On September 29 the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued the final rules for businesses to report the beneficial ownership rules. The rule is effective January 1, 2024.
The rule will require most corporations, limited liability companies and other entities created in or registered to do business in the United States to report information about their beneficial owners—the persons who ultimately own or control the company—to FinCEN.
The new requirement is a major change to corporate transparency rules for the U.S. and is intended to help stop criminal actors, including oligarchs, kleptocrats, drug traffickers, human traffickers and those who would use anonymous shell companies to hide their illicit proceeds.
As part of the regulatory rulemaking process, ICSC and other real estate organizations submitted comments to FinCEN outlining concerns with the proposed rule. These comments resulted in clarifications to the definition of “substantial control,” among others.
Additional information from the FinCEN Beneficial Ownership Information Reporting Rule Fact Sheet:
Reporting Companies
- The rule identifies two types of reporting companies: domestic and foreign. A domestic reporting company is a corporation, limited liability company (LLC), or 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. A foreign reporting company is 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. Under the rule, and in keeping with the CTA, twenty-three types of entities are exempt from the definition of “reporting company.”
- FinCEN expects that these definitions mean that reporting companies will include (subject to the applicability of specific exemptions) limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and LLCs, because such entities are generally created by a filing with a secretary of state or similar office.
- Other types of legal entities, including certain trusts, are excluded from the definitions to the extent that they are not created by the filing of a document with a secretary of state or similar office. FinCEN recognizes that in many states the creation of most trusts typically does not involve the filing of such a formation document.
Beneficial Owners
- Under the rule, a beneficial owner includes any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. The rule defines the terms “substantial control” and “ownership interest.” In keeping with the CTA, the rule exempts five types of individuals from the definition of “beneficial owner.”
- In defining the contours of who has substantial control, the rule sets forth a range of activities that could constitute substantial control of a reporting company. This list captures anyone who is able to make important decisions on behalf of the entity. FinCEN’s approach is designed to close loopholes that allow corporate structuring that obscures owners or decision-makers. This is crucial to unmasking anonymous shell companies.
- The rule provides standards and mechanisms for determining whether an individual owns or controls 25 percent of the ownership interests of a reporting company. Among other things, these standards and mechanisms address how a reporting company should handle a situation in which ownership interests are held in trust.
- These definitions have been drafted to account for the various ownership or control structures reporting companies may adopt. However, for reporting companies that have simple organizational structures it should be a straightforward process to identify and report their beneficial owners. FinCEN expects the majority of reporting companies will have simple ownership structures.
For more information, please contact Phillips Hinch at phinch@icsc.com.