By Joseph Pomerantz
Many owners of small businesses will soon be facing new compliance requirements that, if unattended to, can subject them to civil and criminal charges up to $10,000 in fines and up to two years in prison. This article will outline (1) what the new rule is, (2) who does the new rule apply to and what steps are necessary to take in order to comply with it, and (3) the consequences of failing to comply.
FinCEN’s proposed rule:
On December 7, 2021, the Financial Crimes Enforcement Network (“FinCEN”) released a proposed regulation1 that would require corporations, LLCs, and other formed and registered businesses, otherwise referred to as “reporting companies,” to report their beneficial owners. Additionally, “company applicants” must also be identified and reported. The proposed regulation is intended to implement and enforce particular 2021 Corporate Transparency Act (“CTA”) provisions.2 The CTA was mainly passed to prevent money laundering and the financing of terrorism by requiring businesses to report and identify their beneficial owners. A beneficial owner, as defined by FinCEN, is “any individual who meets at least one of two criteria: (1) Exercising substantial control over the reporting company; or (2) owning or controlling at least twenty-five percent of the ownership interest of the reporting company.”3 While the language of the regulation may seem broad and encompassing, its very purpose is to target shell corporations and dissuade and prevent their formation; therefore, many exemptions limit the types of businesses subject to the proposed rule. Despite its intent, the proposed regulation may influence the reporting practices of legitimate and honest small businesses. Here is what you should know:
What is a company applicant?
Under the proposed rule, a reporting company must report the company applicant. A company applicant is either any individual (1) who files a document that creates a domestic reporting company or (2) who first registers a foreign reporting company with a secretary of state or similar office in the United States.4
Does my business need to report?
Proposed 31 CFR 1010.380(a) requires reporting companies to disclose their beneficial owners to FinCEN.
What is substantial control?
As stated above, if a beneficial owner does not control at least twenty-five percent ownership interests, one can still be considered a beneficial owner if it meets FinCEN’s definition of an individual with “substantial control.” The proposed regulation provides its own definition of substantial control, which is defined as someone who has:
(1) Service as a senior officer of a reporting company; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; and (3) direction, determination, or decision of, or substantial influence over, important matters of a reporting company. The regulation also includes a catch-all provision to make clear that substantial control can take additional forms not specifically listed.5
In the case of most small businesses, it simply means to be the boss or manager, as a senior officer with substantial control over the direction and decision-making of the company.
What information does FinCEN require to be reported?
Under the CTA, an entity must provide the following information regarding a beneficial owner to FinCEN: (1) Full legal name, (2) date of birth, (3) current residential or business street address, (4) unique identifying number from an acceptable identification document (e.g., from a passport or driver’s license), or alternatively a FinCEN identification number.
Is my business exempt from reporting?
Because the proposed rule is specifically targeted against shell companies, there are twenty-three exemptions from reporting your entity may fall under. Among the more notable and pertinent exemptions are “large operating companies,” publicly traded companies, tax-exempt entities, banks, insurance companies, credit unions, and accounting firms. The rule defines large operating companies as entities that (1) employ more than 20 employees on a full-time basis in the United States; (2) filed the previous year’s Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate; and (3) has an operating presence at a physical office within the United States.6
Are there any exceptions to being a beneficial owner?
Under the proposed rule, the definition of a beneficial owner does not include certain people, even if they meet certain criteria, such as holding a twenty-five percent ownership interest. There are five exceptions found in the CTA and further clarified in the proposed rule. Entities are not required to report these people if they fall under one of these categories:7
- Minor children. Despite this, a reporting company may be required to report the identities of the child’s parent or legal guardian.
- Nominees. If one is acting on behalf of or as an agent to an individual that exercises substantial indirect control over an entity, the individual behind the scenes wielding indirect power must be identified. Here, the actual beneficial owner must be identified, not the apparent owner.
- Employees of the entity. Only individuals who “act solely as an employee” fall under this exception to the rule. While many corporate structures treat CEOs as salaried employees, such positions are not deemed to be employees under the FinCEN’s guidelines. There is a distinction made between senior officers and those who act “solely as employees.” Senior officers are excluded from this exemption.
- Individuals in-line to inherit either substantial control and/or over twenty-five percent ownership interest in the entity. Once the inheritor inherits said control and/or ownership, they are deemed beneficial owners and thus must be identified.
- Creditors. A creditor is not considered a substantial owner of an entity unless they exercise actual substantial control over the entity or personally have over twenty-five percent ownership stake in the entity.
When do I report to FinCEN?
Entities created prior to the rule will have a compliance period of up to one year, from the proposed rule’s effective date to report their beneficial owners.8 Entities created after the rule takes effect will have a fourteen-day window to report their beneficial owners to FinCEN.9 If there is any change to beneficial ownership, the proposed rule will give entities 30 days to update such information and report to FinCEN.10
Are there any penalties for not reporting?
Per the CTA, it is illegal for any individual 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 (cleaned up).”11 There are both civil and criminal penalties at stake in refusing to comply. An individual can be fined $500 per day for each day the violation is not remedied and eventually face up to $10,000 in fines and up to 2 years in prison.12
So, what now?
As of right now, FinCEN has not provided an effective date for which the proposed rule will take effect. Despite this, it is advised that entities start compiling the necessary information and data needed, as reporting requirements will begin soon after the rule takes effect.
KI Legal has a robust Corporate Governance practice that can assist you with all your business compliance needs. For further information on this proposed rule and how it may effect your business, we advise you to contact us at KI Legal.
 Beneficial Ownership Information Reporting Requirements, 86 FR 69920 (proposed December, 8 2021) (to be codified at 31 CFR § 1010.380).
 Corporate Transparency Act, 31 U.S.C.A. § 5336 (West 2021).
 Id. (a)(3)(A).
 Id. (a)(2).
 86 FR 69920 (proposed December, 8 2021) (to be codified at 31 CFR § 1010.380).
 Id. (to be codified at 31 CFR § 1010.380(c)(2)(xxi)).
 Id. (to be codified at 31 CFR 1010.380(d)(4)).
 Id. (to be codified at 31 CFR 1010.380(a)(1)(iii)).
 Id. (to be codified at 31 CFR 1010.380(a)(1)(i)).
 Id. (to be codified at 31 CFR 1010.380(a)(2)).
 31 U.S.C.A. § 5336(h)(1).
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