How Will the US Corporate Transparency Act Impact Sovereign Wealth Funds and Other Non-US Government Institutions?

The final rule of the Financial Crimes Enforcement Network implementing the Corporate Transparency Act’s beneficial ownership requirements will become effective on January 1, 2024. Absent further guidance, sovereign wealth funds and similar non-US governmental institutions need to evaluate whether and to what extent the rule will apply to them, whether any exemptions are available, and whether operations can be restructured in order to take advantage of an available exemption.

On January 21, 2021, the Corporate Transparency Act (CTA) was enacted into federal law in the United States. The CTA establishes uniform beneficial ownership information (BOI) reporting requirements for certain business entities created or registered to do business in the US (Reporting Companies).

On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury and the US financial intelligence unit, published a final rule that implements the CTA’s BOI reporting requirements (Final Rule).

The CTA and the Final Rule may significantly increase the BOI disclosure requirements of any sovereign wealth fund or similar non-US governmental institution that invests and/or conducts other business in the United States through an affiliated entity that is created or registered to do business in the United States.

We have previously prepared a comprehensive overview of the CTA’s implementing regulations. Below are key takeaways of the CTA and the Final Rule.

KEY DATES

• Existing Companies: Reporting Companies created on or registered before January 1, 2024, must file their initial BOI reports by January 1, 2025.
• New Companies: Reporting Companies created on or after January 1, 2024, must file their initial reports within 30 calendar days of the earlier of the date on which it receives actual notice that its creation has become effective (in the case of domestic reporting companies) or it has been registered to do business (in the case of a foreign reporting company), or the date on which a secretary of state or similar office first provides public notice.

WHAT IS A REPORTING COMPANY?

Reporting Companies are bifurcated between domestic Reporting Companies and foreign Reporting Companies.

• A domestic Reporting Company is any entity that is (1) a corporation, (2) a limited liability company (LLC), or (3) created by the filing of a document with a secretary of state of any similar office under the law of a state or American Indian tribe.
• A foreign Reporting Company is any entity that is (1) a corporation, LLC, or other entity, (2) formed under the law of a foreign country, and (3) registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state of any similar office under the law of a state or American Indian tribe.

WHOSE INFORMATION MUST BE REPORTED?

• Reporting Companies must disclose certain personal information of each “beneficial owner” and “company applicant” to FinCEN.
• A “beneficial owner” is any individual who exercises “substantial control” over the Reporting Company or who owns or controls a 25% “ownership interest” in the Reporting Company. Both terms are further defined in the Final Rule.
• A “company applicant” is any individual who directly files the document that creates the domestic Reporting Company or registers the foreign Reporting Company, and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.

WHAT INFORMATION IS REPORTED?

• Reporting Company Information: Required disclosures include: (1) legal name, (2) trade name, (3) business address, (4) jurisdiction information, and (5) US Internal Revenue Service taxpayer identification number.
• Beneficial Owners and Company Applicant Information: Required disclosures include: (1) legal name, (2) date of birth, (3) current address, and (4) an identification document with a unique identifying number (e.g., passport).

ARE THERE ANY EXEMPTIONS TO REPORTING?

The CTA and the Final Rule contain 23 exemptions for certain types of entities. The types of entities exempted generally include a range of entities regulated in the United States, certain participants in the investment funds industry, tax exempt entities, large operating companies, and subsidiaries of certain exempt entities, among others.

WHAT HAPPENS IF REPORTS ARE NOT FILED?

Reporting violations (e.g., false reporting or failure to report) can lead to civil or criminal penalties for a Reporting Company and certain individuals associated with it.

WHAT’S NEXT?

The foregoing highlights are not an exhaustive discussion of the details surrounding the application of the CTA and the Final Rule and their accompanying compliance obligations. Further, FinCEN still needs to finalize additional rulemakings (as discussed in our two prior LawFlashes) regarding (1) the form that will be used to submit information; (2) access to BOI information; and (3) safeguards required to protect BOI.

In addition, FinCEN must amend the customer due diligence requirements of financial institutions to conform them with the requirement of the CTA and the Final Rule and develop the infrastructure to administer the Final Rule’s reporting requirements. Morgan Lewis is closely following the development of these related sets of rules.