Tag: FinCEN

The Corporate Transparency Act December 2023 Update

The Corporate Transparency Act (“CTA” or the “Act”) comes into effect on January 1, 2024. Enacted by Congress as part of the Anti-Money Laundering Act of 2020, the CTA requires certain entities, domestic and foreign, to report beneficial ownership to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

The CTA’s reporting obligations will apply to “Reporting Companies” (discussed below) currently in existence, and to those formed after January 1, 2024. However, while FinCEN estimates that the CTA will affect over 32 million entities, it will largely impact only smaller and unregulated companies. For example, companies that meet the CTA’s definition of a “large operating company,” are publicly traded or regulated, or are a subsidiary of certain exempt entities are not required to submit beneficial ownership information to FinCEN. Accordingly, while all companies should take note of the CTA and the significant change in the law for corporate reporting obligations, an equally vast number of entities will likely find themselves exempt from these requirements.

With the CTA’s effective date fast approaching, companies should consider its potential impact to their compliance obligations and, if appropriate, implement appropriate policies and procedures for handling reporting.

WHAT DOES THE CTA REQUIRE?

The CTA will require Reporting Companies to file reports electronically with FinCEN identifying their beneficial owners, in addition to certain other information. For Reporting Companies formed prior to 2024, these reports require information about the Reporting Company and its beneficial owners. Reporting Companies formed prior to 2024 will have until January 1, 2025, to file an initial report.

For Reporting Companies formed on or after January 1, 2024, reports will require information about the Reporting Company and its beneficial owners, as well as its company applicants (i.e., individuals involved in the company’s formation filing). Reporting Companies formed after January 1, 2024, will have 30 days from formation to file their initial reports, although FinCEN recently issued a final rule extending this reporting period to 90 days for companies created or registered in 2024.

WHO MUST REPORT?

Reporting Companies are defined as legal entities that are formed through a filing in a state secretary of state’s office or similar office under the law of a state or Indian tribe. Reporting Companies can be domestic or foreign and include, but are not limited to, corporations, limited liability companies, certain partnerships and certain trusts. A foreign Reporting Company is an entity formed under foreign law that registers to do business in any state or Indian tribe. Certain entities outside of the CTA’s scope include sole proprietorships, most general partnerships, common law trusts, unincorporated
associations, and foreign entities not registered to do business in a state or tribal jurisdiction. These entities are likely to have no reporting obligations under the CTA.

EXEMPT ENTITIES

The CTA provides 23 exemptions for Reporting Companies that would otherwise be required to report beneficial ownership information under the Act. These exemptions are predominantly for large or heavily regulated companies, including:

  • securities reporting issuers, banks, credit unions, depository institution holding companies, money services businesses, brokers-dealers, securities exchange or clearing agencies, pooled investment vehicles, regulated investment companies and investment advisors, insurance companies and state-licensed insurance providers, and accounting firms;
  • “large operating companies” who have more than 20 full-time employees in the U.S., an operating presence at a physical office within the United States, and more than $5 million in gross receipts or sales on their previous years’ U.S. tax returns;
  • U.S. publicly traded companies;
  • governmental authorities and tax-exempt entities; and
  • inactive entities who have been in existence prior to January 1, 2020, are not engaged in active business, are not owned in any manner by a foreign person, have not had a change in ownership within the last 12 months, have not sent or received any amount greater than $1,000 within the last 12 months, and have no assets or ownership interests in any entity in the United States or abroad.

The CTA also exempts subsidiaries of certain exempt entities if those exempt entities own or control the subsidiary.

WHAT MUST BE REPORTED?

Reporting Companies are required to report to FinCEN:

  • basic company information, including full legal name, trade names, business address, state of incorporation or business registration, and employer identification number;
  • information of Beneficial Owners, including full legal name, date of birth, residential street address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document (e.g., driver’s
    license, passport, state-issued ID, etc.), and image of ID document from which unique ID number was obtained;
  • information of Company Applicants, including full legal name, date of birth, business address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document, and image of ID document from which unique ID number was obtained. A “Company Applicant” is defined as the individual who directly files a document with the state secretary of state’s office to create the entity or register it to do business in the state, and the individual who is primarily responsible for directing or controlling the filing.

There is no cap on the number of beneficial owners a Reporting Company is required to report. In contrast, a Reporting Company cannot have more than two reportable company applicants. Additionally, the CTA only requires Reporting Companies formed on or after January 1, 2024, to report company applicants in their initial reports. There is no requirement to report company applicants for entities formed prior to January 1, 2024.

WHO IS A BENEFICIAL OWNER?

A beneficial owner is defined as any individual who, directly or indirectly, either exercises substantial control over a Reporting Company or owns or controls at least 25% of the ownership interests of such Reporting Company.

An individual may exert substantial control by (i) serving as a senior officer (e.g., company’s president, CEO, COO, CFO or general counsel, or any officer who performs a similar function), (ii) having authority to appoint or remove certain officers or a majority of directors (or similar governing body) of the Reporting Company or (iii) having “substantial influence” over important matters at the company, regardless of their title or role.

Ownership interests in a company generally refer to any arrangement that establishes ownership rights in the Reporting Company, such as stock, capital or profit interests, convertible interests, options to buy or sell any of the above-named interests, or contracts, relationships or other understandings. Option interests must be treated as exercised for purposes of the analysis. Additionally, a beneficial owner may own or control such interest directly or indirectly, jointly with another person or through an agent, custodian, trust or intermediary entity.

The CTA identifies five instances where an individual who would otherwise be a beneficial owner under the Act qualifies for an exception. In these cases, the Reporting Company does not have to report the individual’s information to FinCEN. These exceptions are as follows:

  • a minor child;
  • a nominee, intermediary, custodian or agent;
  • an employee (excluding senior officers);
  • an inheritor, whose only interest in the company is a future interest through a right of inheritance; and
  • a creditor.

HOW TO REPORT

No filings are due prior to the Act’s effective date. While FinCEN has published draft forms for filing by a Reporting Company for comment, they are not yet finalized. FinCEN is also in the process of setting up the beneficial owner reporting infrastructure, the Beneficial Ownership Secure System (“BOSS”), which has not yet been finalized.

If beneficial owners or company applicants do not want to provide their personal data to a Reporting Company, individuals have the option of applying directly to FinCEN for a “FinCEN identifier” (a “FinCEN ID”). The individual will need to provide directly to FinCEN all of the same data that he or she would need to submit to the Reporting Company, but then would only need to provide his or her FinCEN ID to the Reporting Company for inclusion on its reporting.

Individuals who receive FinCEN IDs have the burden of keeping their data updated with FinCEN, whereas a Reporting Company has the burden of keeping the individual’s data current if the individual reports such data directly to the Reporting Company.

WHEN TO REPORT

For non-exempt Reporting Companies in existence as of January 1, 2024, they will have until January 1, 2025, to make their initial beneficial ownership report.

For non-exempt Reporting Companies formed on or after January 1, 2024, they will need to file their first beneficial ownership report within 30 calendar days after the date of formation. On November 29, 2023, FinCEN issued a final rule extending this deadline to 90 days for companies formed or registered in 2024. The time of formation is the earlier of (i) a company receiving actual notice of its registration from the state secretary of state or (ii) a company receiving notice of its registration becoming publicly available.

In addition to filing initial reports, Reporting Companies are also obligated to make reports within 30 days of a change to any data that FinCEN requires to be reported for the company and its beneficial owners.

PENALTIES FOR NONCOMPLIANCE

Congress included steep penalties for non-compliance with the CTA’s reporting requirements. Specifically, the CTA provides that willfully reporting or attempting to report false or fraudulent beneficial ownership, or willfully failing to make updates, shall be punishable with a civil penalty up to $500 per day while such violation continues, with a possible criminal fine up to $10,000 and up to two years in prison. If a reporting violation is found to be “willful,” the CTA provides that responsible parties can include individuals that cause the failure, or are senior officers of the Reporting Company at the
time of the failure. The CTA also enhances criminal penalties when a Reporting Company’s failure to file is combined with other illegal activity.

Additionally, it is also unlawful to knowingly disclose or knowingly use beneficial ownership information obtained by the person for an unauthorized purposes. Violations are punishable with a mandatory civil penalty of $500 per day while the violation continues, plus a possible criminal fine of up to $250,000, five years in prison, or both.

HOW YOU CAN PREPARE

The CTA will alter the ways entities organize and govern themselves and it will impose substantial and continuing reporting obligations. In the weeks leading up to the CTA’s implementation, entities should be developing internal policies and procedures to assess their reporting obligations, identify beneficial owners, and identify company applicants on a go-forward basis.

Reporting Companies may wish to consider adopting a CTA compliance policy. Such a policy can educate managers and senior officers on obligations under the CTA, address procedures for reporting to FinCEN and monitoring changes to a company’s reporting status and beneficial ownership, and address the application of the CTA to potential future affiliates of the Reporting Company.

Reporting Companies may also wish to consider how the CTA may implicate its constituent documents and evaluate amending existing operating agreements to incorporate provisions addressing compliance with the CTA. Similarly, some entities may wish to consider their organizational structures and corporate governance in light of the obligation to collect and report personally identifiable information. Additionally, Reporting Companies should consider how the CTA will impact future material transactions, such as mergers and acquisitions.

© 2023 Vedder Price
by: Joel R. Thielen of Vedder Price
For more news on Corporate Transparency Act Updates, visit the NLR Financial Institutions & Banking section.

Corporate Transparency Act: Implications for Business Startups

Congress passed the Corporate Transparency Act (CTA) in January 2021 to provide law enforcement agencies with further tools to combat financial crime and fraud. The CTA requires certain legal entities (each, a “reporting company”) to report, if no exemption is available, specific information about themselves, certain of their individual owners and managers, and certain individuals involved in their formation to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. The beneficial ownership information (BOI) reporting requirements of the CTA are set to take effect on January 1, 2024. Those who disregard the CTA may be subject to civil and criminal penalties.

A recent advisory explaining the CTA reporting requirements in further detail may be found here.

While the CTA includes 23 enumerated exemptions for reporting companies, newly formed businesses (Startups) may not qualify for an exemption before the date on which an initial BOI report is due to FinCEN. As a result, Startups (particularly those created on or after January 1, 2024) and their founders and investors, must be prepared to comply promptly with the CTA’s reporting requirements.

As an example, businesses may want to pursue the large operating company exemption under the CTA. However, among other conditions, a company must have filed a federal income tax or information return for the previous year demonstrating more than $5 million in gross receipts or sales. By definition, a newly formed business will not have filed a federal income tax or information return for the previous year. If no other exemption is readily available, such a Startup will need to file an initial BOI report, subject to ongoing monitoring as to whether it subsequently qualifies for an exemption or any reported BOI changes or needs to be corrected, in either case triggering an obligation to file an updated BOI report within 30 days of the applicable event.

Startups also should be mindful that the large operating company exemption requires the entity to (i) directly employ more than 20 full time employees in the U.S. and (ii) have an operating presence at a physical office within the U.S. that is distinct from the place of business of any other unaffiliated entity. Importantly, this means that a mere “holding company” (an entity that issues ownership interests and holds one or more operating subsidiaries but does not itself satisfy the other conditions of this exemption) will not qualify. Startups may want to consider these aspects of the large operating company exemption during the pre-formation phase of their business.

Fundraising often requires Startups to satisfy competing demands among groups of investors, which can lead to relatively complex capitalization tables and unique arrangements regarding management and control. These features may cause BOI reporting for Startups to be more complicated than reporting for other small and closely held businesses. Founders, investors, and potential investors should familiarize themselves with the CTA’s reporting requirements and formulate a plan to facilitate compliance, including with respect to the collection, storage and updating of BOI.

By ensuring all stakeholders understand the BOI reporting requirements and are prepared to comply, your Startup can avoid conflicts with current and potential investors and ensure that it collects the information that it needs to provide a complete and timely BOI report.

Yezi (Amy) Yan and Jordan R. Holzgen contributed to this article.

© 2023 Varnum LLP
For more news on the Corporate Transparency Act, visit the NLR Corporate & Business Organizations section.

FinCEN Issues Final Rule on the Corporate Transparency Act Requiring Businesses to Report Beneficial Ownership Information

On September 30, 2022, the U.S. Financial Crimes Enforcement Network (“FinCEN”) published its final rule implementing Section 6403 of the Corporate Transparency Act (“CTA”). The final rule, which will take effect on January 1, 2024, will require “tens of millions” of companies doing business in the U.S. to report certain information about their beneficial owners. The reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial beneficial ownership reports with FinCEN. Reporting companies created or registered on or after January 1, 2024, will be required to file initial beneficial ownership reports within 30 days of formation.

The CTA was passed by Congress on January 1, 2021, as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021. After publishing a Notice of Proposed Rulemaking and receiving public comments, FinCEN adopted the proposed rule largely as proposed, with certain modifications intended to minimize unnecessary burdens on reporting companies.

What Entities are Reporting Companies? The final rule describes two types of reporting companies: domestic and foreign.

  • A domestic reporting company is any entity that is a corporation, a limited liability company, or other entity (such as limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships and business trusts) created by the filing of a document with a secretary of state or any similar office under the law of a state or American Indian tribe.

  • A foreign reporting company is any corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a state or American Indian tribe.

What Entities are Exempt? The final rule exempts twenty-three separate categories of entities from the definition of the reporting company. Many of the exempted entities are already subject to federal or state regulations requiring disclosure of beneficial ownership information, such as banks, credit unions, depositary institutions, investment advisors, securities brokers and dealers, accounting firms, governmental entities, tax-exempt entities, and entities registered with the SEC under the Exchange Act of 1934. Additionally, the rules set forth an exemption for “large operating companies” that can demonstrate each of the following factors:

  • Employ more than 20 full-time employees in the U.S.

  • Have an operating presence at a physical office within the U.S.

  • Filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales (excluding gross receipts or sales from sources outside the U.S.)

Finally, under the so-called “subsidiary exemption,” entities whose ownership interests are controlled or wholly owned by one or more exempt entities may also qualify for exemption. If a reporting company was formerly exempt but loses its exemption, it must file an updated report that announces the change and includes all the information required in a reporting company’s initial report.

Who are Beneficial Owners? The final rule requires reporting companies to report each individual who is a beneficial owner of such reporting company. A “beneficial owner” is any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company. An individual exercises “substantial control” if such individual:

  • Serves as a senior officer (except for corporate secretary or treasurer)

  • Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body)

  • Directs, determines, or has substantial influence over important decisions made by the reporting company

  • Has any other form of substantial control over the reporting company

Additionally, an individual may exercise substantial control over a reporting company, directly or indirectly, including as a trustee of a trust or similar arrangement, through:

  • Board representation

  • Ownership or control of a majority of the voting power or voting rights of the reporting company

  • Rights associated with any financing arrangement or interest in a company

  • Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company

  • Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees

  • Any other contract, arrangement, understanding, relationship, or otherwise

The final rule exempts five categories of individuals from the definition of beneficial owner: (i) minors, (ii) nominees, intermediaries, custodians, and agents, (iii) certain employees who are not senior officers, (iv) heirs with a future interest in the company, and (v) certain creditors.

Who are Company Applicants? In addition to the beneficial owner information, the final rule requires reporting companies created or registered on or after January 1, 2024, to report identifying information about each “company applicant.” A “company applicant” is:

  • Any individual who directly files the document to create a domestic reporting company or register a foreign reporting company with a secretary of state or similar office in the U.S.

  • Any individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing

The final rule provides further clarification as to certain individuals who, by virtue of their formation roles, fall under the definition of “company applicants.” For example:

  • If an attorney oversees the preparation and filing of incorporation documents and a paralegal files them, the reporting company would report both the attorney and paralegal as company applicants.

  • If an individual prepares and self-files documents to create the individual’s own reporting company, the reporting company would report the individual as the only company applicant.

The final rule removes the requirements that i) entities created before the effective date report company applicant information and ii) reporting companies update their company applicant information (except to correct inaccuracies), each of which were set forth in the proposed rules.

When are Initial Reports Due? When an initial report must be filed depends on the status of the reporting company as of January 1, 2024:

  • If Created or Registered on or after January 1, 2024 – It must file a report within 30 calendar days from the earlier of: i) the date on which the company receives actual notice that its creation or registration has become effective, or ii) the date a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the company has been created or registered.

  • If Created or Registered Prior to January 1, 2024 – It must file a report not later than January 1, 2025.

What Information Must be Reported? An initial report must include the following information with respect to the reporting company:

  • The full legal name of the reporting company

  • Any trade name or “doing business as” name of the reporting company

  • The street address of the principal place of business of the reporting company (if outside the U.S., the street address of the primary location in the U.S. where it conducts business)

  • The state, tribal, or foreign jurisdiction of formation of the reporting company (a foreign reporting company must also report the state or tribal jurisdiction where it first registers)

  • The IRS Taxpayer Identification Number (“TIN”) of the reporting company (including the EIN of the reporting company, or if a foreign reporting company without a TIN, a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction)

For each company applicant (of a reporting company registered or created on or after January 1, 2024) and each beneficial owner of a reporting company, the following information must be reported:

  • The full legal name of the individual

  • The date of birth of the individual

  • The current business street address (for a company applicant who forms or registers an entity in the course of such company applicant’s business) or residential street address (for all other individuals including beneficial owners)

  • A unique identifying number from, and image of, an acceptable identification document (e.g., a passport)

If a reporting company is directly or indirectly owned by one or more exempt entities and an individual is a beneficial owner of the reporting company exclusively by virtue of such individual’s ownership interest in the exempt entity, the reporting company’s report may list the name of the exempt entity in lieu of the beneficial ownership information set forth above.

When do Companies have to Report Changes? If there is any change with respect to required information previously submitted to FinCEN concerning a reporting company or its beneficial owners, including any change with respect to who is a beneficial owner or information reported for any particular beneficial owner, the reporting company is required to file an updated report within 30 calendar days of when the change occurred.

What are the Penalties for Violations? The final rule provides for a fine of up to $10,000.00 and/or imprisonment of up to two years for any person who willfully: (i) provides or attempts to provide false or fraudulent beneficial ownership information, or (ii) fails to report complete or updated beneficial ownership information to FinCEN. The penalties may also extend to individuals causing a reporting company’s failure to report or update information and senior officials of a reporting company at the time such failure occurs.

What is Coming Next from FinCEN? FinCEN is expected to publish the forms and instructions to be used for reporting beneficial ownership information well in advance of the effective date. FinCEN will further establish a secure nonpublic database for storage of the beneficial ownership information. Finally, FinCEN will issue rules on who may access the information (a limited group of governmental authorities and financial institutions), under what circumstances, and how the parties would generally be required to handle and safeguard the information.

What Should Reporting Companies be Doing Now? Existing companies should begin evaluating whether they are a “reporting company” and if so, determining who are their beneficial owners. Such reporting companies, including any other reporting companies that may be created or registered before the effective date, will have until January 1, 2025, to file an initial report. As noted, reporting companies created or registered on or after the effective date will have 30 calendar days after the date of creation or registration to file an initial report.

Article By Thomas G. Appleman, Arthur L. Griem, and Vera S. Hansen of Miller Canfield

For more financial legal news, click here to visit the National Law Review.

© 2022 Miller, Canfield, Paddock and Stone PLC

Department of Justice Settles Virtual Currency Enforcement Action

The US Attorney’s Office in the Northern District of California recently settled an enforcement action against Ripple Labs Inc., a Delaware corporation providing virtual currency exchange services. According to the settlement agreement, Ripple Labs was not registered with the Financial Crimes Enforcement Network (FinCEN) as a money services business (MSB) pursuant to the Bank Secrecy Act of 1970 while engaged in currency trading, and lacked required anti-money laundering controls.

Ripple Labs is a virtual currency exchange service dealing in XRP, the second-largest cryptocurrency by market capitalization after Bitcoin. Between at least March and April 2013, Ripple Labs sold XRP in its exchange. During the time of the sales, Ripple Labs was not registered with FinCEN. In March 2013, FinCEN’s released guidance clarifying the applicability of registration requirements to certain participants in the virtual currency arena. Ripple Labs also lacked an adequate anti-money laundering program, and did not have a compliance officer to assure compliance with the Bank Secrecy Act.

The settlement agreement reached by Ripple Labs and the US Department of Justice (DOJ) called for a $450,000 forfeiture to the DOJ, as well as a civil money penalty of $700,000 to FinCEN. Ripple Labs agreed to cooperate with any DOJ or regulatory request for information. In addition, Ripple Labs agreed to operate its XRP exchange as an MSB registered with FinCEN and to maintain all necessary registrations. Ripple Labs also agreed to implement and maintain an effective anti-money laundering program, complete with a compliance officer and training program. Finally, Ripple Labs agreed to conduct a review of prior transactions for evidence of illegal activity, as well as monitor transactions in the future to avoid potential money laundering or illegal transfer activity.

U.S. Department of Justice Settlement Agreement (May 5, 2015)

ARTICLE BY

Michael M. Rosensaft & Zachary D. Denver of Katten Muchin Rosenman LLP
©2015 Katten Muchin Rosenman LLP

Financial Crimes Enforcement Network (FinCEN) Proposes Anti-Money Laundering Rules

Vedder Price Law Firm

On July 23, 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking that would amend existing Bank Secrecy Act regulations with respect to customer due diligence (CDD) requirements for certain covered financial institutions, including mutual funds, brokers or dealers in securities and futures commission merchants and introducing brokers in commodities. The proposed rules would formalize certain CDD requirements and also require that covered financial institutions “identify and verify the beneficial owners of legal entity customers.” FinCEN’s proposal includes a standard certification form that covered financial institutions would be required to use for documenting the beneficial ownership of their legal entity customers. An individual may qualify as a “beneficial owner” of a legal entity customer if the individual either (1) owns 25% or more of the equity interests of the entity, or (2) has significant management responsibilities within the entity. As proposed, covered financial institutions would be exempted from identifying the beneficial owners of an intermediary’s underlying clients if the covered financial institution has no customer identification program obligation with respect to those underlying clients.

Comments on the Notice of Proposed Rulemaking are due by October 3, 2014.

ARTICLE BY

Investment Services Group
OF
Vedder Price