As one is reminded upon every gasoline station visit, events on the other side of the world impact our lives. The Financial Crimes Enforcement Network (FinCEN) explained in its 99-page report to the Federal Register that its reporting regime is, in part, a response to the Russian invasion of Ukraine. FinCEN alleged that Russian actors have been using shell companies worldwide to evade sanctions. The well-publicized confiscation of Viktor Vekselberg’s 255-foot luxury yacht embedded in shell companies was given as an example. According to FinCEN, the United States is particularly vulnerable to this abuse due to an American reporting regime that is both decentralized and nearly anonymous. A business entity must be registered with the state when formed with varying disclosure requirements.
At least four states (Delaware, Nevada, New Mexico, and Wyoming) market themselves for LLC formation partially through the anonymity they afford. This will be impossible within a few years concerning the federal government. Entities formed before 2024 must file a report by January 1, 2025. Entities formed after 2023 must file their report within 30 days after formation. Any change in the reported information must be disclosed in an updated report within 30 days of the change.
The report identifies the reporting company and each “beneficial owner.” The term “beneficial owner” includes holders of at least 25% of the company’s equity and individuals with “substantial control” over the company, such as a senior corporate officer. An image of a document, such as a passport, must be submitted for each beneficial owner. Specifically, the image must be of a government-issued document used for identification with a unique identifying number must be submitted. Each report will be nonpublic, but the mechanics of government access have not been determined.
There are nearly two dozen types of entities that are exempt from these reporting requirements, usually because they are subject to different reporting requirements, such as publicly traded corporations. However, small businesses are targeted for returns through an exemption for large operating companies. A “large operating company” is an entity with a physical office in the U.S., 20 full-time employees in the U.S., and a tax return demonstrating more than $5 million in gross receipts.
Despite assurances to the contrary by commentators, “FinCEN intends that the reporting requirement will be accessible to the personnel of reporting companies who will need to comply with these regulations and will not require specific professional skills or expertise to prepare the report.” FinCEN estimates that most initial reports will cost $85.14. The proverbial fine print reveals an estimated range of $85.14 to $2,614.87 for each initial report and $37.84 to $560.81 for the annual report. The total reporting cost is estimated to be $22.7 billion for the first year and $5.6 billion annually after that, requiring 126.3 million hours and 35 million hours, respectively, affecting 32.6 million and 5 million companies. The penalty for willfully filing false information or for willfully failing to file is a fine of up to $10,000 and 2-years imprisonment with a civil penalty of $500 per day of violation.
If you have question or concerns about how these new reports may affect you or your business, please contact the Burton Law Firm at: 916-822-8700 or email email@example.com for a consultation.