Compliance Blog

Oct 26, 2022
Categories: BSA

FinCEN Adopts the First of Three CTA Rules

Greetings, Compliance folks!

Fall is in full swing - I recently took a trip to upstate New York for a family function and was delighted to see the gorgeous fall foliage in the mountains. We also took a family trip to an apple orchard and did some apple picking, which my son and daughter both enjoyed immensely. In the spirit of Fall, grab a warm mug of cider or a pumpkin-flavored latte and settle in – we’re going to look at FinCEN’s most recent regulation!

Summer of 2022 was a relatively quiet period for FinCEN – the agency did not issue any press releases, guidance or rulemakings for about 60-days. However, at the end of September FinCEN published their final rule implementing the beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA) of 2020.

For those who need a refresher, the CTA became law on January 1, 2021 and aimed to fight criminal use of the U.S. financial system by limiting the use of shell companies or front companies by criminal enterprises. In the preamble to the new final rule, FinCEN discusses how the current corporate formation system in the U.S. generally makes it easy to create a corporation or limited liability company (LLC) while providing very little information about who owns those entities, making corporate ownership difficult for law enforcement to trace. Additionally, legal entities can be owned by other legal entities, creating a “nesting doll” of corporate ownership that further complicates efforts to discern which individuals might be behind a particular entity. Current regulations – such as 2016’s Customer Due Diligence (CDD) rule, require credit unions to obtain BOI when a legal entity becomes a member and opens an account. However, Congress and federal regulators acknowledged that requiring submission of BOI information to the government at the time a corporation or LLC is formed would be more effective at increasing transparency in the U.S. corporate system and at cutting down on the utility of shell companies.

In a recent speech, FinCEN Acting Director Himamauli Das discussed the rulemaking process, noting that the CTA will be implemented through three separate rulemakings. First, the “BOI reporting” rule will establish the requirement for existing and newly formed entities to provide their BOI directly to FinCEN. Secondly, a ”BOI access” rule will establish how law enforcement and financial institutions can access that information once its in FinCEN’s database. And finally, a third rule will amend the existing CDD requirements to reduce the burden on credit unions and other financial institutions.

The BOI Reporting Rule

The BOI reporting rule – which would establish the FinCEN BOI database and require “reporting entities” to submit their BOI directly to FinCEN – is the first rule that FinCEN has focused on in their implementation of the CTA. NAFCU has been following this closely – we originally blogged about FinCEN’s Advanced Notice of Proposed Rulemaking on this topic back in April 2021, and again when a Proposed Rule was issued in December 2021. The finale rule was published in September 2022 and takes effect on January 1, 2024.

Notably, this rule does not have much of an effect on credit union operations, as credit unions are not required to report BOI under the rule – however, understanding this rule can be important to understanding how beneficial ownership requirements will be changing in the future.

Under the Final Rule issued in September 2022, “reporting company” is defined to include any domestic corporation, LLC, or similar entity formed through filing documents with the Secretary of State for a U.S. State or Indian Tribe. The regulation also applies to foreign corporations, LLCs or similar entities that are registered to do business in any State or Tribal Jurisdiction. A number of entities are excluded from coverage, including government entities, banks, credit unions, and securities reporting issuers (i.e., publicly traded companies).

After the effective date (Jan. 2024), any newly formed domestic “reporting company” will be required to report its BOI to FinCEN within 30 calendar days of its creation. Foreign “reporting companies” will be required to submit BOI to FinCEN within 30 days of receiving notice that they have been registered to do business within the U.S. Existing reporting companies (i.e., those formed prior to 2024) will be required to submit their BOI within 1 year of the effective date – i.e., on or before January 1, 2025. Additionally, reporting companies are required to submit updated BOI reports to FinCEN within 30 days of “any change with respect to who is a beneficial owner or information reported for any particular beneficial owner.”

With respect to the contents of the BOI report, FinCEN will require reporting companies to submit the following information about the reporting company itself:

  • The full legal name of the reporting company;
  • Any trade name or “doing business as” (DBA) name;
  • A current street address for the reporting companies “principal place of business” (if within the U.S.) or the primary location in the U.S. where the reporting company conducts its business;
  • The State or Tribal Jurisdiction where a domestic reporting company was formed or where a foreign reporting company first registered; and
  • An IRS taxpayer identification number (TIN) or, if no TIN has been issued, a tax identification number issued by a foreign jurisdiction.

Additionally, reporting companies are expected to report information relating to their beneficial owners. The rule defines “beneficial owner” to mean a person with at least 25 percent of the ownership interest of the reporting company, or a person who directly or indirectly exercises “substantial control” over the reporting company (such as senior officers, those with substantial influence over important decisions, and more). Reporting companies are required to submit the following information to FinCEN about their beneficial owners:

  • Full legal name;
  • Date of birth;
  • Address;
  • The unique identifying number from an unexpired passport or other government issued ID;
  • An image of the passport or government issued ID from which the identifying number was obtained.

The rule also provides instructions for how to calculate the ownership interest in more complex ownership situations.

Notably, the definition of “beneficial owner” is similar to the definition under current regulations – with one notable difference. Current regulations place a limit on how many beneficial owners can be included, such as limiting the number of “control” persons to just one individual. However, the new Final Rule does not limit the “control person” reporting to just one individual, which means reporting companies could be required to report on a number of senior officers or other individuals who satisfy the “control” prong of beneficial ownership.

The Other Two BOI Rules

But what about the other two rules that will be needed to implement the CTA?

According to Acting Director Das, FinCEN is currently working on a proposed rule for the “BOI access” rule (which will describe how credit unions can access information in FinCEN’s BOI database) and should issue it “in the near term.” As for the changes to the existing CDD rule, Acting Director Das stated recently that FinCEN plans to update those regulations by the deadline set in the CTA – no later than 1 year after the effective date of the BOI reporting rule (Jan. 2024). Thus, sometime before January 2025 credit unions can expect changes to the current beneficial ownership rules, such as removing the requirement that credit unions obtain BOI directly from members and instead requiring credit unions to obtain that information from FinCEN.

NAFCU will continue to monitor the implementation of the CTA and will update our members through future posts in the Compliance Blog.


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About the Author

Nick St. John, NCCO, NCBSO, Director of Regulatory Compliance, NAFCU

Nick St. John, Regulatory Compliance Counsel, NAFCUNick St. John, was named Director of Regulatory Compliance in August 2022. In this role, Nick helps credit unions with a variety of compliance issues.

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