companies: domestic and foreign. Domestic Reporting Companies include corporations and unincorporated business organisations created by the filing of a document with a secretary of state or a similar office under the laws of any US state, the District of Columbia, Puerto Rico or any other commonwealth, territory or possession of the US.[1] Foreign Reporting Companies include corporations and unincorporated business organisations registered to do business in the US by filing a document with the secretary of state or similar office under US law.[2]

Importantly, only an entity that is created (or registered to do business) by filing a document with the relevant state office constitutes a Reporting Company. Most trusts used for estate-planning purposes are therefore not considered Reporting Companies. However, if the trust directly or indirectly owns a Reporting Company, then the trust may be considered a beneficial owner of such Reporting Company.

The Act enumerates several types of entities that are exempt from reporting requirements including, but not limited to: financial institutions; qualified charities; certain inactive, non-foreign owned entities that have no assets; and companies filing federal income tax returns demonstrating at least USD5 million in gross receipts and having at least 20 full-time employees.[3]

Reportable individuals

If an entity qualifies as a Reporting Company, then there are two categories of individuals whose information is reportable to FinCEN: company applicants and beneficial owners (BOs).

Company applicants

A company applicant is any individual who files, or directs or controls the filing of, an application to form a corporation or unincorporated business organisation under the laws of a US state or Native American tribe, or registers or files an application to register a corporation or unincorporated business organisation to do business in the US by filing a document with the secretary of state or similar office under the laws of a US state or Native American tribe.[4] This sweeping provision requires disclosure of many individuals, including paralegals who made the filing, attorneys who directed the filing and the client representative (e.g., family office lawyer) who directed the law firm to form the entity. Notably, Reporting Companies formed prior to 1 January 2024 need not report applicant information.

Beneficial owners

A beneficial owner of a Reporting Company is any individual who directly or indirectly:

• exercises substantial control over the entity; or
• owns or controls 25 per cent or more of the ownership interests of the entity.[5]

Substantial control

The Regulations include three indicia of substantial control:

• service as a senior officer of a Reporting Company (e.g., C-suite executives, general counsel, etc.);
• authority over the appointment or removal of any senior officer or a majority of the board of directors of a Reporting Company; and
• direction, determination or substantial influence over important decisions made by a Reporting Company.[6]

In addition, the Regulations include a catch-all provision underscoring that substantial control may exist outside of the three enumerated criteria, noting that nominal or de jure authority, as well as functional or de facto authority, can still be substantial and so reportable to FinCEN.[7]

Ownership test

In determining whether an individual owns or controls 25 per cent or more of the ownership interests of a Reporting Company, the Regulations broadly define ownership interests to include equity interests, profit interests and capital interests, among others. However, nominees, intermediaries and custodians are not considered BOs. The Regulations also enumerate classes of individuals who would be considered to have an ownership interest in a Reporting Company held through a trust, including:

• settlors of revocable trusts;
• beneficiaries who are the sole permissible recipient of income and principal from the trust or who have the right to compel a distribution of substantially all trust assets;
• trustees of trusts; and
• individuals who have authority to dispose of trust assets.

Properly structured trusts may therefore require disclosure only of trustees.

Reportable information

The Act requires Reporting Companies to disclose to FinCEN certain beneficial ownership information, including the:

• full name of the Reporting Company’s legal and ‘doing business as’ name;
• business street address of the Reporting Company;
• US state or Tribal jurisdiction of formation (or registration, if foreign) of the Reporting Company; and
• Internal Revenue Service taxpayer identification number (including an employer identification number or other identifiable information) of the Reporting Company.[8]

In addition, every BO and applicant must report to FinCEN:

• the individual’s full legal name and date of birth;
• in the case of a company applicant who files a document in the course of such individual’s business, such business’s address;
• or in any other case, the residential address that the individual uses for tax-residency purposes; and
• a unique identifying number and recognisable photograph from a valid government identification document (e.g., passport or driver’s licence).[9]

Filing deadlines

Reporting Companies formed or registered after 1 January 2024 must file an initial report within 30 days of the date of formation or registration.[10] However, Reporting Companies formed before 1 January 2024 must file an initial report no later than 1 January 2025,[11] as well as an updated report within 30 days after the date on which there is a change to any information previously submitted to FinCEN (e.g., any change to BOs and their information, such as address changes) or an inaccuracy in a prior report is discovered.[12]

Penalties

The Act imposes criminal and civil penalties for wilful reporting violations and unauthorised disclosure or use of reportable information. Penalties may be mitigated where an inaccurate report is inadvertently submitted but is corrected within 90 days after submission.[13]

Conclusion

Starting on 1 January 2024, Reporting Companies will be obligated to disclose identifying information about individuals who form, ultimately own or substantially control such entities. Consequently, companies registered throughout the US across virtually every industry and persons who regularly cause the formation of such entities should take note of the Legislation to ensure timely compliance. Although many public, large operating[14] and highly regulated companies may be exempt from reporting under the Act, domestic and international entity groups with US affiliates, fiduciaries, family offices and professional service providers must evaluate whether and to what extent the Legislation requires action. This applies not only before 2024 but also on an ongoing basis. Future revisions to FinCEN’s Customer Due Diligence Final Rule are also much anticipated as a corollary to the Legislation.