THE NEW UBO RULE: BEWARE THE CONFLICT WITH CURRENT CDD REQUIREMENTS

In late September, FinCEN issued a final rule implementing the Corporate Transparency Act’s beneficial ownership information (BOI) reporting provisions. The Rule describes who must file a BOI report, what information must be reported, and when a report is due. 

The Rule’s requirements apply to domestic and foreign “reporting companies,” which include most legal entities with exceptions such as trusts and partnerships that don’t require state filings and entities specifically exempted such as public companies. FinCEN introduced a new concept -- requiring reporting companies to file reports with FinCEN that identify not only the beneficial owners of the entity but, also, the “company applicants” of the entity – with a “company applicant” being either the individual who files the document that creates or registers the entity to do business in the U.S., or the individual primarily responsible for directing or controlling the filing of the document. When filing BOI reports with FinCEN, a reporting company must identify itself and report four pieces of information about each of its beneficial owners and company applicants: name, birthdate, address, and a unique identifying number and issuing jurisdiction. 

Of significance to financial institutions is that the new Rule diverges from the existing CDD Rule in important ways. Notably, the definition of “beneficial owner” is broader than the definition under the CDD Rule in that it requires the identification of all individuals that control a company rather than a single individual. FinCEN also expanded the definition of “beneficial ownership” to include any individual who exercises “substantial control” over the reporting company, in an attempt to capture anyone making important decisions on behalf of a company. Under the new Rule, an individual may exercise substantial control of a company if the individual, for example, serves as a senior officer or on the Board; has ownership or control of a majority of the voting power; has authority over the appointment or removal of any senior officer or a majority of the Board; directs, determines, or has substantial influence over important decisions; or has any other form of substantial control over the reporting company. An individual can be considered to exercise substantial control of a company either directly or indirectly; for example, substantial control can be exercised as a trustee of a trust or similar arrangement. Some of these factors – and in particular the final catch-all provision – are broad and may be highly subjective.

Also, the underlying definition of “ownership interest” under the new Rule is broader than the ownership prong of the CDD Rule. An ownership interest of a reporting company can be held indirectly through “any contract, arrangement, understanding, relationship, or otherwise.” The new Rule also elaborates on how total ownership interest is calculated, setting out separate standards with respect to individuals, companies that issue capital or profit interest, and corporations that issue shares of stock. 

The effective date for the rule is January 1, 2024. Reporting companies created or registered before then will have until January 1, 2025 to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.

The new Rule is the first of three rules that FinCEN plans to issue to implement the CTA. The second will govern access to the UBO Registry. The third will conform the beneficial ownership requirements of the CDD Rule to the new UBO Rule. For financial institutions, this will be the most important of the three rules, since it will address the information that they’re required to obtain from their legal entity customers and the methods of verifying the identities of those customers’ beneficial owners. Until the revised CDD Rule is issued and has become effective, covered financial institutions are required to continue to comply with the existing CDD Rule.