By: Christina Houston, Robert R. Keatinge, Thomas E. Rutledge, James J. Wheaton, American Bar Association, Business Law Today
This is the second part of a three-part series about beneficial ownership reporting; in the first part we discussed the Financial Crimes Enforcement Network’s (“FinCEN”) general residential real estate geographic targeting orders (“GTOs”), the Southwest U.S. border GTO, and the soon to be effective non-financed residential real estate reporting regulations.[1] We now turn our attention to the Corporate Transparency Act (“CTA”) and its Reporting Rules[2] as (being generous) “revised” by the Interim Final Rule (the “IFR) published on March 26, 2025.
When we brought to a close the last of our earlier articles reviewing the CTA,[3] both of the nationwide injunctions against its enforcement had been lifted, court challenges to the constitutionality of the CTA were proceeding in a variety of district and appellate courts, the administration had informally announced a revision of the Reporting Rules to the effect that U.S. companies and U.S. persons would be exempt from reporting obligations, and Senators Whitehouse and Grassley had written to Treasury Secretary Bessent asking for an explanation of how that proposed significant restriction of the CTA is consistent with the statutory requirements and the congressional findings in support thereof.[4] As we write this installment of this seemingly never-ending story, the IFR has been published, comments have been solicited, and we await a final rule promised before the end of the year. Meanwhile steps have been taken to hold the litigation against the CTA in abeyance.
If January 1, 2021, the date of passage of the CTA, and September 22, 2022, the date of the release of the Reporting Rules, have been the crucial dates for those practicing in this realm, then March 21, 2025,[5] will be added to that series of dates of crucial developments. On that day, FinCEN released the IFR, effecting its stated plan of neutering the CTA by exempting U.S. organized companies and all U.S. persons from its scope.[6] Complementing the IFR,[7] FinCEN released a press release,[8] a notice,[9] and an alert.[10] Collectively, they rendered the CTA statute as implemented by FinCEN’s regulations a pale and withered shadow of itself.
So, What Has Changed?
The question of “what has changed” between the Reporting Rules[11] and the IFR is, depending on your perspective, either “almost everything” or “almost nothing.”
As for the former viewpoint, what were previously domestic reporting companies[12] have been exempted from the scope of the Reporting Rules. Further, if a foreign reporting company as defined under the Reporting Rules, now a “reporting company” under the IFR, has a U.S. person as a beneficial owner (regardless of whether that person is a beneficial owner under the beneficial ownership test, the control test, or both), there is no obligation to report that person on the filed Beneficial Ownership Information Report (“BOIR”) (whether initial or updated).[13] To that end, a foreign business organization that is qualified to transact business in one or more of the states and that has only U.S. persons as beneficial owners will have nothing to report beyond its own identification and perhaps that of a company applicant, depending upon when it files or will file its initial BOIR. As herein otherwise discussed, FinCEN’s system will not accept a BOIR that does not list at least one beneficial owner,[14] so what is to happen in that circumstance is as of now unknown.
Turning to the “almost nothing” perspective on the changes wrought by the IFR, there are innumerable other obligations and rules set forth in the Reporting Rules. The ownership test and the control test for who is a beneficial owner remain in place,[15] as do the rules for reporting of trusts[16] and the treatment of ownership interests in an estate.[17] The twenty-three categories of companies exempt from the BOIR reporting obligations[18] have been left in place even as another category has been added.[19] Meanwhile, it must be recognized that the rule as to ownership interests owned by a minor was updated in the IFR to address the now-limited scope of the IFR as contrasted with the Reporting Rules.[20] Retained as well is the ambiguity in needing to determine whether a foreign organized venture is an “entity,”[21] a condition precedent to bringing it into the BOIR filing requirements.[22]
Various terms—including “crumbled,”[23] “gutted,”[24] “significantly limited,”[25] “broadly eliminated,”[26] “hollowed out,”[27] and the far gentler “out like a lamb”[28]—have all been used to describe the impact of the IFR on the CTA. But let’s not kid ourselves—the IFR has destroyed[29] the beneficial ownership system approved by Congress in the CTA. Domestic reporting companies, estimated as of September 2022 to number 32,600,000 and more than 36,500,000 by 2024,[30] were expected to be filing BOIRs; now they are not obligated to do so.[31] These estimates stand in opposition to estimates of “foreign reporting companies,” which measure in the low tens of thousands.[32] Assuming 36.5 million domestic reporting companies and FinCEN’s high-end estimate of 20,000 foreign reporting companies, requiring only the latter to file BOIRs yields .0547 percent of the total sum, a vanishingly small number.[33] Put another way, the IFR has released 99.945 percent of the universe of CTA reporting companies from the reporting obligation. By illustration, if we assume that the population of the United States is 342 million and reduce it by the same percent that the CTA reporting companies have been cut, our country would now have 187,000 souls (not even enough for one congressional district). Going forward, those few reporting companies remaining, being what were previously “foreign reporting companies,” do not have to identify on a BOIR any beneficial owner who is a U.S. person.[34] As noted below, it is so easy for persons who are not U.S. persons to circumvent the remaining reporting obligations that their existence is a joke—just not a funny joke.
Noteworthy Gaps in the IFR and a Huge Blind Spot (or Is That a Planning Opportunity?)
There are at least four noteworthy gaps in the IFR as well as a huge blind spot even in its greatly reduced scope. These are just five of the “ready-fire-aim” criticisms raised as to the IFR. First, although the IFR (i) exempts from reporting all business organizations “created”[35] in the U.S. (they are no longer “reporting companies”)[36] and (ii) relieves foreign business organizations that are reporting companies of the responsibility of providing either the personally identifiable information (“PII”) or a FinCEN ID for any U.S. person who is a beneficial owner,[37] there is no exemption from providing the PII or a FinCEN ID for a U.S. person who is a company applicant.[38] So, although a U.S. person who is the sole beneficial owner of a reporting company need not be identified on a BOIR, the attorney, paralegal, or employee of a service company who files the “application for a certificate of authority”[39] must be so identified even though in most instances that person has only a passing relationship with the reporting company.[40]
Second, a BOIR must identify at least one beneficial owner; the BOIR’s cells for a beneficial owner are marked with an asterisk on the BOIR form as mandatory.[41] Assume a German GmbH is qualified to transact business in, say, Kentucky; it is a reporting company and must file a BOIR.[42] However, further assume that the only beneficial owners of that GmbH are U.S. persons; per the IFR, they are not to be identified.[43] As noted above, in order to file a BOIR, that GmbH reporting company must identify at least one beneficial owner, but on these facts all beneficial owners are exempt from being identified. The IFR did not address what this GmbH should do. Is there an implicit exemption for reporting companies in which all beneficial owners are U.S. persons?[44] It would seem that this is the case as they cannot file a “true, correct, and complete” BOIR,[45] but the Reporting Rules as amended by the IFR do not provide an exemption to that effect. Granted, the release accompanying the IFR says that no filing is required; are we now in a realm in which the language of the regulations may be superseded by language in a subsequent release?
Third, while exempting U.S. persons from being identified on BOIRs filed by reporting companies (a set now reduced to what were “foreign reporting companies”), no relief was granted to U.S. persons from the obligation to update the applications they filed for FinCEN IDs.[46] While numbers have not been published by FinCEN that will enable an exact calculation, it is a fair assumption that the vast majority of persons who applied for a FinCEN ID were U.S. persons who were or anticipated that they would be beneficial owners of what were domestic reporting companies. While those companies are no longer obligated to file initial or updated BOIRs reporting changes in information as to the organization or its beneficial owners, those beneficial owners with FinCEN IDs must still update the FinCEN ID applications until, as matters stand currently, death.[47] In effect, holders of a FinCEN ID must keep it current even though there is almost no circumstance in which that FinCEN ID number will be submitted on a BOIR.[48] The only exceptions are as follows: (i) the holder of the FinCEN ID is a company applicant or (ii) the holder is a beneficial owner who is not a U.S. person. It is a fair assumption that the group comprising the excepted holders is a small subset of the persons who in 2024 applied for a FinCEN ID.
Fourth, the IFR created a twenty-fourth exemption from status as a reporting company for those companies formed in the U.S.[49] This exemption applies to all U.S. organized reporting companies (previously defined as “domestic reporting companies”) that filed a BOIR prior to the publication of the IFR. Under the Reporting Rules as amended by the IFR, a company that has filed a BOIR but that comes within the scope of an exemption from reporting is to file an updated BOIR indicating that it now satisfies an exemption from reporting.[50] But must every company that has filed a BOIR that is now exempt from reporting under the IFR file an updated BOIR in order to give notice that it is no longer obligated to file BOIR updates? On the one hand, a strict reading of the Reporting Rules as amended by the IFR would say that the amended BOIR is required. On the other hand, FinCEN said in the release accompanying the IFR amendments to the Reporting Rules that such a filing is not necessary.[51] But can commentary released with an interim final rule modify an existing regulation that is itself not revised/amended/supplemented by the interim final rule?
Last, notwithstanding that the CTA as approved by Congress and implemented in the Reporting Rules has been destroyed by the IFR and its exclusion of U.S. persons and business entities created in the U.S., leaving only within its grasp business organizations formed under non-U.S. law, that grasp is easy to avoid. Assume a Spanish Sociedad de Responsabilidad Limitada (“S.A.”) has qualified to transact business in one or more states and has beneficial owners who are not U.S. persons. Absent the application of one of the twenty-four exemptions,[52] the S.A. must file a BOIR—but it would rather not. Appreciating that regulatory or tax considerations need to be taken into account and may derail on particular facts this “easy out,” our S.A. can avoid the application of the CTA by forming a U.S. subsidiary, probably a single-member LLC, and transferring to it its U.S. operations. Then our S.A. withdraws its certificate(s) of authority to transact business. While the new subsidiary has as beneficial owners a mix of persons only some of whom are U.S. persons, none needs to be identified to FinCEN because the subsidiary itself, being what was previously a “domestic reporting company,” is exempt from a CTA reporting obligation.[53] In its simplest application, our S.A. operates its U.S. operations through a single-member LLC that is not a CTA reporting company. And life goes on.
