On September 29, 2022, FinCEN issued a final rule (published in the Federal Register the next day) under the CTA requiring each “reporting company” (which includes both domestic and foreign entities that are formed or registered to do business with a secretary of state or similar office of a U.S. state or tribe) to file reports with FinCEN that identify (1) each “beneficial owner” and (2) each “company applicant” who directly files the document to form or register the entity to do business or who is primarily responsible for directing or controlling such filing.
The final rule exempts public companies, large operating companies, and certain types of regulated entities whose ownership and control are generally known to governmental authorities from the definition of “reporting company.”
What is a “reporting company”?
A reporting company can be a domestic reporting company or a foreign reporting company. A domestic reporting company is a 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 of a U.S. state or tribe. A foreign reporting company is a corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in any U.S. state or tribal jurisdiction by the filing of a document with a secretary of state or a similar office of a U.S. state or tribe.
Domestic limited partnerships, limited liability partnerships, limited liability limited partnerships, and statutory trusts will generally be reporting companies because they are created by filing a formation document with a secretary of state or similar office.
Domestic general partnerships and non-statutory trusts will generally not be reporting companies because typically there is no formation filing.
When are reports due, and what information is required to be in them?
A reporting company created or registered on or after January 1, 2024 will be required to submit an initial report to FinCEN within 30 calendar days of the reporting company’s formation or registration.
A reporting company created or registered before January 1, 2024 will be required to file a report with FinCEN not later than January 1, 2025. Reporting companies created or registered before January 1, 2024 are not required to report information with respect to any company applicant.
The following information must be provided in the report:
For the reporting company:
- Full legal name
- Any trade name or “doing business as” name, whether registered or not
- Street address that is the principal place of business (if a domestic reporting company) or the primary location in the U.S. where the reporting company conducts business (if a foreign reporting company)
- Jurisdiction of formation
- For a foreign reporting company, the state or tribal jurisdiction where the company first registers
- Taxpayer identification number (TIN) or, if a TIN has not yet been issued for a foreign reporting company, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction
For each beneficial owner:
- Full legal name
- Date of birth
- Residential street address
- A unique identifying number and the issuing jurisdiction of a non-expired U.S. passport, non-expired driver’s license, or other non-expired identification document issued by a state, local, or tribal jurisdiction, or, if none of those is available, then a non-expired passport issued by a foreign jurisdiction
- An image of the document from which the unique identifying number was obtained
For each company applicant:
- Full legal name
- Date of birth
- Business street address
- A unique identifying number and the issuing jurisdiction of a non-expired U.S. passport, non-expired driver’s license, or other non-expired identification document issued by a state, local, or tribal government, or, if none of those is available, then a non-expired passport issued by a foreign government
- An image of the document from which the unique identifying number was obtained
Individuals and reporting companies may obtain a “FinCEN identifier” (FinCEN ID), a unique identification number that can be provided in lieu of the information described above. FinCEN intends to provide information at a later time about the FinCEN ID application process, the processing time, the procedure for updating a FinCEN ID, and other procedural questions.
Updated reports must be filed within 30 calendar days after the date of a change concerning the reporting company or its beneficial owners. With respect to identifying documents, a change in name, date of birth, address, or unique identifying number on a document would trigger an updated report, including an updated image of the document; however, changes in expiration dates or other personally identifiable information do not require the submission of an updated image of the document.
Corrections to reports must be filed within 30 calendar days after the date on which a reporting company becomes aware of or has reason to know of an inaccuracy in a report. If a corrected report is filed within 90 calendar days of the inaccurate report’s filing, the remediation will generally satisfy the CTA’s safe harbor from civil and criminal penalties for inaccurate reports.
Are there any exemptions from the definition of “reporting company”?
The final rule exempts certain regulated entities or entities that are already subject to disclosure requirements concerning their beneficial ownership and certain large entities from the definition of reporting company (an “exempt entity”). The list of exempt entities includes:
- Public company – An issuer with a class of securities registered under Section 12 or subject to Section 15(d) of the Securities Exchange Act of 1934, as amended
- Government authority – An entity established under the laws of the U.S., a tribe, state, or political subdivision of a state, or under an interstate compact between two or more states, that exercises governmental authority on behalf of the U.S. or any such tribe, state, or political subdivision
- Banks, savings associations, trust companies (including non-depository trust companies), credit unions, bank holding companies, and savings and loan holding companies
- A “money transmitting business” registered with FinCEN under 31 U.S.C. § 5330, and any “money services business” registered with FinCEN under 31 C.F.R. § 1022.380 (e.g., a money transmitter, check casher, issuer or seller of traveler’s checks, provider of pre-paid access, or dealer in foreign exchange)
- Securities brokers or dealers registered with the Securities and Exchange Commission (SEC)
- Exchanges or clearing agencies registered with the SEC
- Other entities registered with the SEC under the Securities Exchange Act of 1934
- Investment companies and investment advisers registered with the SEC
- Venture capital fund advisers that have reported their beneficial ownership information to the SEC on Form ADV
- Insurance companies
- State-licensed insurance producers
- Futures commission merchants, introducing brokers, swap dealers, major swap participants, commodity pool operators, commodity trading advisers, retail foreign exchange dealers, and registered entities under Section 1a of the Commodity Exchange Act registered with the Commodity Futures Trading Commission
- Public accounting firms
- Regulated public utilities
- Financial market utilities
- Pooled investment vehicles operated by certain exempt entities (see discussion below)
- Certain non-profit and other tax exempt organizations, and certain entities that operate exclusively to provide financial assistance to, or hold governance rights over them
- Large operating companies – Entities that employ more than 20 full-time employees, has an operating presence at a physical office within the U.S., reported more than $5 million of gross receipts or sales in the previous year on a Federal income tax return, and have physical presence (i.e., an office) in the U.S. (i.e., a large operating company)
- Wholly-owned subsidiaries of certain exempt entities
- Certain inactive entities that were in existence on or before January 1, 2020, do not engage in an active business or hold any assets, are not owned directly or indirectly by a foreign person, have not experienced a change in ownership in the preceding 12 months, and have not sent or received funds in an amount greater than $1,000 in the preceding 12 months
Exempt entities are not required to make any filing to claim an exemption; however, if a reporting company becomes an exempt entity after filing an initial report with FinCEN, that change would trigger an updated report.
Who is a “beneficial owner”?
A beneficial owner is an individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls 25% or more of the ownership interests of the reporting company.
All beneficial owners must be reported, and FinCEN expects that each reporting company will have at least one beneficial owner. An ownership interest in the reporting company is not required to qualify a person as a “beneficial owner.”
An individual exercises substantial control over a reporting company if the individual (1) serves as a senior officer; (2) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); (3) directs, determines, or has substantial influence over important decisions; or (4) has any other form of substantial control.
FinCEN acknowledges that control exercised in novel and less conventional ways can still be substantial and could apply to varying and flexible governance structures, such as series limited liability companies and decentralized autonomous organizations (DAO).
An individual, including a trustee of a trust or similar arrangement, may directly or indirectly exercise substantial control over a reporting company through (1) board representation; (2) ownership or control of a majority of the voting power or voting rights of the reporting company; (3) rights associated with any financing arrangement or interest in a company; (4) control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company; (5) arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or (6) any other contract, arrangement, understanding, relationship, or otherwise.
“Ownership interests” include (1) any equity, stock, or similar instrument; preorganization certificate or subscription; or transferable share of or voting trust certificate or certificate of deposit for an equity security, interest in a joint venture, or certificate of interest in a business trust; (2) capital or profit interests; (3) instruments convertible into the foregoing; (4) warrants or rights, and options or privileges to acquire or sell a share or interest in a reporting company as well as any put, call, straddle, or other option or privilege of buying any of ownership interest in a reporting company (except to the extent that such option or privilege is created and held by a third party without the knowledge or involvement of the reporting company); and (5) and any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.
A person may also have direct or indirect ownership or control of ownership interests through any contract, arrangement, understanding, or relationship, including (1) joint ownership of an undivided interest; (2) through another individual acting as a nominee, intermediary, custodian, or agent on behalf of an individual; or (3) through ownership or control of one or more intermediary entities.
With respect to interests held in a trust, a trustee or other person with authority to dispose of trust assets is considered to have ownership or control. A beneficiary is considered to own or control ownership interests held by the trust if the beneficiary is the sole permissible recipient of trust income and principal or has the right to demand distribution or withdrawal or substantially all trust assets. A grantor or settlor having the right to revoke the trust or withdraw trust assets is considered to own or control ownership interests held in the trust.
To determine if an individual owns or controls 25% or more of the ownership interests of the reporting company, the total ownership interests that the individual owns or controls, directly or indirectly, are calculated as a percentage of the total outstanding ownership interests. For this purpose, (1) calculations are performed at the present time, and any options or similar interests are treated as exercised; (2) for reporting companies that issue capital or profit interests, the individual’s ownership interests are the individual’s capital and profit interests in the entity, calculated as a percentage of the total outstanding capital and profit interests in the entity; and (3) for corporations, entities treated as corporations for federal income tax purposes, and other reporting companies that issue shares of stock, the applicable percentage is the greater of (a) the total combined voting power of all classes of ownership interests of the individual as a percentage of total outstanding voting power of all classes of ownership interests entitled to vote or (b) the total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interest. However, if the facts and circumstances do not permit such calculations to be performed with reasonable certainty, then any individual who owns 25% or more of any class or type of ownership interest of a reporting company shall be deemed to own or control 25% or more of the ownership interests of the reporting company.
Certain individuals are excluded from the definition of beneficial owner:
- A minor child (as determined under the law of the state or tribe where the reporting company is created or first registered), though the information of the parent or guardian of the minor child must be reported
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual
- An individual acting solely as an employee of an entity (other than an employee who is a senior officer)
- An individual whose only interest in an entity is through a future right of inheritance (as opposed to a present interest that person already acquired through inheritance)
- A creditor of a reporting company whose rights or interests are solely for the payment of a predetermined sum of money or a loan covenant or similar right associated with the right to receive payment that is intended to secure or enhance the likelihood of repayment
Who is a “company applicant”?
A company applicant is the individual who directly files the document that creates a domestic reporting company or that first registers a foreign reporting company. A company applicant is also the individual who is primarily responsible for directing or controlling such filing, if more than one individual is involved in the filing.
What requirements apply to pooled investment vehicles seeking an exemption? Do different rules apply to foreign pooled investment vehicles?
A “pooled investment vehicle” operated or advised by a bank, credit union, broker or dealer, investment company, registered investment adviser, or venture capital fund adviser that has reported beneficial ownership information to the SEC on Form ADV, is exempt from the definition of “reporting company.”
A “pooled investment vehicle” is any investment company (as defined in Section 3(a) of the Investment Company Act of 1940, as amended), or any company that would be an investment company but for the exclusions provided by Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act and that is identified by its legal name by the applicable investment adviser in its Form ADV or will be so identified in the next annual updating amendment to Form ADV required to be filed by the applicable investment adviser.
A pooled investment vehicle formed under the laws of a foreign country is a reporting company, but its reporting obligation is limited to reporting information only with respect to the individual having the greatest authority over the strategic management of the entity. The final rule does not indicate how that determination would be made.
Bank-maintained common trust funds and collective investment funds, which rely on Section 3(c)(3) and Section 3(c)(11) of the Investment Company Act, respectively, are typically organized as common law trusts without the filing of a document with a secretary of state, so these types of funds do not fall under the definition of “reporting company.”
Other types of funds, such as real estate funds, that do not fall within the definition of investment company in Section 3(a) of the Investment Company Act or that may rely upon Section 3(c)(5)(C) or Section 3(c)(6) of the Investment Company Act, are not “pooled investment vehicles” under the final rule. Sponsors of funds that do not qualify as pooled investment vehicles under the final rule should consider updating subscription documentation to require subscribers to provide information needed to comply with the CTA.
What reporting requirements apply to exempt entities with ownership interests in reporting companies?
If an exempt entity has a direct or indirect ownership interest in a reporting company and an individual is a beneficial owner of the reporting company exclusively by virtue of the individual’s ownership interest in the exempt entity, the reporting company may identify the name of the exempt entity in its report submitted to FinCEN in lieu of the information with respect to such beneficial owner.
Are there any penalties for violating the requirements of the final rule?
The final rule makes it unlawful to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN, or to willfully fail to report complete or updated beneficial ownership information to FinCEN. Under the CTA, a person that violates these requirements can be subject to civil penalties of up to $500 for each day the violation continues or has not been remedied and may be fined not more than $10,000, imprisoned for not more than two years, or both.
 Post office boxes, private mailboxes, and addresses of business agents or corporate agents will not fulfil this requirement.
 If a beneficial owner does not have a street address in the U.S., the reporting company may report a street address in a foreign jurisdiction.
 If a company applicant does not form or register an entity in the normal course of the company applicant’s business, then the company applicant’s residential street address may be reported. If a company applicant does not have a street address in the U.S., the reporting company may report a street address in a foreign jurisdiction.
 Wholly-owned subsidiaries of money transmitting businesses, money services businesses, or pooled investment vehicles are not considered “exempt entities.”
 “Senior officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function.
 These decisions include (1) the nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets; (2) the reorganization, dissolution, or merger of the reporting company; (3) major expenditures or investments, equity issuances, incurrence of any significant debt, or approval of operating budget of the reporting company; (4) the selection or termination of business lines or ventures, or geographic focus, of the reporting company; (5) compensation schemes and incentive programs for senior officers; (6) the entry into or termination, or the fulfillment or nonfulfillment, of significant contracts; and (7) amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.
 The final rule defines “bank” to include savings associations and state or federally chartered trust companies.