FinCEN – the Financial Crimes Enforcement Network

FinCEN – the Financial Crimes Enforcement Network – is a division of the U.S. Treasury Department that exists to collect and distribute information to law enforcement relating to money laundering and financial crimes. As part of the National Defense Authorization Act of 2021 Congress adopted the Corporate Transparency Act (or “CTA”). The CTA includes some of the most significant changes to US anti-money laundering (“AML”) laws in recent years.

One of the primary changes requires the beneficial owners of corporations, partnerships, limited liability companies and other businesses to file a report that discloses their beneficial ownership. This new law will have a significant impact on entrepreneurs, business owners, attorneys and others involved in the process of forming new companies. The U.S. government uses AML to identify parties involved in money transfers. Before the CTA it was possible to form a corporation, partnership or limited liability company without publicly disclosing the owners of that legal entity. The CTA will end that practice and will compel the beneficial owners of most businesses to disclose their ownership by filing a report with FinCEN, the Financial Crime Enforcement Network, an agency of the U.S. Treasury Department.

The CTA requires the Treasury Department to issue regulations by January, 2022 that will require corporations, partnerships, limited liability companies and similar entities formed or registered to do business in the United States (“covered entities”) to report and verify the identity of their beneficial owners to FinCEN at the time of their formation and within a year of any changes to their beneficial ownership. Existing covered entities will be given no more than two years from the effective date of the regulations to submit reports on their beneficial owners. New covered entities must report at the time of formation or registration after the effective date of the regulations.

The CTA defines “beneficial owner” to include any individual, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise who:

1. Exercises substantial control over the covered entity, or

2. Holds at least 25 percent of the ownership interests of the covered entity.

Importantly, the CTA does not define “substantial control” and does not describe how ownership interests are to be measured. We expect that the upcoming FinCEN regulations will define these terms.

The CTA provides several exemptions that apply to specific categories of beneficial ownership: 1. Custodians/agents for an individual, or those acting solely as an employee of an entity.

2. An entity’s creditors, unless the creditor holds at least 25 percent of the ownership interests of the covered entity or substantial control.

3. An individual whose only interest in a covered entity is through a “right of inheritance.”

4. A minor child if the information of the parent (or guardian) is reported. The obligation to file a FinCEN report is an obligation of the covered entity itself. The covered entity must report, for each beneficial owner, as well as the individual that files the paperwork to form or register an entity with a state secretary of state or similar office: 1. Full legal name, 2. Date of birth, 3. Current residential or business street address, and 4. A unique identifying number from an acceptable identity document or a unique identity number generated by FinCEN. Importantly, if an exempt entity has a direct or indirect ownership in a covered entity, the covered entity must report the legal name of the exempt entity, but not the other information generally required.

The CTA exempts the following entities from the obligation to file a FinCEN report:

1. Public companies (defined as issuers of a class of securities under section 12 of the Securities Exchange Act of 1934 or issuers that are required to file information under section 15(d) of that Act).

2. Any entity that employs more than 20 full-time employees in the United States, filed a federal tax return for the previous year with more than $5 million in gross receipts or sales (includes subsidiaries and operating affiliates), and operates from a physical US office.

3. Shelf companies (defined as any entity that is in existence for over one year, not engaged in “active business,” and not directly or indirectly owned by a non-US person).

4. Certain charitable trusts and charitable split-interest trusts, Internal Revenue Code Section 501(c) charitable organizations and certain related entities. 5. Any pooled investment vehicle that is operated or advised by a bank, registered broker-dealer, registered investment company, or registered investment adviser, among others.

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