US treasury publishes draft beneficial ownership reporting rule

The CTA was enacted at the beginning of 2021 as part of the Anti-Money Laundering Act 2020, which itself was an addendum to the annual National Defense Authorization Act for Fiscal Year 2021. It amends the federal Bank Secrecy Act to require beneficial ownership reporting by domestic and foreign corporations, limited liability companies and ‘similar entities’ created in, or registered to do business in, the US. The resulting database, to be managed by FinCEN, will not be available to the general public, but FinCEN will be authorised to disclose it to several categories of recipients, including federal law enforcement.

The primary legislation left many implementation details open to interpretation, including the definitions of 'similar entities', 'reporting company' and 'beneficial owner'. The draft rule addresses these details, setting out who must report beneficial ownership information, when and what they must report and which entities are exempt. It will be the first time that most such information has been collected, as few US states currently require legal entities to disclose information about their beneficial owners or the persons forming them.

Specifically, entities within scope of the rule will have to file reports identifying both the beneficial owners of the entity and any individual who has applied to form or register it to do business in the US. The rule will apply to any entity created by filing a document with state officials, including limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and limited liability companies.

Other types of legal entities ‘would appear to be excluded from the definitions’, if they are not created by filing documents with government officials, says FinCEN. It recognises that the creation of many trusts does not involve the filing of such a formation document, but will be seeking public comment on local legal practices regarding trust formation, to clarify the scope of the rule.

'Beneficial owners' are defined in the rule as any individual who exercises 'substantial control' or who owns or controls at least 25 per cent of the entity. It exempts five types of individuals from the definition, but sets out a list of activities that could constitute 'substantial control', capturing anyone who is able to make significant decisions on behalf of the entity.

Reports of beneficial ownership information must contain four pieces of information about each of the company's beneficial owners and applicants: name, date of birth, address and a copy of an acceptable identification document bearing a unique identifying number.

Companies created before the effective date of the final regulation would have a year to file their initial reports and those created or registered after the effective date would have 14 days after their formation to file. The same deadlines apply to both domestic and foreign companies. Previously filed reports can be updated within 30 days of information changing and inaccurate reports can be corrected within 14 days.

The rule also addresses the anti-money laundering risks posed by anonymous shell companies as set out in the US government's new strategy on countering corruption. 'The proposed rule would significantly enhance the ability to protect the U.S. financial system from illicit use, and provide essential information to law enforcement and others help prevent corrupt actors, terrorists, and proliferators from hiding money or other property in the United States', says FinCEN. It says it has tried to minimise the reporting burdens introduced by the proposed regulation. It estimates that the forms will cost a company less than USD50 to prepare and submit.

Comments on the draft rule can be submitted until 7 February 2022.

Sources

• FinCEN
• FinCEN (fact sheet)
• White House (United States Strategy on Countering Corruption, PDF)
• DLA Piper
• MNE Tax
• STEP International News 6 April 2021: US Treasury begins rule-making process for beneficial ownership reporting