Angela Gamalski and Michael Domanski on the rising trend of corporate transparency and why there may be further compliance complexities still to come.

The global trend of requiring business enterprises to comply with rigorous ownership and control disclosure mandates continues unabated.

The US enacted the Foreign Account and Tax Compliance Act (FATCA) for the purpose of bolstering its efforts to improve tax enforcement by expanding the scope of information to be shared among counterparties and the Internal Revenue Service (IRS) in the context of cross-border transactions – including the creation of the IRS Form W-8BEN-E that initiated the reporting of certain owners of non-US entities.

Consistent with these objectives, the Organisation of Economic Cooperation and Development established the common reporting standard in 2014 as the non-US counterpart to the FATCA regime.

Similarly, jurisdictions like Bermuda and the Cayman Islands have historically maintained ‘beneficial owner’ regimes that have furthered aided in the disclosure of corporate arrangements. In the midst of these international regulatory developments, the US has emphasised its priority of increasing the level of transparency in the reporting of financial and business transactions.

For example, in 2018, the Financial Crimes Enforcement Network (FinCEN) imposed new customer due diligence requirements on financial institutions that mandated the disclosure of certain beneficial owners prior to the opening of company bank accounts.

More recently, the Corporate Transparency Act (the ‘Act’) was enacted on 1 January 2021 as part of the Defense Authorization Act for Fiscal Year 2021 to mandate standardised reporting, maintenance and disclosure of beneficial ownership information of US companies to FinCEN (the beneficial ownership reporting rules).

As a result of the Act, the increasing transparency and regulatory requirements that already apply to captives operating in jurisdictions outside of the US will soon need to be considered by captives in US domiciles as well.

On 30 September 2022, FinCEN issued its final regulations for administering the beneficial ownership reporting rules, which will become effective on 1 January 2024. All corporations, limited liability companies or other similar entities that are either created through a US state filing or formed under the law of a foreign country and registered to do business in the US will be reporting companies unless an exemption applies.

While the Act provides 23 ‘reporting company’ exemptions, including for insurance companies, careful analysis of the exemption is required as each is narrowly tailored.

For example, FinCEN has commented that the insurance company exemption does not automatically apply to captive insurance companies, which may directly or indirectly be eligible for reporting exemptions through other means.

Reporting companies must therefore disclose to FinCEN all business names, jurisdiction of formation, business street address and US tax identifier.

A reporting company must identify as its beneficial owners all natural persons holding at least 25% of the company’s ownership interests or who otherwise have substantial control over the company.

A variety of direct or indirect control ownership interests, including profits interests, puts, calls, warrants and convertible equity, can be deemed beneficial ownership.

Waterfall ownership structures should identify the natural persons who own or control each layer of company ownership.

FinCEN views substantial control broadly and differently than the 2018 FinCEN rules for company bank accounts. US companies should carefully review the regulatory definitions to determine what interests may be subject to beneficial ownership reporting.

Reporting companies must disclose identifying information of all beneficial owners, including names, addresses and copies of personal identification.

Foreign entities registered to do business in the US will additionally need to report their jurisdiction of formation and a foreign tax identification number in lieu of a US tax identification number.

Foreign entities will need to identify as the company applicant the natural person who filed the entity’s US registration documents rather than the natural person who incorporated or formed the entity in its jurisdiction of formation.

Foreign pooled investment vehicles, which would otherwise be exempt from reporting, will need to identify an individual with substantial control within the US.

Unless a reporting exemption applies, all existing companies formed or registered to do business in the US before 1 January 2024 will have until 1 January 2025 to report the company’s current beneficial owners.

Companies established after 1 January 2024 must provide the required information within 30 days. Changes to a company’s beneficial ownership must be reported to FinCEN within 30 days of the change.

The final regulations clarify reporting requirements for various types of entities which may be created under state law, parent entities, subsidiary entities, convertible equity interest holdings and creditors, among others. FinCEN affirmed that exempt entities will not be required to take further affirmative actions to report or claim an exemption.

FinCEN has also indicated that further guidance and FAQs will follow with respect to numerous aspects of these new reporting rules before the effective date of this regulation.

Beneficial ownership information reported to FinCEN will be subject to strict confidentiality and access restrictions which will limit this information from public access.

However, under the Act, FinCEN may disclose reported beneficial ownership information upon request from federal law enforcement, national security or intelligence agencies, a non-federal law enforcement agency with court authorisation, a federal agency coordinating with foreign agencies under specified requirements and to financial institutions with company consent.

If a company fails to report to FinCEN as required under the Act, its beneficial owners and senior officers can be held individually liable and may be subject to both civil and criminal penalties for willful reporting violations.

The new beneficial ownership reporting database will ultimately feed into the US Strategy On Countering Corruption.

Released in December 2021, the US Strategy on Countering Corruption describes the national commitment to rooting out corruption within the US business and financial system, identifying criminals and tax avoidance mechanisms in the global financial ecosystem and re-establishing the US as a global leader in ethical business practices.

Released in October 2022, the US National Security Strategy further flags outbound investment review as a coming governmental mechanism to identify where American businesses are funding activities around the world.

Taken as a whole, these latest mandates and those on the horizon will add another layer of complexity to the ever-expanding corporate and tax compliance function.