Additional business financial reporting requirements on the horizon

What you need to know now: Additional business financial reporting requirements on the horizon

The new law and proposed regulations
To crack down on money laundering and other illegal activities, Congress passed the Corporate Transparency Act (“CTA”) into law effective January 1, 2021.

The CTA requires all entities formed in or registered to do business in the United States to report beneficial ownership and other identifying information to the Financial Crimes Enforcement Network (“FinCEN”). On December 7, 2021, The Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM), proposed regulations, to implement the beneficial ownership information (BOI) reporting provisions of the CTA. The proposed rule is designed 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, such as money laundering and terrorist financing.

Who will be required to file a report?
The NPRM proposed regulations identify foreign and domestic entities as two types of "reporting companies" that are required to disclose BOI to FinCEN (see Proposed 31 CFR 1010.380(c)(1).) The proposed rule defines a "domestic reporting company" to include any "corporation," "limited liability company" or "other entity that is created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe." Similarly, a "foreign reporting company" would be any entity that is a "corporation," "limited liability company," or other entity formed under the law of a foreign country and "registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian Tribe."

There are 23 NPRM exemptions - which include companies that are already subject to substantial federal or state regulation upon which their beneficial ownership is disclosed under heavily regulated settings. As such, entities that file reports with the SEC, banks, credit unions, depository institutions, investment advisors, securities brokers and dealers, tax-exempt entities, insurance companies, and accounting firms are among others that are specifically excluded from the definition of a "reporting company.”

Important exemption for a “large operating company”
There is also an exemption for a “large operating company” – defined as any entity that (1) employs more than 20 full-time employees in the U.S., (2) has an operating presence at a physical office within the U.S., and (3) filed a federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales.

Who is a “beneficial owner” and “company applicant?”
Under the CTA, a beneficial owner is defined as any individual who directly or indirectly exercises substantial control over the reporting company. Or, any individual who directly or indirectly, owns or controls at least 25% of the ownership interests of the reporting company.

The term “substantial control” includes (i) service as a senior officer, (ii) authority over the appointment or removal of senior officers or a majority or dominant minority of the board, and (iii) direction, determination, or decision of, or substantial influence over, important matters affecting the reporting company.

The proposed rule exempts the following individuals from the definition of beneficial owner (i) a minor child, (ii) a nominee, intermediary, custodian, or agent of another individual, (iii) an employee acting solely as an employee, (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance, and (v) a creditor of the reporting company.

For domestic reporting companies, the “company applicant” is the person who files the document that forms the entity. For foreign reporting companies, it is the individual who files the document that first registers the entity to do business in the U.S.

What information will be required to be reported to FinCEN?

• reporting company’s full name
• any trade or d/b/a names
• business street address
• jurisdiction of formation of a domestic company and of the first state of registration for a foreign company
• IRS taxpayer identification number (or if not issued yet, DUNS number or Legal Entity Identifier)

• full legal name
• date of birth
• current residential or business street address (current address of an individual who acts as a company applicant in the course of the individual’s business can provide a business street address)
• unique identifying number from a non-expired passport, government-issued ID document, or driver’s license

Once the regulations and rules are final, when will the reports be due?
As indicated above, the regulations issued in December 2021 are only “proposed” regulations at this time and will not be effective until final regulations are issued after a comment period in which interested parties can comment on the proposed rules.

Pre-existing companies formed before the effective date of regulation would be required to file the initial report within one year of the regulation’s final effective date (to be determined).

Under the proposed rule, an initial report must be filed within 14 calendar days of the date a domestic reporting company is formed and within 14 calendar days of the date a foreign reporting company first registers to do business in the United States.

When there is any change in the information previously submitted to FinCEN, an updated report must be filed within 30 calendar days after the date on which such change happened.

Any company that reports inaccurate information to FinCEN must file a corrected report within 14 calendar days of the reporting company becoming aware that previously submitted information was inaccurate when the report was filed.

A company that was previously exempt and therefore not required to file an initial report must file an initial report within 30 calendar days of the date it no longer qualifies for an exemption. And vice versa, a reporting company that becomes exempt after filing an initial report is required to file an updated report within 30 days. Such report must indicate that it is no longer a reporting company.

Penalties for reporting violations can be severe
The new law and regulations make it unlawful for any person to ‘‘willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FinCEN’’ or to ‘‘willfully fail to report complete or updated beneficial ownership information to FinCEN.’’ Furthermore, the CTA provides for civil and criminal penalties for any person violating that obligation. Under this provision, “such person shall be liable for a civil penalty of up to $500 for each day a violation continues or has not been remedied, and may be fined up to $10,000 and imprisoned for up to two years, or both, for a criminal violation.”

Conclusion and anticipated actual effective date
FinCEN is still developing reporting procedures, applicable forms, and is not currently proposing a final format or mechanism of reporting.

This blog is intended to provide advance information on some, but not all, of the provisions of the proposed regulations. Since it is likely that some version of these proposed regulations will become final, business owners should become familiar with this new compliance requirements imposed by the CTA, and if interested, review the proposed rule, which was published in the Federal Register here: Beneficial Ownership Information Reporting Requirements.

Also, if it appears they will be affected by this additional financial reporting requirement, business owners should start identifying and gathering the information required to be reported to FinCEN to comply with the CTA and regulations.

FinCEN indicated in its Notice of Proposed Rulemaking that it is seeking comments on any and all aspects of the proposed reporting rule. Written comments on the proposed rule may be submitted on or before February 7, 2022. Since the comment period ends in 2022 and considering normal timeline for the issuance of final regulations it is likely that the actual effective date of this new rule will be later in 2022 or early 2023.

Herbein will continue to monitor these regulations and will provide an update when further developments occur.

For additional information email us at info@herbein.com. Article prepared by Savorn Ung.