FinCEN Publishes Proposed Regulations for Corporate Transparency Act

Marshall B. Paul, Rick Carroll

Proposed regulations (the “Proposed Regulations”) recently published by the Secretary of the Treasury under the Corporate Transparency Act (the “CTA”) make it clear that reporting under the CTA is imminent for owners of closely-held businesses.

What You Need to Know:

• The Corporate Transparency Act will require disclosures to the US Department of Treasury for almost all business entities

​The CTA, which likely will present a significant filing burden for many small and medium-sized businesses, was part of the National Defense Authorization Act, passed by Congress on January 1, 2021. Among other things, the CTA makes the Financial Crimes Enforcement Network of the Department of Treasury (“FinCEN”) responsible for collecting data surrounding the ownership of corporations and other entities. The CTA requires “Reporting Companies” to report the identities and information concerning their “Beneficial Owners” at the time of formation or registration of the Reporting Company and within one year after the date on which there is change with respect to any information previously reported.

In the late fall of 2021, FinCEN, for the purpose of drafting Regulations, posted an extensive list of questions with respect to which it was seeking public input. Now, only several months later, the Secretary of the Treasury, with the publication of the Proposed Regulations, has signaled that it is moving ahead post haste to implement the CTA.  
The Proposed Regulations go a long way toward clarifying the reach of the CTA’s reporting requirements. The Proposed Regulations reaffirm that entities created by filing a document with the Secretary of State or any similar office under the law of a State or Indian tribe are Reporting Companies. Any entity that offers limited liability to its owners by virtue of a State or tribal law will be required to report. In addition, entities that are formed under foreign jurisdictions that are registered to do business within the U.S. will be subject to the CTA’s reporting requirements. Both the statute and the Proposed Regulations exempt certain types of entities, however, including public companies, tax-exempt entities, entities assisting tax-exempt entities, and “large operating companies,” which are entities that (1) employ more than 20 full-time employees in the U.S.; (2) have an operating presence at a physical office in the U.S.; and (3) file a federal income tax return or information return reporting more than $5 million in gross receipts or sales in the U.S. Also exempt are what the statute and Proposed Regulations define as “inactive” entities. 
In addition to providing basic information about itself, a Reporting Company, most significantly, must provide information about every individual who is a beneficial owner of the Reporting Company and every individual who is a “Company Applicant.” “Beneficial owners” are any individuals who, directly or indirectly, either exercise substantial control over the Reporting Company or own or control at least 25 percent of the ownership interests in the Reporting Company.  
“Substantial control” of a Reporting Company is defined to include, among other things, as (1) service as a senior officer of a Reporting Company; (2) authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors or similar body; or (3) the authority to direct, determine, or decide or have substantial influence over important matters concerning the Reporting Company; or (4) any other form of substantial control over the Reporting Company. Substantial control does not depend on the individual’s office or title. Therefore, an individual could be deemed to have substantial control if the individual has the ability to direct such things as major expenditures, the issuance of equity interests, the approval of the Reporting Company’s operating budget, the selection or termination of business lines, the amendment of governance documents, or the amendment of any substantial governance documents. The means through which the individual exercises control is irrelevant; and an individual may be deemed to have substantial control even if the individual has not exercised this type of control, as long as the individual possesses it.  
With regard to the inclusion of persons whose ownership equals or exceeds 25 percent as beneficial owners, the Proposed Regulations indicate that all ownership interests or any class or type and the percentage of ownership interests of the individual are aggregated and are compared to the aggregate of the undiluted ownership interests of the company. Such things as convertible debt, warrants, rights to purchase or subscribe to equity interests, and put, call, straddle, and other options or privileges are considered to be ownership interests. Minor children are not subject to reporting if the Reporting Company discloses the required information regarding the parent or legal guardian of the minor child. Likewise, individuals acting as nominees, intermediaries, custodians, or agents are not required subject to reporting, nor are creditors except where such creditors are exercising substantial control over the Reporting Company. 
The Proposed Regulations also make it clear that one can be deemed to be a beneficial owner even without holding an actual ownership in the Reporting Company. In this regard, a beneficiary of a trust is considered to be a reporting person if the person is the sole beneficiary of the trust. The settler of a trust, if the settlor has the ability to revoke the trust or withdraw trust assets, is also considered to be a beneficial owner.  
Most relevant to attorneys themselves, the Proposed Regulations explain that a “Company Applicant” is the individual who files the document that creates the Reporting Company or registers a Reporting Company, “including any individual who directs or controls the filing of such document by another person…” This means that lawyers or paralegals who file documents that establish an entity and, likely, also the persons who direct the activity of the person filing the organizational documents are deemed to be Company Applicants.  
With regard to beneficial owners and Company Applicants, the individual’s disclosure obligations include the person’s full legal name, the person’s date of birth, the business address of a Company Applicant, the residence address of each Beneficial Owner, and either the person’s passport number, driver’s license number or another unique identifying number issued to the person. A Company Applicant or Beneficial Owner also must provide a picture ID that includes the disclosed identification number or, in the alternative, a FinCEN identifier.
Given the sensitivity of the information provided, the CTA imposes strict confidentiality, security and access restrictions on the information. FinCEN will be authorized to disclose the information collected only in furtherance of national security, intelligence or law enforcement information. State, local and tribal law enforcement agencies will require a court of competent jurisdiction to authorize them to seek this information. FinCEN may also disclose reported information to financial institutions that need such beneficial owner information to comply with their own due diligence requirements under applicable law.
Initial reports must be filed within fourteen (14) days after the date a domestic Reporting Company is formed and a foreign Reporting Company is registered. Pre-existing entities must file their initial reports within one (1) year after the effective date of the final regulations. In addition, initial reports must be amended within thirty (30) days after there is a change with respect to previously provided information.  
Final regulations are anticipated to be adopted before the end of this year.  

Marshall B. Paul
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Marshall B. Paul
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