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March 04, 2022

A Proposed New FinCEN Rule Would Create Filing Requirements for Most New and Existing Entities

by Paul Hess, Esq., Kegler Brown Hill + Ritter

On Dec. 7, 2021, the Financial Crimes Enforcement Network, a U.S. Treasury Department agency, issued a Proposed Rule, “Beneficial Ownership Information Reporting Requirements,” under the Corporate Transparency Act. The CTA was part of the Anti-Money Laundering Act of 2020 and was intended to help “stop bad actors from using legal entities to hide illicit funds behind anonymous shell companies or other opaque corporate structures.”

The Proposed Rule would require most new and existing “reporting companies” (and their “company applicants”) to file reports with FinCEN. The comment period ended Feb. 7 with over 300 comments received. FinCEN is expected to issue its final rule later this year.

“Reporting companies” include corporations, limited liability companies and other similar domestic entities created by a filing with a secretary of state or similar office, and foreign entities registered in the U.S. The Proposed Rule exempts certain types of entities, including public companies, governmental authorities, banks, credit unions, broker-dealers, investment companies, investment advisers, insurance companies and public accounting firms. Companies with at least 20 full-time U. S. employees would be exempt if they filed a federal tax return showing sales exceeding $5,000,000.

A “beneficial owner” is any individual who, directly or indirectly, either (i) exercises “substantial control”, such as senior officers and others with substantial influence, or (ii) owns or controls at least 25% of the “ownership interests”, including through options, warrants and other rights and including through another entity. Minor children, nominees, custodians, agents, non-officer employees and creditors are generally exempt.

A “company applicant” includes the individual who files the document that formed or registered the entity and anyone else who directed or controlled that filing.

Initial reports include (i) the reporting company’s name, address, state or jurisdiction and TIN, and (ii) each beneficial owner’s and company applicant’s name; birth date, address and a unique identifying number from (and a picture of) a government-issued ID such as a passport or driver’s license.

Once a final rule becomes effective, an existing reporting company would have one year to file its initial report, while a new reporting company would have only 14 days from its formation or U.S. registration. In addition, inaccuracies must be corrected within 14 days, and changes must be filed within 30 days.

A willful violation could include civil penalties up to $500 per day and criminal penalties up to $10,000 and/or imprisonment. Employers will want to pay close attention to the wording of the final rule and consult an attorney to be sure that they are complying with the reporting requirements.

Once a final rule becomes effective, an existing reporting company would have one year to file its initial report, while a new reporting company would have only 14 days from its formation or U.S. registration.