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Understanding the Beneficial Ownership Reporting Requirements of the Corporate Transparency Act

May 23, 2023

Introduction

On January 1, 2021, Congress passed the Corporate Transparency Act (the “ CTA “) in an effort to enhance corporate transparency and combat financial crimes. The CTA requires covered entities to file a report with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“ FinCEN “) and directs FinCEN to propose rules specifying the information to be collected in such reports.

On September 29, 2022,  FinCEN issued a final rule regarding the CTA’s beneficial ownership information (“ BOI “) reporting requirements (the “ BOI Rul e”). Covered entities must file a report with FinCEN identifying (i) the entities’ beneficial owners—the persons who ultimately own or control the company—and (ii) relevant identifying information about the persons who formed the entity. The CTA grants FinCEN the authority to share this information with authorized government authorities and, under specific circumstances, with financial institutions.

This article provides a focused overview on the requirements of the BOI Rule.

Who Must Comply?

The CTA applies only to certain domestic and foreign entities which fall under the definition of a “reporting company.”

  1. “Domestic reporting companies” include any domestic corporation, limited liability company, or other entity (limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships and business trusts) that is created by the filing of a document with a secretary of state or similar office (including an American Indian tribal office).
  2. “Foreign reporting companies” include any foreign corporation, limited liability company, or other entity (limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships and business trusts) that is formed under the laws of a foreign country and registered to do business in any state or tribal jurisdiction by filing of a document with a secretary of state or similar office (including an American Indian tribal office).

Legal entities that are not formed by the filing of a document with a secretary of state or similar office, including certain trusts, are excluded from the CTA’s reporting requirements.

Which Entities are Exempt?

Certain legal entities are excluded from the ‘reporting company’ definitions to the extent that they are not created by the filing of a document with a secretary of state or similar office. The BOI Rule lists 23 types of entities that are exempt from the definition of “reporting company,” including but not limited to: governmental authorities, banks, credit unions, money services businesses, registered broker dealers, exchanges and clearing agencies, insurance companies, accounting firms, public utilities, certain tax exempt entities, and entities assisting tax-exempt entities, among others.

  • Corporate exemptions include:
    • Large operating companies, which include any entity that (i) employs more than 20 full-time employees in the U.S., (i) in the previous year filed U.S. federal income tax returns demonstrating more than $5,000,000 in gross receipts or sales in the aggregate (on a consolidated basis, if applicable), excluding gross receipts or sales from sources outside the U.S., and (iii) has an operating presence at a physical office within the U.S.
    • Publicly traded companies that are issuers of securities and registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise required to file supplementary and periodic information under Section 15(d) of the Exchange Act

  • Fund related exemptions include:

    • Registered investment advisors with the Securities and Exchange Commission (“ SEC “)
    • Registered investment companies with the SEC
    • Venture capital fund advisers that have made certain filings with the SEC
    • Commodity pool operators and commodity trading advisors that are registered with the Commodity Futures Trading Commission
    • Funds that are operated or advised by a bank, Federal or State credit union, SEC registered broker-dealer, SEC registered investment company or investment adviser, or venture capital fund adviser

  • The subsidiary exemption includes:

    • Subsidiaries that are controlled or wholly owned, directly or indirectly, by certain exempt entities are also exempt from the reporting requirements of the BOI Rule

Scope of Exemptions

The subsidiary exemption does not extend to subsidiaries of money services business, pooled investment vehicles, or entities assisting a tax-exempt entity. Additionally, entities registered in a state or tribal jurisdiction that are subsidiaries of large foreign entities that do not qualify for the large operating company exemption because of insufficient U.S. presence or gross receipts will be required to report BOI under the BOI Rule, absent another applicable exemption

While SEC registered investment advisers are exempt from the reporting requirements under the BOI Rule, non-exempt entities include private fund advisers, foreign private advisers, and family offices. Moreover, although the BOI Rule exempts directly or indirectly wholly owned subsidiaries of registered investment companies, there is no such blanket exemption for subsidiaries of private funds. Similarly, while private fund clients of registered investment advisers relying on the 3(c)(1) and 3(c)(7) exemptions under the 1940 Act are exempt from the definition of “reporting company” under the BOI Rule, subsidiaries of those private fund clients may not be exempt.

Other types of entities that are likely to be subject to the BOI Rule include:

  • Certain alternative investment vehicles, feeder fund vehicles, other subsidiaries of private funds, and holding company entities that are otherwise ineligible for an exemption;
  • Certain kinds of pooled investment vehicles, such as real estate vehicles relying on the Section 3(c)(5)(c) exemption under the Investment Company Act of 1940 (the “ 1940 Act ”)
  • Certain commodity pools (even if advised by a registered commodity trading advisor and operated by a registered commodity pool operator)
  • Certain foreign pooled investment vehicles

Will an Exemption Help Me?

It depends. Despite the long list of exemptions, the BOI Rule is expected to have a significant impact on private investment funds and other entities structured to facilitate group investments. The BOI Rule authorizes the Secretary of the Treasury to exempt additional entities. Such an expansion, however, is unlikely unless FinCEN establishes that the applicable non-exempt entity’s submission of a BOI report would not serve the public interest and would not be effective in furthering the anti-money laundering objectives of the CTA.

Who is a Beneficial Owner?

A “beneficial owner” is as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

  1. Exercises substantial control over an entity; or
  2. Owns or controls at least 25% of the entity’s ownership interests.

Substantial Control

Under the BOI Rule, an individual exercises “ substantial control ” over a covered entity if the individual:

  • Serves as a senior officer of the covered entity (a “senior officer” includes any individual holding the position or exercising the authority of president, CEO, CFO, COO, general counsel, or any other officer performing a similar function);
  • Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the entity;
  • Directs, determines or has substantial influence over important matters of the entity (e.g. reorganization, dissolution or merger, selection or termination of business lines or ventures, or amendment of any corporate governance documents);  or
  • Has any other form of substantial control over the entity (i.e. the authority to make important decisions on behalf of the entity).

Ownership Interest

The BOI Rule defines  “ownership interest ” as any instrument, contract, arrangement, understanding, or mechanism used to establish ownership (such as any equity, stock, capital, or profit interest). An individual may own or control an ownership interest of an entity in various ways, directly or indirectly, such as: joint ownership, certain trust arrangements, or acting as an intermediary, custodian, or agent on behalf of another. Regardless of whether they are considered debt or equity, convertible instruments, warrants, and other rights to purchase, sell, or subscribe to an ownership interest are deemed “ownership interests” under the BOI Rule. Puts, calls, and other options to buy or sell ownership interests are also “ownership interest,” except to the extent created and held by a third party without the knowledge or involvement of the entity.

There are two approaches to determining the percentage of ownership interest. Both methods treat options and similar interests as being exercised.

  1. Ownership interests for corporations, entities taxed as corporations, and other share-issuing entities are determined using the “vote or value” method. Under this method, the ownership interest is the greater of (i) one’s voting power as percentage of total outstanding voting power and (ii) one’s ownership interest value as percentage of total outstanding ownership value.
  2. When dealing with non-corporate entities that do not issue shares, the ownership interest is determined by comparing an individual’s ownership stake to the overall outstanding ownership interest in the company.

Other instances under which an individual is required to report BOI are as follows:

  • Beneficial Ownership via an Exempt Entity : The BOI Rule clarified that if an individual is a beneficial owner of a covered entity based on ownership interests in one or more exempt entities, such individual’s BOI must be reported.
  • Beneficial Ownership via Indirect Control : One may be deemed a beneficial owner through direct or indirect possession or control of an ownership interest by way of a “joint ownership with one or more other persons of an undivided interest in such ownership interest.”
  • Beneficial Ownership via Trusts or Similar Arrangements : With respect to trusts and similar arrangements, the following persons can be considered beneficial owners:
    • The trustee of the trust or any other person with the power to dispose of the trust’s assets.
    • A beneficiary who is exclusively entitled to receive income and principal from the trust, or has the ability to demand a distribution of or withdraw substantially all of the trust’s assets.
    • The grantor or settlor who retains the right to revoke the trust or withdraw its assets.

Who is Not a Beneficial Owner?

The definition of “beneficial owner” does not include:

  • Minor children (so long as a parent or legal guardian’s information is reported)
  • Individuals acting as nominees, intermediaries, custodians, or agents;
  • Employees acting solely as employees and not as senior officers;
  • Individuals whose only interest in an entity is a future interest through a right of inheritance; nor
  • Creditors of an entity ( unless the creditor otherwise meets the definition of beneficial owner by exercising substantial control or by owning or controlling 25% or more of the entity’s ownership interests).

What BOI Must Covered Entities Provide to FinCEN?

The BOI Rule requires a covered entity to identify itself and report four pieces of information about each of its beneficial owners:

  1. Name;
  2. Birthdate;
  3. Address; and
  4. A unique identifying number and the issuing jurisdiction from an acceptable identification document (e.g. passport), and an image of the document from which the unique identifying number was obtained.

If a beneficial owner has obtained a FinCEN identifier and provided the FinCEN identifier to a covered entity, such entity may include the FinCEN identifier in its report in lieu of the information required for that individual.

Less information may be required for certain entities, such as foreign pooled investment vehicles, or if an exempt entity has or will have a direct or indirect ownership interest in a covered entity.

Do I Need to Report Anything Else?

Basic Entity Information

Each covered entity is also required to report:

  1. Entity name (and any alternative trade or dba name)
  2. Business street address
  3. Jurisdiction of formation and, for foreign entities, the state or tribal jurisdiction of registration
  4. A unique identification number (e.g. TIN or EIN)

Company Applicant Information

The BOI Rule requires covered entities created or registered on or after January 1, 2024  to provide the identifying information of “company applicants.”

There can be up to two individuals who qualify as “company applicants”:

  1. The individual who directly files the document that creates a domestic reporting company or first registered a foreign entity to do business in the U.S.; or
  2. The individual who is primarily responsible for directing or controlling the filing of the relevant document by another, if more than one individual is involved in the filing.

If applicable, the covered entity must report the following four pieces of information about each of its company applicants in its report to FinCEN, in addition to the basic entity information and BOI:

  1. Name;
  2. Birthdate;
  3. Address; and
  4. A unique identifying number and the issuing jurisdiction from an acceptable identification document (e.g. passport), and an image of the document from which the unique identifying number was obtained.

Who Has Access to the BOI Report?

On December 15, 2022, FinCEN proposed the Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for the BOI Rule (the “ Proposed Access Rule ”). The Proposed Access Rule proposes regulations regarding who may request BOI that will be reported to FinCEN starting on January 1, 2024, who may receive it, how recipients may use the information, how they must secure it, and the penalties for failing to follow applicable requirements. The Proposed Access Rule also discusses aspects of the secure, non-public information technology (IT) system that FinCEN is building to store BOI and manage disclosures to maintain data protection and oversight. It also proposes rules specifying when and how covered entities may report FinCEN identifiers tied to entities.

In a nutshell: The CTA mandates that the BOI report be made available solely to authorized government authorities, subject to effective safeguards and controls (as provided in the Proposed Access Rule). The U.S. Department of the Treasury will maintain the information in a secure, nonpublic database. Separately, however, the information in the BOI report may also be disclosed to certain financial institutions to facilitate the confirmation of beneficial ownership information provided by their customers.

When Does Enforcement Begin?

The BOI Rule becomes effective on January 1, 2024.

The exact deadlines for filing reports will depend on when an entity was created or registered.

  • Covered entities created or registered before that date until January 1, 2025 (i.e. one year after the effective date of January 1, 2024) to file their initial reports.
  • Covered entities created or registered after January 1, 2024, must file their initial reports within 30 days of receiving notice of their creation or registration.

How do I Update or Correct a Report?

There are additional deadlines for submitting updated reports with new information or reports correcting errors.

  • New Information. Covered entities have 30 days to report “changes” to previously filed information and must correct any inaccuracies within 30 days of becoming aware of them.
    • “Changes” mean a change in the party or parties holding beneficial ownership, a previously exempt minor reaching the age of maturity, and a change to reported information, (for example a change in address).
  • Errors. Covered entities have a 90-day safe harbor from the date of filing to correct an inaccurate report.

FinCEN does not require covered entities to file a report after termination or dissolution. It also does not require covered entities to report changes to the BOI of their company applicant(s).

What are the Penalties for Non-Compliance?

  • Civil Liability. Under the CTA, any person who provides false information, or fails to report complete or updated information, is subject to a civil penalty of not more than $500 for each day that the violation continues, and may face fines not more than $10,000, imprisonment for not more than two years, or both.
  • Criminal Liability. One may also be found liable under the federal criminal code, which prohibits knowingly and willfully providing false information or concealing a material fact to any of the three branches of the federal government.

How to Submit the BOI Report to FinCEN

If you are required to report your entity’s BOI to FinCEN , you will do so electronically through a secure filing system available via FinCEN’s website. As of the date of this article, the FinCEN system is currently being developed and will be available before the BOI report must be filed.

Considerations for Covered Entities

The management of companies should assess whether they fall under the category of a reporting company and initiate the compilation of necessary information regarding all beneficial owners and company applicants. Additionally, they should consider incorporating the following provisions into their company’s operative documents:

  • A representation by each shareholder, member, or partner, as applicable, stating their commitment to (i) comply with the CTA or (ii) qualify for an exemption from the CTA;
  • An indemnification by each shareholder, member, or partner, as applicable, in favor of the company and other shareholders, members, or partners, as applicable, for any failure to comply with the CTA or the provision of false information;
  • A covenant by each shareholder, member, or partner, as applicable, obligating them to maintain ongoing compliance with the CTA’s requirements and disclose relevant information, or alternatively, provide evidence of their exemption from such requirements; and
  • A consent by each disclosing party for the covered entity to disclose identifying information to FinCEN , to the extent mandated by law.

Investment funds should consider adding similar representations, covenants, and requests for consent by and from their investors within subscription and management agreements. Lenders should also consider adding similar representations and covenants by their borrowers to loan documents (i.e. to consent to the disclosure of the borrower’s future BOI reports by FinCEN to the lender).

Conclusion

The CTA’s beneficial ownership reporting requirement may represent a significant challenge for entities who are unsure of their reporting responsibilities. Compliance with these reporting obligations is crucial for covered entities to ensure compliance with the CTA and maintain trust and integrity in their operations.

For More Information

If you have any questions about BOI reporting obligations, please contact info@rppmh.com or the attorney in the firm with whom you are regularly in contact.

Disclaimer : This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For specific legal advice regarding the CTA and its implications, please consult a qualified legal professional.

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