On September 30, 2022, the Financial Crimes Enforcement Network (“FinCEN”) of the United States Treasury issued a new final rule (“Final Rule”), requiring certain entities to file reports with FinCEN that identify two categories of individuals:
Companies created after January 1, 2024, will be required to file this information within ninety (90) days of their creation, while existing companies will be required to file this information by January 1, 2025.
The Final Rule was issued to combat “illicit actors who frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system.”
The Final Rule implements Section 6403 of the Corporate Transparency Act (“CTA”) and was adopted pursuant to the comprehensive revisions to the United States anti-money laundering statutes as part of the National Defense Authorization Act for Fiscal Year 2021. The Final Rule is a major departure from the current system of FinCEN’s regulations regarding the identification of the beneficial ownership of legal entities, which only requires banks, other lenders, and certain other financial intermediaries to obtain a limited amount of beneficial ownership information (“BOI”) prior to engaging in a financing transaction or opening an account relationship with a covered legal entity — known as the “CDD Rule,” because it requires customer due diligence by financial institutions.
As a result of the new Rule, the scope of reportable BOI will expand significantly. By January 1, 2025, the Final Rule will require millions of existing and newly-formed smaller-sized businesses to register directly with FinCEN. In fact, the FinCEN estimates that there will be approximately 32.6 million reporting companies required to file in 2024 and 5 million additional reporting companies each subsequent year. Failure to file can result in harsh penalties of $500 per day up to $10,000 and up to 2 years of of imprisonment. Civil and Criminal penalties may both be imposed if someone willfully files fraudulent information.
Entities that are subject to these new reporting requirements include corporations, limited liability companies, limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships. The Final Rule divides reporting companies into two types: domestic and foreign.
A domestic reporting company is created by the filing of a document with a secretary of state or any similar office under the law of a state, the District of Columbia or an Indian tribe. A foreign reporting company is formed under the law of a foreign country that is registered to do business in any state, the District of Columbia or a tribal jurisdiction by the filing of a document with a secretary of state or any similar office.
Under the Final Rule, twenty-three (23) types of entities are exempt from reporting, including, without limitation, governmental authorities and banks. Other types of legal entities, including certain trusts, are also excluded from the reporting requirements to the extent that they are not created by the filing of a document with a secretary of state or similar office.
Owners of any legal entity should note that, as part of the new reporting requirement, a “beneficial owner” now includes any individual who either:
This change will have a material effect on reporting companies by requiring them to disclose their beneficial owners.
Entities should be aware that the Final Rule is actually the first in a series of proposed regulations that FinCEN plans to implement the CTA’s legal entity reporting requirements. The next proposed Rule is expected to create new regulations establishing:
This next proposed Rule was submitted for public comment on December 16, 2022, and the commenting period ended on February 14, 2023.
If you are a small business owner or the owner or manager of a legal entity, it is important to reach out to a tax advisor or legal team member, who can provide more specific advice based on the facts and circumstances relating to your entity, including whether your entity is required to register with FinCEN in accordance with the Final Rule. That being said, it is possible that your legal team is unaware of the Corporate Transparency Act.
FileForms is a mission-driven organization focused on being the industry leader in CTA compliance and BOI reporting. FileForms provides tools, education, and technology while working with expert legal professionals and accountants to provide impactful guidance and tools to help business owners and their advisors navigate these new FinCEN reporting requirements.