Payments Report: News from Washington, Brought to you by NEACH
Overview: On January 1, 2024, FinCEN’s final rule implementing the beneficial ownership information (“BOI”) reporting requirements (the “Reporting Rule”) of the Corporate Transparency Act (“CTA”) went into effect. On March 1, 2024, a federal court ruled that the CTA is unconstitutional as applied to the plaintiffs in that case, casting a cloud over the implementation of the BOI reporting rule. Nevertheless, FinCEN has proceeded with requiring covered entities to submit BOI reports and has published two extensive guides to assist small businesses with compliance.
Background
Enacted in January 2021, the CTA requires certain covered legal entities to file reports with FinCEN containing information about their direct owners, indirect owners, and other controlling individuals (collectively, “beneficial owners”). Its coverage includes nearly all legal entities operating within the United States, subject to certain exemptions. After collecting BOI from reporting entities, FinCEN is also required by the CTA to maintain the BOI in a secure database for the use of specific anti-money laundering purposes by certain organizations such as law enforcement agencies.
The CTA directed FinCEN to adopt regulations implementing the BOI reporting obligations for covered entities and the CTA’s database access provisions. FinCEN promulgated the Reporting Rule on September 30, 2022, and issued the BOI database access rule on December 21, 2023. Reporting companies that were in existence when the Reporting Rule took effect have until the beginning of 2025 to submit their BOI reports. However, any reporting company formed on or after January 1, 2024, must file a BOI report within 30 days after formation.
FinCEN Small Entity Compliance Guide
FinCEN has set up a BOI home page with information, guidance, and notices at https://www.fincen.gov/boi. Among other resources, the BOI homepage contains an FAQ page and a page of reference materials, which include the Small Entity Compliance Guides—one addressing the BOI reporting requirements (the “Reporting Guide”) and one covering the BOI access and safeguards requirements. The Reporting Guide is organized into six areas of compliance with the CTA and the Reporting Rule:
- Whether a company must report its beneficial owners.
- Who is considered a beneficial owner.
- Whether the company must report its “company applicants.”
- What specific information must be reported.
- When and how to file the initial BOI report.
- How to handle changes or inaccuracies in reported information.
Each of these six sections are presented as questions, each with useful flowcharts and interactive checklists to guide a potential reporting company using plain language. Although the Reporting Guide is a helpful resource for compliance, it is important to note that its guidance does not take precedence over the text of the CTA or the Reporting Rule. FinCEN took care to disclaim that the Reporting Guide is “explanatory only and does not supplement or modify any obligations imposed by statute or regulation,” and moreover “does not supersede more recent guidance documents issued by FinCEN.”
As explained in the Reporting Guide, a beneficial owner is any individual who, directly or indirectly, either (i) owns or controls at least 25% of the ownership interest of a reporting company, or (ii) exercises “substantial control” over a reporting company. Because of the “substantial control” qualification, there is no maximum number of individuals who can be reported as beneficial owners. Importantly, FinCEN expects that even if no individual directly or indirectly owns at least 25% of the ownership interest of a company, there will be at least one individual with substantial control of the company. In other words, FinCEN presumes that there will be no reporting company without at least one beneficial owner to report.
The Reporting Guide provides an interactive checklist of six questions to help determine whether an individual exercises substantial control over the company. A reporting company should be careful in determining which individuals exert substantial control over the company, as the text of the Reporting Rule is remarkably broad—for example, it includes any person who has substantial influence over important decisions made by the company, such as whether to enter into “significant contracts.” However, there are five exceptions to the definition of a beneficial owner. A crucial exemption is for any individual who is an employee whose substantial control derives solely from their employment status and is not a senior officer (such as president, CEO, CFO, COO, general counsel, or similar function).
In addition to its beneficial owners, each reporting company formed after January 1, 2024, will have to identify and report to FinCEN at least one “company applicant” (but no more than two). A company formed prior to that date will have to report the fact that it has a company applicant but will not be required to report information about that individual. A company applicant is an individual who either (i) directly filed the documents that created a domestic company or registered a foreign company in the US, or (ii) was primarily responsible for directing or controlling the filing of the creation or registration documents. Importantly, a company applicant need not be an employee. Thus, external legal counsel or corporate filing services may be captured by the Reporting Rule as company applicants.
Constitutional Challenge
Approximately six weeks after the Reporting Rule was issued by FinCEN, in 2022, a small business owner named Isaac Winkles, together with the National Small Business Association (“NSBA”)—a non-profit corporation—sued the Treasury Department, Treasury Secretary Janet Yellen, and Acting Director of FinCEN Himamauli Das, claiming that the CTA’s BOI disclosure requirements exceed the constitutional authority of Congress. On March 1, 2024, a federal district court in Alabama agreed with the plaintiffs, ruling that the CTA “is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers.” Although the court’s opinion did not explicitly limit its ruling to the plaintiffs in the case, FinCEN has taken the position that the court’s decision only precludes it from enforcing the CTA against Isaac Winkles, the NSBA, and members of the NSBA as of March 1, 2024. FinCEN is expected to appeal the decision, but in the meantime this case casts a cloud of uncertainty over the CTA and may lead to additional court challenges.
Outlook: The CTA’s BOI reporting requirements are now in effect for all newly formed legal entities covered by the Reporting Rule. FinCEN has issued helpful guidance to assist entities and individuals in determining whether and how to comply with the Reporting Rule’s requirements. However, the question of the CTA’s constitutionality may interfere with FinCEN’s ability to enforce these obligations.