Cracking Down on Foreign Bank Secrecy While Becoming a Tax Haven: The Irony of U.S. Tax Policy

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Overview

The Foreign Account Tax Compliance Act (FATCA) has been a cornerstone of the U.S. government’s efforts to combat tax evasion involving foreign financial accounts. By imposing obligations on Foreign Financial Institutions (FFIs) to report information about financial accounts held by U.S. taxpayers, FATCA has largely eliminated overseas tax havens.

However, the reciprocal exchange of information is not as robust in the opposite direction. While the U.S. has entered into a number of Intergovernmental Agreements with other jurisdictions to facilitate the exchange of information under FATCA, the level of information the U.S. provides to other countries about their citizens’ financial accounts in the U.S. is not always equivalent. The U.S. has not committed to adopting the Common Reporting Standard, which is the global standard for the automatic exchange of financial account information, developed by the Organization for Economic Cooperation and Development.

This asymmetry in information exchange has raised concerns that the U.S. could be seen as a tax haven for non-U.S. persons. For instance, certain trusts, limited liability companies, and other investment vehicles in the U.S. can offer non-U.S. persons a degree of confidentiality about their ownership interests and assets. This is particularly true in states with favorable trust and corporate laws that do not require the disclosure of beneficial ownership information.

It is important to note that the U.S. has taken steps to address some of these concerns. The Corporate Transparency Act requires U.S. and foreign persons to report their beneficial ownership information of certain U.S. entities to the Financial Crimes Enforcement Network. This legislation is aimed at preventing and combating the misuse of legal entities for purposes of money laundering, tax evasion, and other illicit activities.

But the Corporate Transparency Act has significant limitations. It only applies to entities that are formed or registered by the filing of a document with a secretary of state or similar office. This means that certain entities, such as trusts that are not registered with a secretary of state or similar office, are still not required to disclose beneficial ownership information. This continuing lack of transparency, combined with the potentially favorable tax treatment of foreign persons, means that the U.S. has emerged as a major international tax haven.

FATCA: Legislation Passed by the U.S. in 2010 to Combat Offshore Tax Evasion by U.S. Taxpayers

  • Requires foreign financial institutions (FFIs) like banks and investment companies to report information about financial accounts held by U.S. taxpayers to the IRS.
  • Includes requirements for US taxpayers to report foreign assets and offshore accounts.
  • Imposes a 30% withholding tax on certain payments from U.S. sources made to FFIs that do not comply with FATCA reporting requirements.

U.S. Implementation of FATCA

  • The U.S. has signed intergovernmental agreements (IGAs) with many countries to facilitate implementation of FATCA and information sharing.
  • Partner countries entering into IGAs agree to share that information with the IRS.
  • These IGAs require the partner countries to share information with the IRS, but help to protect the financial institutions of partner countries from FATCA penalties.
  • More than 100 countries have entered into IGAs with the U.S., requiring FATCA compliance.
  • This effectively breaks secrecy laws in tax havens and forces disclosure of information about accounts held by US taxpayers
  • FATCA has resulted in the disclosure of billions in previously unreported offshore assets and income, helping the IRS crack down on offshore tax evasion

The U.S. Also Used Its Criminal Laws to Target Institutions in Foreign Tax Havens

The enforcement of FATCA went hand-in-hand with the U.S. government’s broader efforts to pursue tax compliance and combat offshore tax evasion. The aggressive enforcement actions that began around 2009, prior to FATCA’s enactment, were a clear signal of the government’s intent to crack down on noncompliance with tax obligations related to foreign accounts.

The Department of Justice, in collaboration with the IRS, targeted FFIs that they believed were complicit in helping U.S. taxpayers hide assets and income offshore. High-profile cases against Swiss banks, in particular, led to numerous deferred prosecution agreements and non-prosecution agreements. Under these agreements, FFIs were required to admit to wrongdoing, pay fines, and provide detailed information about U.S. customers who had held undisclosed accounts. These enforcement actions resulted in billions of dollars in fines and the disclosure of thousands of account holders to the IRS.

Following these disclosures, the IRS pursued U.S. taxpayers who had not reported their foreign accounts and income. The IRS offered several Offshore Voluntary Disclosure Programs and the Streamlined Filing Compliance Procedures as a way for U.S. taxpayers to come into compliance voluntarily. Taxpayers who did not take advantage of these programs and were subsequently identified faced significant penalties and potential criminal prosecution.

The International Community Seeks to Implement Financial Account Information Sharing

The larger international community has sought to implement FATCA’s information-sharing provisions on a broader scale. The Common Reporting Standard (CRS) is a global standard for the automatic exchange of financial account information between tax authorities. It was developed by the Organization for Economic Cooperation and Development (OECD) in 2014 and has been adopted by over 100 countries and jurisdictions.

  • CRS requires financial institutions like banks, brokers, and funds in participating countries to identify foreign account holders and report information on their accounts to their domestic tax authority. This includes account balances, interest/dividend payments, sale proceeds from financial assets, and other income.
  • The domestic tax authority then automatically exchanges that information with the tax authorities in the account holder’s country of tax residence. This enables tax authorities to verify if their tax residents have properly reported their offshore financial accounts and income.
  • Reciprocal exchange is a key component of CRS. If country A exchanges information about country B’s tax residents, then country B will also provide the same information about country A’s tax residents.
  • Over 100 countries and jurisdictions participate in CRS information exchange, including major economies like the UK, Germany, France, China, India, and Japan.
  • The U.S. does not participate in CRS.

The U.S. Has Not Joined CRS Due to Opposition from Congress and the Financial Industry:

  • The U.S. already unilaterally receives financial account information from other countries through FATCA. CRS is therefore seen as providing little benefit for the U.S.
  • There are concerns about the costs to U.S. financial institutions of implementing CRS due diligence and reporting systems.
  • Powerful voices in Congress oppose adopting legislation that facilitates information sharing with foreign governments to assist their tax enforcement.
  • In summary, CRS is a widely adopted global standard for reciprocal exchange of financial account information between tax authorities, but the U.S. is a notable non-participant due to political and industry opposition.

The U.S.’s Emergence as a Tax Haven

The OECD defines a tax haven as a jurisdiction that (1) has no obligation to exchange information, (2) lacks transparency, (3) does not require a local presence, and (4) has zero or nominal tax rates. For non-U.S. persons, the U.S. meets these four requirements.

  • The U.S. does not provide meaningful reciprocal reporting of financial accounts to other countries.
    • The U.S. has not adopted CRS or implement fully reciprocal information exchange under FATCA.
  • S. entities still can lack transparency.
    • The U.S. has taken significant steps to increase transparency of entity ownership. Prior to this year, there was no U.S. requirement to identify the beneficial owners of U.S. entities. But the Corporate Transparency Act (CTA), effective in 2024, now requires the disclosure of the beneficial owners of certain U.S. entities.
    • But the CTA only applies to entities that are formed or registered through a filing with a secretary of state or similar office. This means that certain types of legal entities, including many trusts, are not subject to the beneficial ownership reporting requirements of the CTA. The U.S. Treasury Department has been tasked with developing regulations to implement the CTA, which may in the future seek to expand its application to trusts and other entities. It is also possible that future legislation or regulatory action could expand the reporting requirements to include additional types of legal arrangements, including trusts.
    • But, at this time, there is still the potential for foreigners to shield their ownership of entities and assets in the U.S.
  • Foreigners do not need a U.S. presence to hold U.S. financial assets, entities, or trusts.
  • Foreigners can generally pay little or no U.S. tax when they invest in U.S. assets.
    • Generally, foreign taxpayers are subject to U.S. tax on (1) fixed, determinable, annual or period (known as FDAP) income and (2) income from a U.S. trade or business.
    • Foreign taxpayers generally pay no tax when selling U.S. assets other than real estate.

The Sunset of International Tax Havens

The enactment of the CTA signals a commitment by the U.S. to enhance financial transparency and combat the misuse of entities for illicit purposes, including tax evasion. The CTA, along with the aggressive enforcement of its tax laws as seen in the past decade, suggests that the U.S. is taking steps to shed any perception of being a tax haven.

As the U.S. aligns with global trends towards financial transparency, it is possible that the characteristics which have made the U.S. attractive for foreign persons seeking confidentiality may change. The playbook used by the U.S. to dismantle secrecy in offshore jurisdictions—compelling information sharing and enforcing domestic laws—could be adopted by other nations looking to protect their tax bases. This international effort is further supported by initiatives like the OECD’s CRS and the automatic exchange of information agreements.

For advisors and financial institutions in the U.S. that assist foreign persons, it is crucial to operate within the bounds of both U.S. law and international legal frameworks. The Department of Justice has the authority to prosecute U.S. persons for crimes such as aiding and abetting tax evasion, even if the tax evasion occurs under another nation’s laws. Additionally, engaging in activities that facilitate the evasion of another country’s taxes can expose U.S. persons to legal action by that foreign jurisdiction. As the Department of Justice pursued the Swiss, foreign nations can pursue U.S. institutions and persons.

Conclusion

At Kim & Rosado, our partners’ background as tax attorneys with the Department of Treasury provides us with unique insights into the government’s enforcement strategies. We understand the serious nature of these matters and the importance of proactive compliance. We offer our clients expert guidance on navigating the complex web of U.S. tax laws, including the intricacies of reporting foreign financial assets and income. Our goal is to ensure that our clients are not only compliant but also protected from the severe consequences that can arise from noncompliance.

For individuals and institutions that may already be facing scrutiny or enforcement actions, we leverage our extensive experience to advocate on their behalf, seeking resolutions that minimize exposure and penalties. Our direct partner involvement means that clients benefit from the highest level of expertise and representation in these serious and high-stakes matters.

By the Numbers: The Corporate Transparency Act and the Probable Impact to IRS Global High Wealth Taxpayer Audits Beginning in 2024

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Back in 2009, the IRS formed the Global High Wealth (GHW) unit focusing on taxpayers who had elevated income and a complexity in their financials that warranted a “holistic approach.” From 2009 through 2022, our seasoned partner Tony Kim served as one of five IRS attorneys working to support this new unit. He found that understanding how a web of partnerships, domestic and foreign trusts, offshore accounts and corporations linked to reveal a GHW taxpayer’s true taxable income was no easy task. But, the IRS first had to find these dots to connect them.

The IRS’s Data Book shows that the agency struggled with GHW audits. IRS Data Book Table 17. As of fiscal year 2010, 13,322 tax returns were filed by taxpayers who had total positive income of $10,000,000 or more – that’s the range to fall within this GHW population. IRM 4.52.1.2. From that number, 21.5% of the returns were audited with an average recommended adjustment of $610,397. Fast forward to fiscal year 2019, where the number of GHW tax returns filed grew to 24,457, resulting in just 10.2% audit coverage with an average recommended adjustment of $49,805. If the GHW division was a stock, we’d probably sell and take a loss. Before we do, let’s look under the hood for a moment.

In building a GHW case, the IRS prepares a review a “yK-1 analysis” for each taxpayer to gain an overview of the taxpayer enterprise that includes the taxpayer’s Form 1040 and all related entities. From this interactive link analysis of the GHW taxpayer and all of their web of entities, the IRS could then review the entire enterprise and consider how to build the case. IRM 4.52.1.1.5(1); IRM 4.52.1.3. The trouble with building this yK-1 analysis is that the IRS needs information on a GHW taxpayer’s web of entities. And, a GHW taxpayer’s ownership information in various entities is elusive.

The GHW unit’s audit results may increase dramatically in the coming years due to the recently enacted Corporate Transparency Act (CTA). Congress added the CTA section, 31 U.S.C. § 5336, to the Bank Secrecy Act to address the broader objectives of beneficial ownership transparency. The CTA requires certain types of domestic and foreign entities, called “reporting companies,” to submit specified beneficial ownership information (BOI) reports to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, that is charged with safeguarding the U.S. financial system from money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence. All of the information that connects GHW taxpayers to their holdings so critical to a yK-1 analysis will soon become available to the IRS beginning in 2024 when taxpayers are required to file BOI reports with FinCEN. The CTA provides, “[b]eneficial ownership information shall be accessible for inspection or disclosure to officers and employees of the Department of the Treasury . . . .” Couple the CTA with the additional funding provided by Congress in the Inflation Reduction Act that will lead to the hiring of more revenue agents and you have the stage set for quite a dramatic change to the landscape of GHW taxpayer audits beginning in 2024.

Conclusion

The IRS is becoming a data-centric organization. By mining ever greater sources of data, the IRS can more effectively select taxpayers for audit. And the adjustments resulting from those audits will be larger. The new beneficial ownership information reports are a source of valuable information for the IRS. The IRS is likely to use information gleaned from beneficial ownership information reports to select and prosecute audits. Experienced counsel can help you navigate both IRS audits and the new beneficial ownership information reporting requirements.

The High Stakes Of Transparency: Navigating Beneficial Ownership Information Reporting Penalties

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Understanding Beneficial Ownership Information Reports

  1. Overview of the Corporate Transparency Act
  2. The Importance of Beneficial Ownership Information Reporting for Businesses
  3. What Entities Must File Beneficial Ownership Information Reports?
  4. Exemptions to the Beneficial Ownership Information Reporting Requirements
  5. What to Do If You Have to File a Beneficial Ownership Information Report
  6. Who is a Beneficial Owner Under the Corporate Transparency Act?
  7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
  8. Who is a Company Applicant Under the Corporate Transparency Act?
  9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
  10. FinCEN Identifier: A Simplified Compliance Tool
  11. Beneficial Ownership Information Reporting: Updates and Corrections

The High Stakes Of Transparency: Navigating Beneficial Ownership Information Reporting Penalties

In the pursuit of greater entity ownership transparency, the federal government has implemented stringent new reporting requirements. The Corporate Transparency Act requires most entities in the United States to file beneficial ownership information reports with the Financial Crimes Enforcement Network (FinCEN). These new filing requirements aim to peel back the layers of anonymity that can shield illegal activities, such as tax evasion, within business entities. Beneficial ownership information reports, as the name implies, require the disclosure of all beneficial owners of an entity.

The Corporate Transparency Act relies on entities themselves to self-report – entities must file beneficial ownership information reports voluntarily. To compel entities to comply with beneficial ownership information reporting, the Corporate Transparency Act penalizes noncompliance. The penalties for noncompliance can be severe. Companies navigating this new regulatory environment must understand the potential penalties for failing to file or failing to file correct beneficial ownership information reports.

Why Penalties Are Imposed

FinCEN would be unable to collect beneficial ownership information itself. The identities of beneficial owners are not currently maintained by most, if any, states that license entities. Instead, FinCEN must rely on U.S. entities themselves to voluntarily provide beneficial ownership information. The Corporate Transparency Act therefore requires entities to self-report their beneficial owners. As with the U.S. tax-reporting system, while voluntary, the beneficial ownership information reporting system is backed up by stiff penalties. Penalties for failing to comply with beneficial ownership information reporting are designed to ensure that entities are transparent about their beneficial owners. The imposition of penalties seeks to deter noncompliance with the beneficial ownership information reporting requirements.

Quantifying Non-Compliance Risks

The Corporate Transparency Act penalizes willful noncompliance. Willfully providing, or attempting to provide, false beneficial ownership information to FinCEN is subject to severe penalties. Similarly, willfully failing to file complete or updated beneficial ownership information can subject you and your entity to penalties. The potential penalties include:

  • Civil Penalties: Noncompliance can result in civil monetary penalties up to $500 for each day the violation continues or has not been remedied, reflecting the ongoing nature of beneficial ownership information reporting.
  • Criminal Penalties: Individuals who intentionally disregard or falsify beneficial ownership information reports may face fines of up to $10,000 and/or imprisonment for up to two years.
  • Reputational Damage: The intangible yet very real consequences of reputational damage can have long-lasting effects on your business.

Proactive Measures to Safeguard Your Business

To mitigate these risks, entities must take a proactive stance, which includes staying informed of regulatory updates, implementing robust procedures for accurate reporting, and seeking expert guidance to navigate the complexities of compliance.

Conclusion

At Kim & Rosado LLP, we specialize in steering our clients clear of the pitfalls of noncompliance. Our former advisory roles within the Department of Treasury equip us to provide you with the guidance necessary to navigate these regulations and implement effective compliance strategies. We are dedicated to working directly with you, ensuring that your business not only meets its legal obligations but also upholds the highest standards of corporate responsibility and ethics.

If you have concerns about your compliance status, we encourage you to contact us. Let our expertise guide you through the intricacies of beneficial ownership information reporting and beyond.

Who Is A Company Applicant Under The Corporate Transparency Act?

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Understanding Beneficial Ownership Information Reports

  1. Overview of the Corporate Transparency Act
  2. The Importance of Beneficial Ownership Information Reporting for Businesses
  3. What Entities Must File Beneficial Ownership Information Reports?
  4. Exemptions to the Beneficial Ownership Information Reporting Requirements
  5. What to Do If You Have to File a Beneficial Ownership Information Report
  6. Who is a Beneficial Owner Under the Corporate Transparency Act?
  7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
  8. Who is a Company Applicant Under the Corporate Transparency Act?
  9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
  10. FinCEN Identifier: A Simplified Compliance Tool
  11. Beneficial Ownership Information Reporting: Updates and Corrections

Who Is A Company Applicant Under The Corporate Transparency Act?

The Corporate Transparency Act requires most entities to file beneficial ownership information reports with the Financial Crimes Enforcement Network (FinCEN). On that report, entities must disclose their beneficial owners. In addition, entities formed on or after January 1, 2024 must also disclose their “company applicant(s).”

A company applicant is the individual or individuals responsible for filing the foundational documents that breathe life into a legal entity. Whether it’s a corporation, a limited liability company, or a similar entity, the company applicant is the person responsible for the actual registration of the company with the appropriate state authority.

A company applicant might be an attorney, an accountant, or a designated agent specializing in company formation services. It’s also possible for one of the future officers or directors of the company to act in this capacity.

The Company Applicant’s Responsibilities

The responsibilities of a company applicant extend beyond mere paperwork. They are tasked with providing accurate information that will form the backbone of the company’s legal existence. This may include, depending on your state:

  • The name of the company
  • Its principal place of business
  • The names of the initial directors or managers
  • The registered agent for service of process
  • Any required information about the company’s purpose and operations

Under the Corporate Transparency Act, the company applicant is also a subject of reporting. Their details must be disclosed as part of the beneficial ownership information report to FinCEN. This measure aims to peel back the layers of anonymity that have historically cloaked the origins of legal entities, making it harder for illicit activities to hide behind corporate structures. It is imperative to understand who is a company applicant under the Corporate Transparency Act.

The Corporate Transparency Act’s Definition of Company Applicant

The Company Applicant is defined as:

  • Direct Filer: This is the individual who directly files the document that creates a domestic reporting company or the individual who directly files the document that first registers a foreign reporting company. This individual would have actually physically or electronically filed the document with the secretary of state or similar office.
  • Individual Who Directs or Controls the Filing Action: This is the individual who was primarily responsible for directing or controlling the filing of the creation or first registration document. This individual is considered a company applicant even if they did not actually file the document with the secretary of state or similar office.

It’s important to note that no reporting company will have more than two company applicants. Additionally, only certain reporting companies must include information about their company applicants in their beneficial ownership information reports—specifically reporting companies created or first registered on or after January 1, 2024.

Reporting companies must disclose the following information on their beneficial ownership information reports about their company applicants:

  • Full legal name
  • Date of birth
  • Complete current residential or business street address
  • A unique identifying number from an acceptable identification document (such as a passport or driver’s license)
  • An image of the identification document from which the unique identifying number was obtained

The Implications for Your Business

Whether you’re forming a new entity or seeking to comply with the Corporate Transparency Act, our team at Kim & Rosado LLP is here to provide the expert guidance and meticulous attention to detail that your business deserves. We invite you to connect with us, explore our extensive experience, and partner with us in navigating the complexities of business formation and compliance.

The Beneficial Owner Exceptions Under The Corporate Transparency Act

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Understanding Beneficial Ownership Information Reports

  1. Overview of the Corporate Transparency Act
  2. The Importance of Beneficial Ownership Information Reporting for Businesses
  3. What Entities Must File Beneficial Ownership Information Reports?
  4. Exemptions to the Beneficial Ownership Information Reporting Requirements
  5. What to Do If You Have to File a Beneficial Ownership Information Report
  6. Who is a Beneficial Owner Under the Corporate Transparency Act?
  7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
  8. Who is a Company Applicant Under the Corporate Transparency Act?
  9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
  10. FinCEN Identifier: A Simplified Compliance Tool
  11. Beneficial Ownership Information Reporting: Updates and Corrections

The Beneficial Owner Exceptions Under The Corporate Transparency Act

The Corporate Transparency Act is designed to reveal the beneficial owners of entities. To accomplish this, the Corporate Transparency Act requires most entities to file beneficial ownership information reports. While other information is required to be disclosed, the beneficial ownership information report’s focus is on identifying beneficial owners.

The concept of a “beneficial owner” is a cornerstone of the Corporate Transparency Act. But certain categories of individuals are excluded from the definition of a beneficial owner. These exclusions help to limit an entity’s reporting obligations.

Key Exceptions to Note

The following are exceptions to the beneficial owner definition that may impact your company’s reporting obligations:

  • Minor Children: Ownership interests held by minors through a parent or guardian do not make them beneficial owners. This exception requires that the reporting company instead identify the minor child’s parent or guardian.
  • Nominees and Agents: Individuals acting as nominees or agents for another person are not considered beneficial owners; rather, it is the person on whose behalf they act that must be identified.
  • Employees: Employees who exercise substantial control over a company solely by virtue of their employment status may be excluded. But this rule does not generally exclude senior officers of a company.
  • Inheritance: Those who may come into ownership through inheritance are generally excepted from the definition of beneficial owner. But once a beneficial ownership interest is inherited, the inheritor can be considered a beneficial owner.
  • Creditors: A creditor, despite potential influence over a company, may not be deemed a beneficial owner. This exception is limited – creditors may still qualify as beneficial owners in certain circumstances.

Understanding who may or may not be a beneficial owner is not just a matter of regulatory compliance; it is also a strategic business consideration. Missteps in this area could lead to compliance failures and unnecessary administrative burdens.

Conclusion

Navigating the maze of beneficial ownership exceptions requires a seasoned guide. We invite you to engage with our team, review our credentials, and let our commitment to excellence in action earn your trust. For more detailed information on beneficial ownership exceptions and how they may pertain to your business, please reach out to us.

Who Is A Beneficial Owner Under The Corporate Transparency Act?

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Understanding Beneficial Ownership Information Reports

  1. Overview of the Corporate Transparency Act
  2. The Importance of Beneficial Ownership Information Reporting for Businesses
  3. What Entities Must File Beneficial Ownership Information Reports?
  4. Exemptions to the Beneficial Ownership Information Reporting Requirements
  5. What to Do If You Have to File a Beneficial Ownership Information Report
  6. Who is a Beneficial Owner Under the Corporate Transparency Act?
  7. The Beneficial Owner Exceptions Under the Corporate Transparency Act
  8. Who is a Company Applicant Under the Corporate Transparency Act?
  9. The High Stakes of Transparency: Navigating Beneficial Ownership Information Reporting Penalties
  10. FinCEN Identifier: A Simplified Compliance Tool
  11. Beneficial Ownership Information Reporting: Updates and Corrections

Who Is A Beneficial Owner Under The Corporate Transparency Act?

Under the Corporate Transparency Act, a “beneficial owner” is defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25 percent of the ownership interests of a reporting company. An individual can be a beneficial owner through substantial control, ownership interests, or both. A reporting company is required to (1) identify all of its beneficial owners and (2) report information related to each beneficial owner on a beneficial ownership information report, unless the individual is subject to an exclusion from the definition of beneficial owner. In this article, we will describe how a reporting company can identify its beneficial owners.

To determine who the beneficial owners of a reporting company are, you should follow these steps:

Identify Individuals Exercising Substantial Control: Determine if any individuals exercise substantial control over the reporting company. This could include senior officers or others who have significant influence over important decisions within the company.

To identify if an individual exercises substantial control over a reporting company, consider the following criteria:

  1. Senior Officer: Determine if the individual holds a position or exercises the authority of a senior officer within the reporting company. Examples of senior officers include a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer who performs a similar function. An individual’s title does not determine if he or she is a senior officer. Instead, the individual’s role within the reporting company must be analyzed to determine if he or she exercises the authority of a senior officer. Senior officers exercise substantial control. Such individuals are therefore beneficial owners.
  2. Authority to Appoint or Remove: Check if the individual has the authority to appoint or remove senior officers or a majority of the board of directors (or similar governing body) of the reporting company. Such powers are exercised by individuals with substantial control of a reporting company. Accordingly, anyone with such appointment or removal powers will be a beneficial owner of the reporting company.
  3. Important Decision-Maker: Assess whether the individual directs, determines, or has substantial influence over important decisions made by the reporting company. The first consideration is whether someone exercises sufficient control over important internal reporting company decisions. Merely having substantial influence over such decisions is sufficient. The second consideration is identifying important decisions. The Financial Crimes Enforcement Network (FinCEN) has provided some examples of important decisions, which can help to narrow the scope of this otherwise broad definition:
    1. The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company,
    2. The reorganization, dissolution, or merger of the reporting company,
    3. Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company,
    4. The selection or termination of business lines or ventures, or geographic focus, of the reporting company,
    5. Compensation schemes and incentive programs for senior officers,
    6. The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts, and
    7. Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.
    8. This list includes examples of what FinCEN has determined to be important decisions. But the list is not exhaustive. Anyone with the ability to direct, determine, or even with substantial influence over these or any similar reporting company decisions will be deemed to exercise substantial control. All such individuals will be beneficial owners.
  1. Other Forms of Control: This is a catch-all provision, and is drafted broadly. Consider if the individual has any other form of substantial control over the reporting company. This rule is meant to prevent evasion of beneficial ownership information reporting through structuring. If your reporting company has a novel or flexible corporate structure, or if there are multiple levels of control, pay close attention to this rule.
  2. Indirect Control: Evaluate if the individual exercises control through intermediary entities or through arrangements, relationships, or other means that allow them to exercise substantial control over the reporting company. Again, this provision is drafted broadly. Indirect control can include control of a reporting company exercised by trustees of a trust, other entities, or any other arrangement. Indirect control can be exercised through:
    1. Board representation,
    2. Ownership or control of a majority of voting power or voting rights,
    3. Rights associated with financing arrangements or interests in the company,
    4. Control over one or more other entities that separately or collectively exercise substantial control over a reporting company,
    5. Any arrangements or relationships with the reporting company through nominees,
    6. Any other contracts, arrangements, or even an understanding or relationship.

These criteria can help you determine who exercises substantial control over the reporting company. All such individuals should be reported as beneficial owners on the company’s beneficial ownership information report, unless they qualify for an exception

Assess Ownership Interests: Identify any individuals who directly or indirectly own or control at least 25 percent of the ownership interests of the reporting company. Commonly, ownership interests can be through shares of stock or membership interests in an LLC. But the Corporate Transparency Act includes many other incidences of ownership in its definition of “ownership interests.” Again, this is meant to prevent avoidance of beneficial ownership information reporting through structuring.

To determine if an individual has an ownership interest in a reporting company, you can follow these steps:

  1. Identify Types of Ownership Interests: Review the types of ownership interests that may exist within the reporting company, such as equity, stock, voting power or rights, capital or profit interests, convertible instruments, options, or other privileges to buy or sell any of these interests. Also look to any other instruments, contracts, arrangements, understandings, relationships, or mechanisms that the reporting company uses, which may establish ownership.
  2. Consider Direct and Indirect Ownership: Determine if the individual directly or indirectly owns or controls types of ownership interests. Direct ownership could be through joint ownership with others, while indirect ownership might involve intermediary entities or through another individual acting as a nominee, intermediary, custodian, or agent. If a trust holds any ownership interests, indirect ownership may be imputed to trustees, beneficiaries, and the grantor or settlor.
  3. Calculate Ownership Percentage: Calculate the percentage of ownership interests held directly or indirectly by each individual.
    1. For corporations, this could involve calculating the greater of (1) the total combined voting power of all of an individual’s ownership interests as a percentage of the total outstanding voting power of all classes of ownership interests entitled to vote or (2) the individual’s total value of the ownership interests as a percentage of the total outstanding shares.
    2. For entities treated as partnerships for federal income tax purposes, this could involve calculating the individual’s capital and profit interests as a percentage of the total outstanding capital and profit interests.
    3. Otherwise, calculate the percentages that all individuals own of all types of ownership interests of the reporting company.
    4. Keep in mind that ownership interests are calculated at the present time: any options or similar interests are to be treated as if they were exercised.
  4. Apply the 25 Percent Threshold: After identifying the types of ownership interests and who owns or controls them, determine who owns or controls 25 percent or more of those ownership interests. Individuals who own or control 25 percent or more of the ownership interests in the company will be reported as beneficial owners on the reporting company’s beneficial ownership information report unless they qualify for an exception.

By following these steps, you can identify individuals who have an ownership interest in the reporting company and determine if they meet the threshold to be reported as beneficial owners. There are legal or factual issues that may complicate the beneficial ownership analysis. Hiring experienced counsel to help you navigate your beneficial ownership information reporting requirements can help you avoid costly mistakes.

Conclusion

Determining beneficial ownership can be complex, especially when ownership structures involve multiple layers or when control is not straightforward. We invite you to leverage our knowledge and experience to navigate the intricacies of beneficial ownership. Contact us to ensure your entity meets its obligations and to gain peace of mind in your compliance efforts.