Late in 2021, the Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rulemaking to implement the beneficial ownership information (BOI) reporting provisions of the Corporate Transparency Act, which was enacted into law on January 1, 2021, as part of the Anti-Money Laundering Act.
The Proposed BOI reporting laws are designed to help stop bad actors from using legal U.S. entities to hide illicit funds behind shell companies and other opaque corporate structures.
The proposed rules would require “Reporting Companies”, to report the identities of their beneficial owners and “Company Applicants” to FinCEN, and they would require FinCEN to establish and maintain a nonpublic database of the information that could be accessed by law enforcement or certain financial institutions for customer due diligence.
“FinCEN is taking aggressive aim at those who would exploit anonymous shell corporations, front companies, and other loopholes to launder the proceeds of crimes, such as corruption, drug and arms trafficking, or terrorist financing,” said Acting FinCEN Director Himamauli Das.
The proposed regulation describes two distinct types of “Reporting Companies” – domestic reporting companies and foreign reporting companies. Domestic reporting companies are those entities that are created by filing with a secretary of state or a similar office of a jurisdiction within the United States. A foreign reporting company is any entity that is formed under the laws of a foreign jurisdiction and is registered to do business within the United States.
There are 23 types of entities that would be exempt from the definition of “Reporting Company,” none of which apply directly to small businesses. Entities exempt includes the following: (1) Securities and Exchange Commission reporting issuers, (2) governmental authorities, (3) banks, (4) credit unions, (5) bank holding companies and savings and loan holding companies, (6) money transmitting businesses, (7) brokers or dealers in securities, (8) securities exchanges or clearing agencies, (9) other Securities and Exchange Act registered entities, (10) investment companies or investment advisers, (11) venture capital fund advisers, (12) insurance companies, (13) state-licensed insurance providers, (14) Commodity Exchange Act registered entities, (15) accounting firms, (16) public utilities, (17) financial market utilities, (18) pooled investment vehicles, (19) tax-exempt entities, (20) entities assisting a tax-exempt entity, (21) large operating companies, (22) subsidiaries of certain exempt entities, and (23) inactive entities.
Beneficial owners would be defined as any individual who meets at least one of the following two conditions: (1) exercises substantial control over the reporting company; or (2) owns or controls at least 25% of the ownership interest of the reporting company.
Proposed categories of exceptions to the definition of beneficial owners include minor children, nominees or other intermediaries, employees, inheritors, and creditors.
For a domestic reporting company, a company applicant would be defined as an individual who files the document that forms the entity with a secretary of state or similar office. For a foreign reporting company, a company applicant would be defined as an individual who first files the document registering the foreign entity to do business within the United States. Company Applicants also include individuals directing the filing of such documents by another person.
FinCEN issued the notice of proposed rulemaking on December 7, 2021, and it required comments to be submitted by February 7, 2022. As of the writing of this alert, final rules have not been put in place. That said, it is widely anticipated that these rules will be far-reaching. We are monitoring developments here and will be providing more information as it’s available. However, in the meantime, if you have questions about how the proposed rules of Section 6403 of the Corporate Transparency Act may change your internal processes, please contact your Ireland Stapleton attorney or Erica L. Tarpey at firstname.lastname@example.org.