NEW COMPLIANCE ON BENEFICIAL OWNERSHIP

Effective January 1, 2024, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury will implement new “beneficial ownership” reporting requirements that will have a significant impact on the restaurant and lodging industry and could impose significant compliance costs. The new regulations, which implement the Corporate Transparency Act of 2020, are intended to ensure that law enforcement investigations are not stymied by the government’s inability to determine who owns or controls legal entities involved in criminal activity by addressing the lack of any centralized U.S. beneficial ownership registry.

Many businesses in the Pacific Northwest will be surprised to find that the breadth of FinCEN’s regulations means that they soon will need to report detailed information about their businesses and their owners and officers to the federal government.

Who must report?

FinCEN estimates that this new requirement will impose reporting obligations on tens of millions of businesses, plus the more than two million new entities that are formed each year. The regulations impose federal filing requirements on “domestic reporting companies,” among other entities. A domestic reporting company generally includes any private entity, such as an Oregon corporation, limited liability company, or partnership, that does not meet one of the specific exemptions set out by FinCEN. Most restaurants and hotels will not be eligible for the exemptions created for 23 types of legal entities. A business may qualify for exemption as a “large operating company” if the business employs more than 20 full-time employees and takes in more than $5 million in gross receipts from its U.S. operations, as shown on its federal income tax return.

What information must be reported?

Among other things, the regulation requires reporting companies to file identifying information about the reporting company’s “beneficial owners.” The term “beneficial owner” means any individual who directly or indirectly exercises substantial control over a company or owns or controls at least 25 percent of the ownership interests in the company. “Substantial control” is defined broadly and will capture many executive officers of Oregon businesses. The term includes senior officers and those individuals who have authority to appoint or remove any senior officer or a majority of the board of directors, as well as individuals who have substantial influence over other important matters affecting the company.

With respect to each “beneficial owner,” a reporting company must report: (i) the full legal name of the individual; (ii) the individual’s date of birth; (iii) a unique identifying number from a government issued ID such as a driver’s license or passport; and (iv) a scanned copy of the government issued ID that includes a photograph of the individual.

When does this regulation take effect?

Fortunately, this new regulation will not become effective until January 1, 2024. Any reporting company that was formed prior to that effective date—such as Oregon companies that are currently operating—will have until January 1, 2025 to file their initial report with FinCEN. Any reporting company formed after January 1, 2024 will have 30 days to submit an initial report to FinCEN. Companies will have to file updates with FinCEN within 30 days of a change in their beneficial ownership information. Thus, companies will need to continuously monitor pertinent beneficial ownership details.

What should Oregon companies do to prepare for this new regulation?

This new FinCEN rule is likely to require a major compliance undertaking for some reporting companies, particularly entities with complex ownership structures that do not qualify for an exemption. Oregon companies can take certain steps to prepare and hopefully reduce the burden and urgency of completing these FinCEN reports:

• Determine whether your company is a “domestic reporting company” or if you qualify for an exemption under the regulation.

• Determine which of your owners qualify as “beneficial owners” who will need to be included in your filing. Note that determining ownership can involve some complexities because ownership or control may arise through joint ownership (e.g., with a spouse), through control of an intermediary entity that owns the underlying business, or through a trust.

• Determine which of your officers exercises “substantial control” over your business and will need to be included in your filing.

• Consider whether your business needs to form any entities in advance of January 1, 2024, as reporting companies formed after that date will have only 30 days to file an initial report with FinCEN.

• Develop processes for monitoring beneficial ownership information on an ongoing basis to ensure ongoing compliance with the regulation. Non-compliance can result in penalties, fines, and reputational damage.  JESSE M. KOBERNICK, MILLER NASH LLP

About

Jesse M. Kobernick is an attorney with Miller Nash LLP and represents clients throughout the Pacific Northwest on a wide range of complex business transactional matters. He also advises clients on corporate governance, commercial agreements, securities law compliance, and debt and equity offerings. Jesse can be reached by phone at 360.619.7023 or by email at jesse.kobernick@millernash.com.