In an effort to strengthen America’s anti-money laundering regulation, Congress passed the Corporate Transparency Act (2020). This statute has been supplemented by a Final Rule issued on September 29, 2022. The Act and the Final Rule represent a sea change to what information about covered U.S. business entities must be filed, with whom it must be filed, and how such information may be used. These changes will impact significantly existing U.S. affiliates of Irish and Northern Irish businesses as well as future U.S. affiliates.
By Michael E. Burke, Arnall Golden Gregory LLP
Until now, U.S. states require much less information—on finances, ownership, and governance—to form and operate a business entity than is required by Ireland’s Companies Registration Office or Companies House in Northern Ireland. In an effort to strengthen America’s anti-money laundering regulation, Congress passed the Corporate Transparency Act (2020) (the “Act”). This statute has been supplemented by a Final Rule issued on September 29, 2022, by the United States Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The Act and the Final Rule represent a sea change to what information about covered U.S. business entities must be filed, with whom it must be filed, and how such information may be used. These changes will impact significantly existing U.S. affiliates of Irish and Northern Irish businesses as well as future U.S. affiliates.
The Act and the Final Rule direct a wide range of private business enterprises to report certain information to FinCEN: (a) corporations; (b) limited liability companies; and (c) other entities that are created or registered to do business by filing a document with a secretary of state or any similar office. The vast majority of U.S. affiliates of Irish or Northern Irish, existing and future, will have to report certain information to FinCEN. In addition, foreign entities registered to do business in the United States are required to report to FinCEN, possibly directly capturing a number of Irish and Northern Irish business entities potentially in addition to such entity’s U.S. affiliate. Note that publicly-traded companies, banks, credit unions, money services businesses, broker-dealers, investment companies or investment advisers, venture capital fund advisers, and insurance companies, among others, are exempt from the reporting requirements in the Act and Final Rule.
Private business enterprises subject to reporting requirements must provide to FinCEN (a) their full name; (b) any ‘doing business as’ name; (c) address, jurisdiction of formation or registration; and (d) employer identification number or other unique tax identification number.
In addition, individuals defined as a “company applicants” must provide to FinCEN their full name, date of birth, address, and photo identification with identification number shown, within thirty (30) days of forming a new entity after January 1, 2024. “Company applicant” is broadly defined as “the individual who directly files the document that first creates the domestic reporting company” and “the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.” This definition contemplates one or two company applicants and likely includes attorneys, paralegals, and accountants if entities are formed by law firms or accountancy firms. Business entities formed before January 1, 2024, do not need to report “company applicant” information and such information does not need to be updated.
The Act and the Final Rule direct a wide range of private business enterprises to report certain information to FinCEN: (a) corporations; (b) limited liability companies; and (c) other entities that are created or registered to do business by filing a document with a secretary of state or any similar office.
The most significant challenge with the reporting requirements in the Act and Final Rule is identifying the entity’s beneficial owner(s), keeping in mind that there can be multiple beneficial owners per entity. The Final Rule defines a “beneficial owner” as any individual who, directly or indirectly, either: (a) exercises “substantial control” over a reporting company; or (b) owns or controls at least 25% of the ownership interests of a reporting company. This definition could include company officers and directors, to the extent they exercise “substantial control” as well as indirect owners who own more than 25% of the reporting company’s equity through one or more intermediaries. Note that the 25% threshold can be met through ownership of equity, convertible debt, profits interests, and warrants and similar rights; in calculating the 25%, the Final Rule specifies that all options or similar instruments should be treated as exercised and that all interests in the business be treated as a single class.
While determining 25% owners may be straightforward, determining “substantial control” is harder to answer. Under the Final Rule, an individual has “substantial control” over an entity who: (a) serves as a senior officer; (b) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); or (c) directs, determines, or has substantial influence over important decisions. This is a wide net that could capture many individuals per business entity.
The Final Rule becomes effective on January 1, 2024. Any covered business entity created on or after January 1, 2024, must report required information to FinCEN within thirty (30) calendar days of its creation. Covered business entities created before January 1, 2024, must provide required information to FinCEN by January 1, 2025. Any changes to previously reported business enterprise or beneficial ownership information must be reported to FinCEN within thirty (30) days of such change.
The Act allows for submitted information to be disclosed by FinCEN to certain governmental entities, and final guidance on such access is expected before January 1, 2024. Under the Act, access filed information may be disclosed by FinCEN to: (a) federal law enforcement, national security, or intelligence agencies; (b) state, local and Tribal law enforcement; (c) select foreign law enforcement and national security agencies; (d) financial institutions subject to customer due diligence requirements, and their regulators; and (e) certain Treasury officers and employees, including tax administration.
Penalties for noncompliance or misuse of beneficial ownership information are significant: (a) civil penalties of up to $500 for each day that a violation continues or has not been remedied; and (b) possible imprisonment of up to two (2) 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.
Guidance on the Act provided to date has errored toward overreporting, as the purpose of its reporting requirements is to broadly begin tracking ownership of the relevant entities. Therefore, potentially impacted companies should seek appropriate advice as far in advance of January 1, 2024, as possible.
About the author:
Michael E. Burke is a partner in, and chair of, the Island of Ireland practice group of Arnall Golden Gregory LLP. He is resident in the firm’s Washington, DC office and can be reached at firstname.lastname@example.org or +1.202.677.4046. This update should not be construed as legal advice and does not reflect the opinions of the firm or its clients.