On September 29, 2022, the Department of the Treasury issued the first in a series of final rules to implement the Corporate Transparency Act, a landmark bill signed into law in January 2021. The act cracks down on shell companies, which are frequently the vehicles of choice for money launderers, traffickers of all kinds, corrupt officials, foreign kleptocrats, and tax dodgers, to anonymously hide, protect, and grow their ill-gotten gains. It does this by requiring covered companies to disclose the identity of their true owners, which the act defines as individuals with either substantial control or a 25% or higher ownership stake in the company. Collecting this information, called beneficial ownership information, will serve as a deterrent to bad actors who try to anonymously infiltrate our financial system.
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This final rule is a major accomplishment. It represents years of efforts in Congress and by civil society to implement beneficial ownership reporting requirements.
In the lead up to the final rule’s publication, Treasury made requests for public comments (one last year and another in February of this year) on the proposed rulemaking, and POGO submitted a number of recommendations that would ensure the beneficial ownership information reported to the department fulfills the criteria established by the act of being as “accurate, complete, and highly useful” as possible. Many of these recommendations supported some of Treasury’s draft proposed rules, and those draft rules were ultimately retained in the recently published final rule.
Below are the key takeaways.
Rule Retains Strong Definition of a Reporting Company
POGO urged the Financial Crimes Enforcement Network (FinCEN), the federal entity responsible for implementing this rule, to employ a strong, role-based definition of a reporting company. This was to ensure a wide range of companies would be required to report their beneficial ownership information.
The final rule does just that, identifying both domestic and foreign companies as reporting companies. It specifically defines the former as “a corporation, limited liability company (LLC), any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.” And it defines a foreign reporting company as a “corporation LLC, or other entity formed under the law of a foreign country that is 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.” By basing these definitions on how a company is created rather than listing specific types or kinds of entities, the rule casts a wide net when it comes to which entities qualify as reporting companies.
Rule Retains Strong Definition of Beneficial Owner
POGO is encouraged to see that the final rule retains a strong definition of a beneficial owner. According to the law, a beneficial owner of a company is an individual who “owns or controls at least 25 percent of the ownership interests of such reporting company” or who exercises “substantial control over such reporting company.” Prior to issuing this final rule, the Financial Crimes Enforcement Network engaged with stakeholders and considered a number of ways to define “substantial control.” Its draft rule required covered entities to report any owners who meet the definition, and identified a non-exhaustive list of the types of individuals who exercise substantial control.
The final rule retains a strong definition of a beneficial owner, and clarifies that an individual may be a beneficial owner of a reporting company by “indirectly holding 25 percent or more of the ownership interests of the reporting company through multiple exempt entities.” As such, it ensures all relevant information is appropriately collected and stored by the federal government and made accessible to law enforcement and financial institutions.
Appropriate and Timely Reporting Requirements
The act requires a covered entity to submit its beneficial ownership information “at the time of formation or registration,” and if a company needs to update its information, it has to do so in a “timely manner” that doesn’t exceed a year after the date on which the change occurs.
The final rule defined both of these phrases reasonably by adopting the following requirements. It requires covered entities to file an initial report within 30 days of the creation or registration of the entity. It provides entities 30 days to report changes or fix inaccuracies to the beneficial ownership information in a previously filed report. It specifies that companies which previously met criteria for a reporting exemption but no longer do will have 30 days to file a report. And it states that entities that later qualify for an exemption will have 30 days to file an updated report.
Low Cost of Compliance
In the second comment we submitted to Treasury, POGO encouraged the Financial Crimes Enforcement Network to minimize the financial burden of reporting companies to the extent practicable. Lowering costs not only increases the likelihood that companies will comply with requirements but also recognizes needs of small businesses, many of which will be covered by this law. As the Financial Crimes Enforcement Network acknowledged when it issued the final rule, millions of small businesses are formed in the U.S. every year, and they play a vital role in our nation’s economy: They create jobs and drive innovation and competition. As such, it’s imperative to balance the need to collect beneficial ownership information in order to combat corruption with the needs of small businesses.
The Financial Crimes Enforcement Network seems to have struck this difficult equilibrium. It estimates that “it will cost reporting companies with simple management and ownership structures — which FinCEN expects to be the majority of reporting companies — approximately $85 apiece to prepare and submit an initial [beneficial ownership information] report.” As Treasury points out in its September 2022 fact sheet, this is exceedingly fair. To put the fee into context, Treasury pointed out that state formation fees for creating a limited liability company can run between $40 and $500, depending on the state.
Next Steps: Future Rulemakings
This is one of three final rulemakings the Financial Crimes Enforcement Network will release related to the implementation of the Corporate Transparency Act. It will issue additional rulemakings to specify who and for what purpose law enforcement authorities may access the collected beneficial ownership information, and will revise its customer due diligence rule — which pertains to financial institutions’ beneficial ownership collection requirements — following the implementation of this rule. Additionally, the Financial Crimes Enforcement Network will continue to develop the information technology system, called the Beneficial Ownership Secure System, that will store this information, in conjunction with the strict security and confidentiality requirements laid out in the act.
The Corporate Transparency Act is a huge step forward when it comes to strengthening financial transparency. POGO supports Treasury’s first final rule in this series, as well as its ongoing efforts to implement additional fair and effective rulemaking that implements this law.