FinCEN Releases Proposed Rule For Beneficial Ownership Reporting Requirements To Counter Illicit Finance

The Financial Crimes Enforcement Network (FinCEN) of the Treasury Department announced last week a Notice of Proposed Rulemaking (NPRM)^[1] to implement the beneficial ownership reporting requirements set forth in the Corporate Transparency Act. The proposed rule is part of FinCEN’s plan “to protect the U.S. financial system from illicit use and impede malign actors from abusing legal entities, like shell companies, to conceal proceeds of corrupt and criminal acts.”^[2] As with the recent Advance Notice of Proposed Rulemaking (ANPRM) regarding action to impose anti-money laundering reporting requirements for all-cash real estate transactions — as discussed in our separate client alert — this effort is part of the Biden administration’s broader efforts to fight corruption and was highlighted at the Summit for Democracy.^[3]

The beneficial ownership information (BOI) reporting requirements derive from the Corporate Transparency Act, part of the Anti-Money Laundering Act of 2020 within the National Defense Authorization Act for Fiscal Year 2021.^[4] This NPRM was drafted after taking into consideration the public comments received in response to the ANPRM on the same topic, issued April 5, 2021, and is the culmination of years of work by Congress, the Treasury Department, national security agencies, law enforcement and other stakeholders.

Under current rules, few jurisdictions in the United States require shell companies to disclose information about their beneficial owners or the individuals who formed the company.^[5] This leaves a vulnerability in the financial system, allowing corrupt actors to secretly move and store money, and has contributed to the proliferation of anonymous shell companies in the United States. A 2006 report from FinCEN found that shell companies enabled the movement of billions of dollars across borders by anonymous beneficial owners, thereby facilitating money laundering or terrorist financing.^[6] Ten years later, the Financial Action Task Force, an international organization focused on the prevention of illicit financial activity, identified the lack of BOI reporting requirements as one of the fundamental gaps in the U.S. anti-money laundering/countering the financing of terrorism regime.^[7] More recently, the 2020 Illicit Financing Strategy, issued by the Treasury Department, also cited the lack of a requirement to collect BOI as one of the most significant vulnerabilities of the U.S. financial system.^[8]

The goal of this NPRM is to enact reporting and recordkeeping requirements that will help combat corruption, money laundering, terrorist financing, tax fraud and other illicit activity. Following the enactment of these new regulations, the number of legal entities in the United States that may need to report BOI pursuant to the Corporate Transparency Act is likely in the tens of millions.^[9]

Key Elements of the Proposed Rule

The proposed rule explains who must file a BOI report, what information must be contained in the report and when the report is due. Eligible reporting entities must identify both the beneficial owners of the entity as well as the individual who filed the application with governmental or tribal authorities to form or register the entity.^[10]

Beneficial owners are defined in the NPRM as any individual who exercises “substantial control” over a reporting company or who owns or controls at least 25% of the ownership interest.^[11] Individuals with substantial control include those able to make significant decisions on behalf of the company, those in senior officer positions, and/or those with authority over the appointment or removal of any senior officer or the majority of board members.^[12] For each beneficial owner, companies would have to report their name, birth date, address and a unique identifying number such as a taxpayer identification number.^[13] These criteria go beyond prior BOI reporting rules, which only required the company to determine which single individual best fit the definition of a beneficial owner.^[14]

The reporting requirements would apply generally to domestic corporations, limited liability companies and other entities created by the filing of a document with a secretary of state or similar office. Foreign entities registered to do business in any state or tribal jurisdiction would also be required to comply with the new rules.^[15] There are 23 types of entities exempt from the proposed reporting requirements, as specified by the Corporate Transparency Act, including banks and insurance companies. These exempt entities are largely already subject to regulations requiring disclosure of BOI.^[16]

Companies subject to the reporting requirements, if established or registered prior to the effective date of the final rule, would have to file BOI reports within one year of the effective date of the rule. Companies established or registered after the effective date would have to file a BOI report within 14 days of their formation. Updates to BOI must be reported within 30 days of receiving the new information.^[17]

This NPRM on beneficial ownership reporting is one of three rulemakings FinCEN has planned to implement in connection with the Corporate Transparency Act. It will release additional rulemakings to (i) establish rules for who may access the BOI and for what purposes, and what safeguards will be enacted to secure the information; and (ii) revise FinCEN’s customer due diligence rule once the BOI reporting rule is finalized.

Written comments must be received on or before Feb. 7, 2022.^[18]

^{[1] Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69920 (Dec. 8, 2021) (NPRM), https://www.federalregister.gov/documents/2021/12/08/2021-26548/beneficial-ownership-information-reporting-requirements.}

^{[2] FinCEN Issues Proposed Rule for Beneficial Ownership Reporting to Counter Illicit Finance and Increase Transparency (Dec. 7, 2021) (FinCEN Press Release), https://www.fincen.gov/news/news-releases/fincen-issues-proposed-rule-beneficial-ownership-reporting-counter-illicit.}

^{[3] Id.; see also Further Information: About the Summit for Democracy, U.S. Dept. of State, https://www.state.gov/further-information-the-summit-for-democracy/#Summit (“On December 9-10, 2021, President Biden will host a virtual summit for leaders from government, civil society, and the private sector. The summit will focus on challenges and opportunities facing democracies and will provide a platform for leaders to announce both individual and collective commitments, reforms, and initiatives to defend democracy and human rights at home and abroad.”).}

^{[4] See Fact Sheet: Beneficial Ownership Information Reporting Notice of Proposed Rulemaking (NPRM) (Dec. 7, 2021) (Fact Sheet), https://www.fincen.gov/news/news-releases/fact-sheet-beneficial-ownership-information-reporting-notice-proposed-rulemaking.}

^{[5] See Fact Sheet; see also NPRM at 69922 (“Though state- and Tribal-level entity formation laws vary, most jurisdictions do not require the identification of an entity’s individual beneficial owners at the time of formation. In addition, the vast majority of states require disclosure of little to no contact information or information about an entity’s officers.”).}

^{[6] NPRM at 69923-24 (citing FinCEN, The Role of Domestic Shell Companies in Financial Crime and Money Laundering: Limited Liability Companies (November 2006), https://www.fincen.gov/​sites/​default/​files/​shared/​LLCAssessment_​FINAL.pdf).}

^{[7] NPRM at 69924.}

^{[8] NPRM at 69924 (citing National Strategy for Combating Terrorist and Other Illicit Financing (2020), p. 12, https://home.treasury.gov/​system/​files/​136/​National-Strategy-to-Counter-Illicit-Financev2.pdf).}

^{[9] See NPRM at 69922.}

^{[10] NPRM at 69920.}

^{[11] NPRM at 69933.}

^{[12] NPRM at 69934.}

^{[13] NPRM at 69929.}

^{[14] See Dylan Tokar, Breaking Down the Treasury’s Proposed Corporate-Ownership Rules, Wall Street Journal (Dec. 7, 2021), https://www.wsj.com/articles/whats-in-the-treasurys-proposed-corporate-ownership-rules-11638925063; see also NPRM at 69934 (recognizing that a number of commenters to the ANPRM stated they would prefer the approach laid out in the current customer due diligence rule requiring BOI for only the one individual who exercises a “significant degree of control” over the entity, but noting that the Corporate Transparency Act does not require the identification of only one person in substantial control; “FinCEN believes that limiting reporting of individuals in substantial control to one person as in the [customer due diligence rule]—or indeed to impose any other numerical limit—would artificially limit the reporting of beneficial owners who may exercise substantial control over an entity, and could become a means of evasion.”).}

^{[15] NPRM at 69938.}

^{[16] NPRM at 69939; see also Tokar, supra.}

^{[17] NPRM at 69941-42.}

^{[18] See NPRM (the comment period is open for 60 days from the date of publication on the Federal Register).}