Is Your Company Prepared to file a Beneficial Ownership Report?

Now that FinCEN has published its proposed regulations to implement the Corporate Transparency Act, company owners should be asking themselves if they are prepared to file their first beneficial ownership report.

The Act, adopted by Congress in December 2020 requires every corporation, LLC and limited partnership to file a beneficial ownership report with FinCEN, the Financial Crimes Enforcement Network. The Act is intended to bring U.S. anti-money laundering standards more in line with European standards and will apply both to U.S. companies as well as non-U.S. companies that register to do business in the U.S. It does this by creating a new national registry of corporate beneficial ownership data. Because this concept is new to U.S. investors, managers and lawyers, the Act’s requirements will be unfamiliar to companies that do business in the U .S. and the attorneys that advise them. 

Definition of "Beneficial Owner"

The Act defines “beneficial owner” as a person who either (a) own more that 25% of the beneficial interest in the company, or (b) exercises “substantial control” over the company. The Act measures beneficial ownership at the individual level, including an individual’s direct and indirect holdings in the reporting company.

The definition of “substantial control” is more difficult to apply. The proposed regulations define “substantial control” as:

• Service as a senior officer of the reporting company;
• Authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body);
• Direction, determination, or decision of, or substantial influence over, important matters affecting the reporting company, including but not limited to:
  • The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
  • The reorganization, dissolution, or merger of the reporting company;
  • Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
  • The selection or termination of business lines or ventures, or geographic focus, of the reporting company;
  • Compensation schemes and incentive programs for senior officers;
  • The entry into or termination, or the fulfillment or non-fulfillment of significant contracts; and 
  • Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; and
• Any other form of substantial control over the reporting company.

Because this definition of “substantial control” is a facts and circumstances test, nearly every reporting company will need to engage an attorney to determine which individuals have “substantial control.” While every beneficial owner with a 25% or greater stake in the company will need to be included in the company’s report, others, with little or no stake in the company, may also need to be included because of their possession of “substantial control.”

Preparing for your first Beneficial Ownership Report

To prepare, business owners should work with their counsel to identify the persons that are beneficial owners, as defined in the proposed regulation.

For each beneficial owner, the company should collect the PII that is required, along with an image of the document that provides the "unique identifying number" for each individual.

For many companies, this process will be challenging.  Investors are not accustomed to giving their companies PII like their date or birth or their passport number. Some companies will want to adopt a shareholders agreement the establishes rules for the company's governance relating to CTA compliance.

Once the proposed regulation is finally effective, companies will need to be prepared to comply. Companies that are newly-formed after the regulations take effect will have only 14 days to file their first report. Companies that existed before the regulations take effect, will have one year to file their first report.  After a company files its first report, however, the company will have only 30 days to file an amendment if any piece of data from a prior report should change. 

Update: FinCEN issued its Final Rule on beneficial ownership reports under the Corporate Transparency Act on September 29, 2022.  This post is superseded by the Final Rule which provided revised guidance on the contents of a beneficial ownership report.