What are the “Reporting Companies” which have these obligations? Any corporation, limited liability company or similar entity which is formed or registered to do business by the filing of a formation document with a state must comply unless they fall within one of 24 exceptions. Among the exceptions are publicly traded companies, public utilities, financial services companies and companies which employ 20 or more people in the U.S., filed a tax return in the prior year reporting at least $5,000,000 in gross revenue and have a physical presence in the United States. Since newly formed companies will not have filed a tax return yet is appears to be the intent of the law to require all newly formed private companies to supply the information.

Who is a beneficial owner? An individual who, directly or indirectly, either owns 25% or more of the equity of the company or exercises substantial control, an undefined term. Minors are not included nor are people who acquire their equity through inheritance. There will doubtless be substantial confusion over the issue of control but even the seemingly fixed standard of 25% equity may be in doubt when issues like options and warrants are considered. Close attention should be paid to further developments in this area.

What information needs to be reported? FINCEN is to receive the full legal name of each Beneficial Owner, the date of birth, the current business or residence street address and an ID number from a Governmental document such as a driver’s license or passport. A person who files the application for the formation may obtain a FINCEN ID number and that ID number may be supplied in lieu of anything else. The information is to be kept confidential by FINCEN but may be released to other Federal agencies in law enforcement, national security or intelligence, to local and state agencies pursuant to a court order or to financial institutions with the consent of the companies.

When will reporting begin? New companies must file reports upon formation or registration to do business. Existing companies have two years to file after the effective date of the anticipated regulations. Regulations have not yet been drafted and all reporting requirements are suspended until they are passed. The reported information will need to be kept current and changes reported within one year of the change.

Are penalties involved? Do you need to ask? Failure to comply may result in both civil and criminal penalties. Fines of up to $500 for each day of violation are possible and prison sentences of up to 2 years may be imposed. Criminal penalties for unauthorized disclosure or use of the violation can result in up to 5 years imprisonment and substantial fines.

Until regulations are drafted there is much that remains unknown. The issue of substantial control will be of great interest in the regulations. This will prove to be of interest to creditors who may be covered if they meet the definition of Beneficial Owner upon foreclosure of security interests. Anyone seeking to form a new company is advised to seek competent advice before doing so as getting it wrong can have serious consequences.

The Business Law Section of Lum, Drasco & Positan stands ready to assist. For more information please contact Steven J. Eisenstein,  Kevin Murphy