The U.S. Department of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) recently issued its Final Rule under the Corporate Transparency Act (CTA) implementing the CTA’s requirements related to reporting beneficial ownership information. While the Final Rule, which goes into effect on January 1, 20204, represents a significant enhancement to current U.S. anti-money laundering laws, it places an undue burden small businesses.  The CTA was intended to make it more difficult to operate shell companies for criminal or tax evasion purposes and will require that “Reporting Companies,” as that term is defined, annually collect and report beneficial ownership information (BOI). Reporting Companies include small companies and will invariable place a further burden on small businesses that operate as corporate or other entity. In the regulatory context, painting with a broad brush is consistent with government’s “one size fits all” approach. The BOI will then be populated and placed in a database maintained by the federal government.


The CTA casts a large net in terms of what entities are required to report BOI to FinCEN and include, but are not limited to, entities that are formed for specific real estate acquisitions or development projects, large companies that form new entities for individual projects as well as small business owners who form an entity to protect themselves from liability. Consequently, corporations, limited liability companies or similar entities formed under state law or foreign entities registered to conduct business in the United States will be required to meet CTA’s reporting requirements. Consequently, bodegas, landscapers and others will be subject to the CTA.


The new Rule serves to implement the CTA’s requirements that reporting companies submit a report to FinCEN that provides BOI of the reporting companies. The implementation of the new Rule will presumably help national security, provide critical information to law enforcement and promote financial transparency.  The predicate for the CTA is based upon the same logic behind the Bank Secrecy Act, which unfortunately has been weaponized against political adversaries and selectively enforced.  The CTA will create similar opportunities for abuse.


The final Rule defines “Reporting Companies” to include both U.S. domestic companies and foreign companies registered to do business in any U.S. state of tribal jurisdiction. Under the Rule, the 23 categories of entities that are specifically exempt from the BOI reporting requirements remain unchanged and include:


  • Certain issuers of securities registered with the Securities and Exchange Commission;
  • Certain financial institutions, including domestic banks, bank holding companies, federal or state credit unions and FinCEN registered money service businesses;
  • Certain U.S. federal and state governmental entities and public utilities;
  • Investment companies and advisors;
  • Insurance companies and insurance producers;
  • Commodity Exchange ACT registered companies;
  • Public accounting firms covered under Sarbanes Oxley;
  • Certain pooled investment vehicles;
  • Certain tax exempt entities, including 501(c) entities, political organizations, and charitable trusts;
  • Large Operating Companies. The term “Large Operating Company” is defined as any entity that
    • Employs more than 20 employees in the United State,
    • Has an operating presence in the United States, and
    • Filed a federal income tax return or information return for the prior year reporting more than $5 million in gross receipts or sale, excluding gross receipts or sales outside the U.S.
  • Companies, whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities that are considered exempt from the reporting requirements.


Ironically, The CTA will do little, if anything; curb the widespread practice of using foreign shell companies that do not register to do business in the states.


It would not be unreasonable to assume that some of the entities that are exempt from the CTA reporting requirements were able to secure exempt status, through effective lobbying efforts and political connections.


The final Rule requires Reporting Companies to provide to FinCEN the following information:


  1. The reporting companies’ full legal name, street address, the state of incorporation or formation or registration and the reporting companies’ Tax Identification Number (TIN). Foreign Companies that do not possess a U.S. TIN are permitted to provide a foreign tax identification number with the name of relevant jurisdictions;
  2. Reporting companies must disclose the beneficial owner or company applicant’s full legal name, date of birth, current residential or business street address and a unique identifying number from an acceptable identification document, such as a valid U.S. Passport, U.S. Identification Document or U.S. Driver’s license. If none of the foregoing documents are available, the reporting company may use a foreign passport. As part of the disclosure the reporting company must identify the jurisdiction that issued the identification document bearing the unique identification number; and
  3. The reporting company must provide a scanned copy of the identification document, bearing the unique identification number.


The final Rule defines the term “beneficial owner” as any individual who, directly or indirectly, either exercises “substantial control” over the reporting company or owns or controls at least 25% of its “ownership interests.”


Under the CTA the Secretary of the Treasury is required to establish security measures designed to maintain confidentiality over the information collected. Once the beneficial ownership information is collected, FinCEN may only disclose the information to government and financial institutions for law enforcement, national security or intelligence purposes and it is prohibited from disclosing the information to the general public. Given Treasury’s abysmal track record with respect to implementing the Foreign Asset Tax Compliance Act (FATCA) and its handling of Report of Foreign Bank and Financial Accounts (FBAR) as well as government’s penchant for leaking confidential information to the media and others for political purposes, Treasury should avoid taking a victory lap.