Communication of Final Beneficiaries in the US. What is the Current Situation?

On December 8, 2021, FinCEN published the Beneficial Ownership Information Reporting Requirements document (to view the full text you can access the following link which establishes the regulations applicable to the requirement to inform the final beneficiaries by companies incorporated in the US or those that, being foreigners, carry out commercial activities in the US, and from which implemented Section 6403 to the CTA.

In this regard, a period of openness to the public was established so that they can make comments about how this new requirement should be treated. Said period of opening to the public ended on February 07 and for the moment no new communications have been issued that contemplate them.

Generalities

This drafting of rules established by FinCEN is the first of three, a second drafting of rules would be focused on the implementation of protocols for access and disclosure of the information provided regarding beneficial owners, while a third drafting of rules is intended to review existing customer due diligence requirements by financial institutions.

In summary, the important points defined by FinCEN through the elaborated rules are framed in describing who must present the information, what information must be provided and when the report must be presented.

Among the main tasks that this provision has, the following are mentioned:

  • Establish a clear federal standard for practices to follow when incorporating companies in the US;
  • Protect national security interests;
  • Protect interstate and foreign commerce;
  • Enable efforts to counter money laundering, terrorist financing, and other illicit activities; Y
  • Bring the US in line with international anti-money laundering standards.

The main obligations assigned to FinCEN by the CTA are the preparation and maintenance of a national registry of final beneficiaries and reporting companies, which is accessible (with protocols and limited access) to state, federal and international public agencies, not being available the information communicated there to the general public.

In this sense, it is important to highlight the privacy of the information provided to FinCEN, emphasizing that state or federal entities may access the information stored there as long as they are conducting an investigation, while a financial institution may do so as long as this conducting a due diligence process covered by the Bank Secrecy Act (BSA) or the USA Patriot Act. Lastly, in the case of international federal agencies making the request on behalf of a foreign government, said government must be covered by a mutual information exchange agreement upon request signed with the US;

What is the definition of final beneficiary for these purposes?

Natural person(s) who exercise control over the Companies or own a share in the capital of at least 25% in them.

Exceptions to which the communication of the aforementioned information does not apply:

  • In the case of minors, when the person supervising them has reported the information in some other way;
  • An individual acting as a fiduciary, intermediary, custodian, or agent on behalf of another;
  • An individual acting as an employee whose control derives solely from their employment status;
  • An individual whose sole interest in the entity is through a right of inheritance;
  • A creditor of the companies, unless said creditor meets the aforementioned beneficial owner requirements.

Regarding who exercises control, the regulation provides three specific indicators:

  1. Senior official of the reporting entity;
  2. The authority that has the power to remove or appoint a senior official or majority in the board of directors of the entity;
  3. Whoever maintains the direction, determines or decides or substantially influences the substantial decisions of the entity.

On the other hand, the regulation also provides a general category understanding that a person who exercises control over an entity may be one who exercises any other form of substantial control over the reporting company.

What are reportable entities?

The regulation establishes two different types of entities that must report:

  • Domestic, any entity that is created by a secretary of state or similar office in a jurisdiction within the United States; Y,
  • Foreign, any entity formed under the law of a foreign jurisdiction that is registered to do business within the United States.

In this regard, 23 exceptions are described for which the report of final beneficiaries should not be made, within these are included:

  • Companies listed on the stock exchange;
  • Churches, charities and other non-profit entities;
  • Other entities that are already subject to the obligation to report to government entities (insurance companies, banks, investment companies, registered accounting firms, etc.);
  • Companies that employ more than 20 people, report profits greater than $5 million for tax purposes, and have a physical presence in the US.

Who should report the information?

For a domestic entity, any natural person who has presented the documentation for the creation of the company, in the case of foreign entities any natural person who has presented the document that registers the foreign entity for the first time to do business in the USA. These definitions also include any person who directs or controls the filing of corporate documents with government entities.

What information must be reported on the final beneficiaries?

Name, date of birth, address, where you have tax residence and identification number (for example, passport or identity document)

Deadlines to make the report

  1. New companies must report the information at the time of formation or registration, obviously applicable after the last regulation regarding the report of final beneficiaries is approved;
  2. Existing Companies are expected to provide the information no later than one year after the regulation becomes effective;
  3. Companies must update the information to FINCEN whenever there are changes in their final beneficiaries within 30 calendar days after said change is made effective.

Penalties for non-compliance

Non-compliance with the communication of final beneficiaries will entail civil penalties that will amount from USD 500 for each day that the obligation to inform is not complied with, up to penalties of USD 10,000 or imprisonment for up to 2 years.

There is a “Safe Harbor” for those who have acted in good faith that allows them to correct the information provided erroneously for 90 days after having communicated said information incorrectly.

Likewise, and this is where the importance of maintaining the privacy of the information provided can be observed, they are stipulated for those who disclose information provided under the CTA without authorization (both for employees of government entities, and for third parties that may receive this information), civil fines ranging from USD 500 per day to penalties that include payment of USD 250,000 or prison terms of up to 5 years.

When can we expect the obligation to report the final beneficiaries of the entities to become effective?

This is not expected to happen in the near term, considering that FinCEN must first review the comments made to this regulation, approve the two pending procedures, enact the final rules and create the software that allows the information to be stored securely.

Conclusions

Although there is still a long way to go before the communication of final beneficiaries of entities incorporated in the US or those foreign entities that carry out commercial activity in the US becomes effective, in terms of regulations that have not been approved, the implementation of the appropriate software to store and communicate the information, and the way in which this information will be kept as confidential as possible, we can affirm that this is not due to fiscal matters or perhaps they are not the main reason for the approval of the norm, but rather that it has a preventive nature in relation to money laundering, coming from crimes such as drug or arms trafficking, among others, protection of national security and compliance with international standards.

Therefore, it is possible to affirm that the US still, and despite this rule, continues to be one of the jurisdictions that offers the greatest confidentiality and privacy in terms of the information of natural persons.

It is also necessary to clarify that the CTA does not include the communication of bank accounts in Financial Institutions located in the US and that said country has already approved regulations related to transparency and exchange of information with very little impact on the effective implementation of the exchange between countries.

We will closely monitor this regulation to inform you of the developments in a timely manner.

Insight Trust has a team trained in matters related to the formation of Companies in the US and the regulations applicable to them, to request more information, a more personalized recommendation, a meeting with one of our advisors or a budget contact to info@insight-trust.com

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