Wednesday, February 2, 2022

Forthcoming U.S. Regulations for Reporting Business Ownership Information and Foreign Investments in the U.S.

          Proposed U.S. Treasury Department regulations will require disclosures of beneficial ownership information (“BOI”) for all legal entities doing business in the United States.  Under the Anti-Money Laundering Act of 2020 (a part of the Corporate Transparency Act of 2020), Treasury’s Financial Crimes Enforcement Network (FinCEN) published the proposed regulations on December 8, 2021, requesting public comments on or before February 7, 2022.  Every one of the roughly 25 million U.S. businesses (in whatever form of legal entity) will be subject to reporting obligations and criminal fines, penalties and possible imprisonment for non-compliance.  Exemptions may apply.   

        The proposed regulations target abuses by domestic or foreign “shell” companies that might engage in domestic or international money laundering, tax fraud, financial fraud, sales of illicit drugs and weapons, election fraud, bribery, evasion of international trade sanctions, terrorism and other crimes.  The proposed regulations will create civil and criminal risks for individuals in business ownership, management and services providers who file any business registrations with state and tribal authorities.  

        Unless exempted, virtually every business person (and not just an owner) can be responsible for disclosures, regardless whether your company is a startup, family-owned business, high-growth business or multinational enterprise. Founders, incorporators, entrepreneurs, investors, shareholders, owners, directors, officers, managers and others filing official documents are at risk of personal liability. 

        Other countries have adopted similar rules on disclosure of the ultimate beneficial owners of business entities.   See, e.g., German Anti-Money-Laundering Law (GeldWaescheGesetz).

        Who Must File?  The proposed regulations describe two distinct types of reporting companies that must file reports with FinCEN—domestic reporting companies and foreign reporting companies. Generally, under the proposed regulations, a domestic reporting company is any corporation, Limited Liability Company or other entity (including a trust) that is created by the filing of a document with a secretary of state or Indian tribe. A foreign reporting company is any entity formed under the law of a foreign jurisdiction that is registered to do business within the United States.  

        A “beneficial owner” would be any individual who meets at least one of two criteria: (1) exercising “substantial control” over the reporting company; or (2) “owning or controlling” at least 25 percent of the “ownership interest” of the “reporting company.”

        Some individuals would be covered as a “company applicant,” even if not a “beneficial owner.” If you individually are engaged in forming or registering legal entities in the United States, you will be personally subject to the CTA reporting requirements.  In fact, the proposed regulations target individuals who file the document that forms the U.S. legal entity (or domestic companies) or who file the document that first registers the foreign entity to do business in the United States.  Under a general principle of hierarchical control, the proposed regulations specify that a “company applicant” includes anyone who directs or controls, directly or indirectly, the filing of the document by another.  Exempted are minor children, employees acting solely as employees, creditors and holders of a future ownership interest under inheritance law.

        You have "“substantial control” if you own at least 25% of all "ownership interests."

        Ownership interests” would be broadly defined (similar to the Securities and Exchange Commission definition of “equity security,” 17 CFR 230.405).   Thus, “ownership interests” would include both equity in the reporting company and other types of interests, such as capital or profit interests (including partnership interests), or convertible instruments, warrants or rights, or other options or privileges to acquire equity, capital, or other interests in a reporting company.  This could include Simple Agreements for Future Equity in startups.  Debt instruments would be included if they enable the holder to exercise the same rights as one of the specified equity or other interests, including the ability to convert the instrument into one of the specified equity or other interests.

        “Control” would be defined very broadly, both de jure and de facto, beyond just 25% registered ownership.  Control could exist directly or indirectly. Under the proposal, “substantial control” can arise under one of three independent indicators:

  1. service as a senior officer of a reporting company;
  2. authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; or
  3. the direction, determination, or decision of, or substantial influence over, important matters of a reporting company.

        Who is Exempt?   Existing and future entities will need to navigate quickly whether they are exempt and, if not, be ready to file accurate reports under penalty of perjury.  Banks, securities brokers and dealers, investment advisors, tax-exempt entities, accounting firms and several other heavily regulated businesses would be exempt.  Surprisingly, “large operating companies” are exempt, provided they have more than 20 employees, annual receipts over $5 million and an operating presence at a physical office within the United States.

        What information Must Be Disclosed?   Required reports must identify the beneficial owner of each covered reporting company.  A “beneficial owner” is any individual who meets at least one of two criteria: (1) Exercising substantial control over the reporting company; or (2) owning or controlling at least 25 percent of the ownership interest of the reporting company.  

        As proposed, a reporting company would need to file reports disclosing its identity and identifying information plus additional information about the reporting company and each beneficial owner. The report must include the name and address of each beneficial owner and company applicant, including each’s (1) full legal name, (2) date of birth, (3) current “tax residence” street address (for individuals) or business street address (for entities), and (4) a unique identifying number from an acceptable identification document; or, if this information has already been provided to FinCEN, by a FinCEN identifier obtained by separate application to FinCEN.

      When Must You File?   For existing companies, you will have a year after the new regulation becomes effective to file your initial report.  A new domestic reporting company will have to file its BOI report with FinCEN within 14 calendar days of the date when the entity was formed as specified by a secretary of state or similar office.  A foreign reporting company will need to file a report within 14 calendar days of the date it first becomes a foreign reporting company.   Updates must be filed within 30 days to reflect changed information.  Correction reports must be filed within 14 days after learning of an error in a prior report.

       Who Can Access your BOI?   Given the sensitivity of the reportable information, the CTA imposes strict confidentiality, security, and access restrictions on the data. FinCEN is authorized to disclose reportable BOI to a statutorily defined group of domestic and foreign governmental authorities and financial institutions, in limited circumstances such as for national security, intelligence, or law enforcement activity, or as part of a criminal or civil investigation or for foreign law enforcement in specified circumstances.  This includes enforcement for antitrust, taxation, foreign direct investment and virtually any new law.  

        Experience with similar "transparency regulations" in other countries suggests that private claimants might also obtain business ownership information if their claims allege a need for law enforcement. 

        Prepare Now!   FInCEN estimates that over 25.8 million initial BOI reports will be due in the first year, with 11 million updated BOI reports and 3.2 million new BOI reports in the second year. The proposed regulations can become effective very soon.  If you miss a deadline, both entities and individuals could face fines, penalties and even imprisonment.
        Get the Big Picture, beyond FinCEN!  Now is a good time to review your general obligations for reporting ownership, control and investments to relevant authorities.  Don’t forget to file any other required disclosures about international business transactions.

  • Foreign direct investment (using Bureau of Economic Analysis reporting forms);
  • Foreign ownership of U.S. entities, IRS Form 5471, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business;
  • U.S. ownership of foreign entities, IRS Form 5472, Information Return of U.S. Persons With Respect To Certain Foreign Corporations; and
  • Export controls and international sanctions reports.

        Welcome to America!  It’s time to plan for new disclosures and ensure compliance.