Corporate Transparency Act: What You Should Know

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Annie: Hello, everyone, and welcome to today's webinar, "The Corporate Transparency Act: What You Should Know." My name is Annie Triboletti, and I will be your moderator.

Joining us today is Paul Hodnefield. Paul is the Associate General Counsel for CSC, where he is responsible for advising the company regarding real estate recording, notary, Uniform Commercial Code, and other public record transaction services. And with that, let's welcome, Paul.

Paul: Thank you, Annie. Good morning, everybody. This presentation is an update on the Corporate Transparency Act or CTA and the presentation that we did earlier last year on this new law. The CTA will soon require many companies to report information on their beneficial owners, applicants, and on the company itself to FinCEN, part of the Department of the Treasury. This will be a huge compliance change for those companies that are subject to the CTA.

The act also requires those companies that need to report to keep the information provided to FinCEN updated. In addition, the CTA carries harsh civil and criminal penalties for anyone who does not comply if they're subject to the act. Therefore, it is critical that those who form or maintain companies in compliance understand the requirements of the CTA.

In December, FinCEN . . . Well, let me back up a little bit. While it is important to understand the CTA requirements, unfortunately the CTA only provided a framework of what would be necessary to comply. Congress left the critical details, such as the effective date, filing deadlines, and contents of reports to rule-making by the Treasury Department and, more specifically, FinCEN. 

So in December, FinCEN released the first draft of the rules for public comment. This draft focused on three of the important aspects of the CTA. One who must file reports, two, the timing of reports, and three, the content of reports. There's still a lot we don't know regarding the final regulations, but the Notice of Proposed Rule-Making, that was released in December, does provide some insight into how FinCEN plans to approach compliance. But it also illustrates that there are some flaws in the underlying assumptions that FinCEN made in promulgating the rules, and that's going to create some compliance problems if they're adopted as is.

The purpose of this program today is to provide an update on the new rules proposed by FinCEN and what it means for both the companies and the individuals that need to comply with the CTA. Due to time limitations, we'll stick at kind of a higher level, but we're going to get into enough detail that the attendees should have a pretty good idea of where the CTA stands and what issues are out there with the currently proposed rules.

So what I'm going to do specifically today, I'm going to begin with a little reminder of the background and overview of the Corporate Transparency Act, and then move on and talk about reporting companies and exclusions, what did the new rules add there, what kinds of clarifications came out about who is a beneficial owner, the new concept of company applicant, which was not in the original CTA, and the reporting requirements as well as reporting changes to information. Wrap up with a few other issues and then go to Q&A.

So I'm going to begin with the background and overview. I'm going to talk about FinCEN a lot today. I just want to clarify what FinCEN is. It's the Financial Crimes Enforcement Network. This is a group within the U.S. Department of Treasury, and they're charged with safeguarding financial system. They do this by combating money laundering and promoting various national interests, such as in national security and financial security through collecting, analyzing, and sharing of financial intelligence with law enforcement authorities.

Now, the Corporate Transparency Act was enacted last year on January 1 of 2021. It was enacted over President Trump's veto in December of 2020. This act for the first time placed national standards on the business formation process, and it placed disclosure obligations on reporting companies. So companies that are classified as the term is a reporting company have to provide certain information on beneficial owners and applicants as well as the company itself.

Reporting companies, as defined in the act, is any domestic corporation, LLC, or similar entity. And it also includes any foreign company that registers to do business in the U.S. So it seems like a very broad definition, but there are certain exclusions. In fact, there were 23 exclusions. Mostly these were for companies that are already required to report beneficial owner information at the federal or state level due to the nature of their business. 

Now, the term "beneficial owner" was defined to include any individual who has 25% ownership or exercises substantial control over a reporting company. And an "applicant" in the CTA was defined as the person that files a document to form or register a company.

Now, there are a lot of ambiguities in these definitions, and they had to be resolved by rule. So FinCEN moved forward with the rule-making process last year. Back on April 1, they released an Advance Notice of Proposed Rule-Making seeking comments on a number of different questions and the CTA in general for how they should regulate. And they put a comment period end date of May 5th on there.

Now, in response to that advance notice, FinCEN received 220 comments from a wide range of stakeholders. These comments are available to the public through the FinCEN website. And using these comments, FinCEN proceeded to issue in December, on December 7th, they issued a Notice of Proposed Rule-Making, and this addresses . . . this was aimed primarily at issues related to beneficial owners and applicants and some other related items. And it provides a 60-day comment period, which runs through February 6th, 2022. 

Now the Notice of Proposed Rule-Making from December gives us some idea of how FinCEN intends to approach this. First of all, FinCEN is very clear that their proposed regulations target small companies. They want to get transparency on small companies who currently may not be subject to other beneficial owner reporting requirements. So basically, that's going to sweep in all small companies that don't fall in one of the exceptions that already exist.

Also, FinCEN, as a drafting policy, is creating the regulations and writing them broadly so that as many companies and other individuals as possible are brought within the reporting requirements. And it's important to bear in mind that FinCEN is drafting this primarily to benefit law enforcement. So they want more information rather than less. So they're looking to gather information and while they do say that they want to minimize the burdens placed on reporting companies and others, if it comes down to a burden or access to more information based on the draft regulations, it looks like they'll lean toward gathering more information.

In addition, another drafting policy is that any exception to the general rules are going to be very narrowly limited. So the exceptions FinCEN wants to apply to the narrowest subset permitted by law. And again, this is aimed at promoting the interest of law enforcement, not necessarily minimizing the impact on small businesses.

Now, the Notice of Proposed Rule-Making that was released in December is only the first round. There are going to be multiple rounds. And the first round dealt with certain aspects of the beneficial owner reporting companies and applicants. Future rounds will deal with methods of reporting, as well as the impact on filing offices around the country.

Now, as I already mentioned, FinCEN says it wants to minimize the burden on reporting companies, but as we're going to see, they potentially missed the mark on that in certain aspects. And I'll come back to that later.

The effective date of the new reporting requirements was left to regulation, and FinCEN has authority to set that and it remains to be determined. We don't know when it's going to take effect. FinCEN does want it in effect as soon as possible after the publication of the final rule. So we don't know exactly how long that's going to take.

Some things that have to be resolved and what FinCEN has to consider in setting the effective date include how long it's going to take them to build a system for the collection and security of beneficial ownership information. They call it the Beneficial Ownership Secure System or BOSS. Another issue is how long is it going to take reporting companies to learn how to comply with the new rules and to gather the information to comply with the new rules? And finally, how long is it going to take the filing offices to understand their responsibilities under the CTA and the regulations and make the required updates to their forms, their websites, and their physical offices?

Currently, in the Notice of Proposed Rule-Making, FinCEN is seeking comments on how long it's going to take before everybody will be ready for the effective date. But again, FinCEN is going to be looking at trying to get it earlier rather than later.

Now I want to move on and talk about how the regulations or the proposed regulations relate to reporting companies and exclusions from reporting companies, because they did provide some clarification on what's a reporting company and what isn't. Now under the CTA, a reporting company means a corporation, LLC, or similar entity that is either, one, created by filing a document with the secretary of state or similar office of a state or Indian tribe, or, two, formed under the law of a foreign country and registered to do business in the U.S. by filing a document with a state or tribe. 

Well, there are some ambiguities here, like, you know, what does it mean to file? What does it mean to register? What constitutes a similar entity? These are all open questions that were left to FinCEN rule.

Now the proposed regulations go a little further than this definition, and they distinguish two different types of reporting companies — a domestic foreign (sic) company and a foreign reporting company. Both of these are pretty much the same thing that were defined in the CTA. The domestic reporting company is formed by the filing of the document. The foreign reporting company is registered by filing of a document. 

Similar entities, the proposed rule suggests that they'll adopt a definition of similar entity that is actually somewhat similar to the idea of a registered organization in UCC Article 9, meaning that they'll look at any entity that's formed by the filing of a document with a state or Indian tribe regardless of form. So it might bring within it everything from a business trust to an LLC, corporation, professional corporations, all sorts of different entities that could be brought in under similar entity. Now, this is still open to comment, but remember that FinCEN, first and foremost, wants to interpret similar entity broadly. So they're still taking comments on it, but I suspect that the final rule will leave similar entity somewhat open-ended so that more entities will be brought within that definition than would otherwise be the case.

There are a number of exclusions from the term "reporting company," and that's found in the CTA. There are 23 specific exclusions, and these are all, with one exception, really regulated businesses. They're already required to report beneficial information either to the SEC, insurance commissioners, or some other federal or state regulatory agency. So companies that are already subject to beneficial owner reporting requirements don't necessarily need to report because they won't be within the definition of reporting company. 

So some types of entities that aren't within the reporting company definition would include financial institutions, publicly traded companies, certain public utilities, and one other, and this is a big one, and it's an important one is a large operating company. A large operating company is an entity with 20 or more employees that has a U.S. income tax return for the previous year showing $5 million or more in gross receipts and has an operating presence at a physical office in the United States. 

As far as other exclusions, FinCEN had the power, it had the authority to exclude other types of entities, but it chose not to, at least not at this time. Maybe sometime in the future it'll decide to exclude other types of entities where they don't feel the need to collect beneficial ownership information any longer.

I want to talk a little bit more about the large operating company exclusion because this is an important one. This applies to entities that may not be regulated otherwise, but are large enough and meet the criteria so that FinCEN apparently isn't worried about them. 

Now they have to have 20 or more full-time employees. The CTA did not define or clarify what constitutes a full-time employee. So what FinCEN did is it looked to the IRS definition, looked to the tax code, and determined what a full-time employee was there. And it simply adopted that as its definition of full-time employee. So a large operating company must have 20 or more full-time employees, which means a full-time employee is one who averages 30 hours or more per week or 130 hours or more per month. 

Five million dollars in gross receipts, FinCEN looked at the law and decided to clarify that this means gross receipts from U.S. income. And as a result, the rule will provide that in order to qualify as a large operating company and have access to that exclusion, the company must have at least $5 million in gross receipts after excluding sources of income from outside the United States. So it must be U.S. source income in order to meet that $5 million threshold.

And finally, it must have an operating presence at a physical office within the United States. Now, FinCEN analyzed what it means to have a physical office and decided that it must be a physical office that's owned or leased by the company, and it cannot be a residence or a shared office space, unless those sharing it are affiliates of the large operating company. So it's a little more specific in the regulations.

Let's see. Now I want to move on and talk about beneficial owner. Under the Corporate Transparency Act, a beneficial owner is an individual who exercises substantial control over the entity or owns or controls not less than 25% ownership of the entity. Well, the act did not define what constitutes substantial control in order to clarify what constitutes ownership or how to calculate when somebody has 25% ownership. So that was left to the administrative rules. And FinCEN did draft some rules regarding these issues.

First of all, substantial control. And FinCEN looked at, you know, what constitutes substantial control and determined that substantial control includes the senior officers of the reporting company, anyone with authority to appoint or remove senior officers or, you know, a substantial number of the board of directors, anyone who sets the direction or exercises substantial influence over other important matters, and any other form of substantial control. So in keeping with the drafting policy, this is a very broad definition of substantial control. So the important thing to remember about the proposed rules for substantial control is that it's broadly drafted.

A few other things, substantial control can be exercised either directly or indirectly. More than one person may exercise substantial control. There's no limit to the number of people that might fall in that category. Although FinCEN did note that the substantial control test is not intended to include ordinary daily managerial decisions, it didn't set any clarification for where to draw that line. There isn't much guidance there.

So what substantial control really boils down to is the authority to make certain kinds of decisions, and FinCEN set out some examples in the Notice of Proposed Rule-Making, such as the sale, lease, or transfer of principal assets of the company, decisions regarding reorganization, dissolution, or merger, financial decisions, decisions to start or terminate lines of business, decisions regarding compensation and incentive schemes for people, entry into or termination of or the fulfillment of significant contracts, and the authority to make decisions regarding amendments of the company governance documents or policies and procedures. So this is a fairly broad interpretation of substantial control, as I mentioned.

Next, we have the beneficial ownership test. Now, here, if a person has 25% ownership of the reporting company, they have to be reported as a beneficial owner. Well, what does it mean to have 25% ownership, or what does it mean to have ownership at all?

Well, the proposed regulations clarify that. An ownership interest includes just about anything that's classified as an equity or stock interest. It can be a capital or profit interest in an LLC or partnership, proprietorship interest. It can be an instrument that's convertible into equity or stock interest at a later time or any option to buy or sell without an obligation to do so. So, again, it's a broad range of ownership interests, and these ownership interests can also be established indirectly through, for example, the rights of a trust that owns or controls a portion of the company, and the beneficiary or perhaps the trustee or the grantor or settlor of the trust could also fall into that category depending on the particular facts and circumstances.

So there's a number of different ways that somebody can have an ownership interest. But then how does one calculate whether they have a 25% ownership interest? Well, the answer to that under the proposed regulations is simply to aggregate all of the individual's different ownership interests of any class or type whatsoever that the person owns or controls. Aggregate those and compare them to the undiluted ownership interests of the company, and if it adds up to 25% or more, then they are a beneficial owner.

Now, there are some exclusions in the CTA to the definition of beneficial owner, and the regulations proposed by FinCEN pretty much mirror those statutory exceptions. They include: a minor child if the parent or guardian is reporting under the CTA; an individual acting as a nominee, intermediary, and so forth on behalf of another; an individual acting solely as an employee, as long as they're not exercising substantial control; an individual whose only interest is through a right of inheritance; and it also would exclude a creditor, unless the creditor meets the beneficial owner definition, which can occur under the substantial control test potentially.

Now the rules that FinCEN has proposed do clarify to some degree some of these exceptions, and those clarifications really just ensure that companies have to identify the real parties of interest. They also clarify that the senior employees don't fall within the solely as an employee exception. And the rules also clarify that the right to inheritance is a future interest, not a present interest that would require reporting.

Now, I want to move on to one of the issues that is perhaps the most problematic of all the proposed rules, and that has to do with the concept of company applicant. This is where reporting companies and individuals who might qualify as company applicant can get into trouble. And this appears to be a blind spot for FinCEN because they really didn't consider the practical realities of the company formation process. So I'm going to delve into this a little bit.

First of all, company applicant, the Corporate Transparency Act requires reporting of applicant information. Generally, under the CTA, it's the same as for a beneficial owner. An applicant is defined in the Corporate Transparency Act to mean the person that files an application to form a corporation or register the corporation under the laws of a state or an Indian tribe. So it's a person who either files to form the company or files to register the company for a foreign reporting company.

Now, the proposed rules went a step further, and they created the concept of company applicant. And this is broader than what the CTA suggested as applicant. Under the proposed rules, a company applicant is any individual who files a document that creates a domestic reporting company or who registers a foreign reporting company with a secretary of state or similar office.

Now the company applicant, where some issues really arise is that, you know, the CTA takes this broad view of who is a company applicant. And it will include under the regulations, or at least the proposed regulations, the person that made the decision to file the document or register the document that formed or registered an entity. Under the definition as it's proposed, it may include an attorney, a paralegal, or law clerk who submitted the document to the jurisdiction for filing. And it can also include the employee of a formation agent that filed the document by mail or across the counter.

Now, I use the term "formation agent." It's interchangeable with service company, and it means entities like CSC and our competitors out there in the industry who file documents on behalf of businesses and law firms and other professionals. Again, FinCEN takes a broad approach to drafting. And the current definition arguably includes this wide range.

Now, because of this broad range, it is entirely possible that a reporting company may have multiple company applicants. It could potentially have the person that decided to form the entity. It could include the paralegal at the law firm that drew up the papers, and then it could include the employee of a formation agent or service company that actually filed the document.

One thing that the proposed regulations do is they address the issue of deceased company applicants. Many existing companies are going to have . . . you know, they'll have been in existence for many years. And as a result, it's quite possible that the person who or a person that falls within the definition of company applicant will be deceased. Well, FinCEN recognized that that's going to be an issue, and they made provision for this in the proposed rules. And so if the company applicant is deceased, the reporting company merely needs to report that the applicant is deceased and whatever information they know about the deceased applicant.

Now, there are a number of issues with the current approach to the company applicant. First of all, there's no sunset on reporting updated information on company applicants in the proposed rules. For a beneficial owner, a reporting company no longer has to report beneficial owner information on a person that's no longer a beneficial owner. But that's not the case with a company applicant because a company applicant achieves that status by filing the document. You can't unfile documents, of course. So it appears that a reporting company will need to keep track and report updated information on a company applicant for the life of the applicant. And, of course, this is going to be all but impossible for many reporting companies for a number of reasons. 

First of all, an existing reporting company may not even know who the company applicant was if it was years ago or they went through a service company. And frankly, service companies don't maintain that detail of information about who carried in a particular document. They carry in hundreds of documents around the country, thousands of documents around the country a day. And it's just a routine, ordinary course of business practice. And it's not something that formation agents or perhaps even law firms ever considered that they might have to someday report who filed a particular document. So it may be all but impossible for a reporting company to identify every company applicant that the company is required to report.

There's also the issue of turnover of employees at law firms and formation agents, the service companies. How does a reporting company track down former employees of its law firm or the formation agent, the service company? That's going to be a substantial burden on reporting companies.

Some other issues that pop up with this concept, a reporting company has no control over ex-employees of these formation agents or law firms. Even if they can find them, can the reporting company make them turn over their sensitive, personal information to this third party who they may have no idea who it is or what their connection is? It's going to be very difficult to enforce this or to explain to people why they should cooperate. And that leads to ex-employees who fall within the definition of company applicant may balk at providing their sensitive, personal information to third parties. You know, they simply . . . you know, this is personal, sensitive information. They're not going to want to turn it over unless they absolutely have to and especially to a third party with which they've never had any real connection.

And even current employees of law firms and formation agents may decide that they don't want to cooperate because it's going to be very hard to justify forcing an employee to turn over sensitive, non-public, personal information to a third party, especially when many of these reporting companies will be small businesses that simply don't have the resources to protect sensitive, personal information like this. So this is a weak spot in the FinCEN proposed regulations.

Now I want to move on and talk about the specific information that's required for reporting companies and for beneficial owners and applicants.

First of all, however, I want to talk about the initial reporting deadlines. These were not set in the Corporate Transparency Act. There were maximum deadlines reported, but FinCEN went ahead and set the deadlines by proposed rule. And the proposed rules, of course, are aimed at getting information sooner rather than later.

So when a new company is formed after the regulations take effect, new domestic reporting companies will have to report the information to FinCEN within 14 calendar days after they file formation documents. For foreign reporting companies, the same 14-day rule applies. They have to file within 14 calendar days after registering to do business with a state in the U.S. 

Then for existing reporting companies, those that are already in existence on the date the regulations take effect, FinCEN had proposed is up to two years to report, or I'm sorry, the CTA said they could have up to two years to report, but FinCEN narrowed that down to one year and is still taking comments as to whether or not they should shorten it further.

So existing companies, as it stands now, would have up to a year to report, but any newly formed or newly registered companies have only 14 calendar days.

Now one of the things the proposed regulations address is information that a reporting company must report about itself. FinCEN is taking the position that because a reporting company must provide information, it follows that Congress intended that they provide information about themselves. So the proposed regulations include a list of information that must be provided for each reporting company, and that includes the full name of the reporting company. It also includes all trade names, also known as fictitious names or DBAs of the reporting company. It requires a business street address for the reporting company. They also want the jurisdiction of formation, whatever state it was formed in or country or the tribal jurisdiction. And they want the IRS taxpayer identification number for each reporting company.

Now, if the reporting company lacks a taxpayer identification number at the time of reporting, the company must then either report its Dun & Bradstreet DUNS number or the legal entity identifier. Now I think this might be a weak spot in the proposed regulations, because a lot of small companies, those who form directly with a state, you know, might be anything from a small, one-member LLC that's a landscaping company or other very small business, it's quite possible they won't have a taxpayer identification number right away. They probably won't have a DUNS or a legal entity identifier. So it's going to require those who form entities to be on the ball and get a taxpayer identifying number right away.

As far as the business street address goes for the reporting company, it wasn't clarified in the proposed rule, but commentary in the Notice of Proposed Rule-Making makes it clear that the address of a registered agent or other third party is not sufficient as the address of the business for reporting purposes. This could be an issue because there are some companies out there that do list the registered agent as their place of business. For other purposes, they wouldn't be able to do that in this case. And I think it's a potential problem. There are new distributed autonomous corporations, which have no physical location. These are emerging technology entities, and it's possible that those could be an issue. They're certainly not accounted for in the proposed rules.

As far as the information required for a beneficial owner, the company for each beneficial owner must report the full legal name and date of birth of the individual beneficial owner. In addition, they must provide the residential street address that the individual uses for tax residency purposes. The Corporate Transparency Act says that it can be a residential or business address, but FinCEN decided to narrow it to the residential street address for tax residency for the beneficial owner. 

The beneficial owner must provide a unique identifier number from a government-issued document that identifies the individual. And in the proposed regulations, it calls for the reporting company to provide an image of the document that was used to provide the identifying number, and that image must include a legible photograph of the individual. So it has to be legible and include a photo of the individual. So that might be a copy of a driver's license or other acceptable document. [inaudible 00:40:05] different acceptable documents identified in the regulations: non-expired passport, non-expired ID cards issued by a state or other government entity, non-expired driver's licenses, and non-expired passports issued by a foreign government. But a copy of the document or at least one page of the document showing the photo and the document number must be submitted to FinCEN as part of this.

Now for the company applicant, it's pretty much the same information, but there is one significant difference. For each company applicant, the reporting company must again provide the full legal name, date of birth, their address, the unique identifying number for the individual, and an image of the document that provided the unique identifying number. The difference is with the address. For a company applicant who is an employee of a formation agent, and they filed the formation or registration document in the course of the business, only the street address of the formation agent business is required. They don't have to provide their residential address. However, in all other cases, company applicants must provide the residential street address that they use for tax residency purposes, same as for a beneficial owner.

So that's the information that has to be reported. Now, the question is what happens if the information changes, as it inevitably will for many of the individuals who are required to report here, both beneficial owners and company applicants. 

The Corporate Transparency Act requires updates of any of the information that changes after it's been reported to FinCEN. The CTA says it has to be updated within a year after the date the change occurs. But the regulations proposed by FinCEN shorten that. Remember FinCEN proposes to operate on shorter time frames. So some of the changes that would require to be reported, if there's a change in beneficial owners for a reporting company, if the name, address, or identification document for a particular beneficial owner or company applicant changes, or if a reporting company suddenly meets the requirements necessary to gain an exemption, then that must be reported.

When it comes to updated reports, the time for reporting the change is going to vary depending on the nature of the change. For one particular change, there's a special rule, and that is if a beneficial owner should pass away, then when does the reporting company have to report that? Well, under the proposed rule, the change is deemed to occur when the estate of the deceased beneficial owner is settled. Now an updated report might still be required earlier following the date of death. If another person steps in the substantial control, it might require the reporting company to add information in there. But as far as with respect to a deceased beneficial owner, the deceased beneficial owner information doesn't actually change until the estate is settled.

If there are multiple changes within the reporting deadline, all of them have to be reported. So if a beneficial owner moves from address A to address B and then a week later moves from address B to address C, all of those changes have to be reported to FinCEN. And they have to be re reported on a fairly short deadline.

Any change or updated information, other than the deceased beneficial owner, has to be reported not later than 30 calendar days after the change to the information. So it is important that reporting companies stay up to date on their beneficial owner information and their company applicant information because this applies equally to changes in company applicant information.

Now sometimes information reported to FinCEN might not be correct at the time it's reported, and in such cases, the Corporate Transparency Act requires the reporting company to correct any incorrect information submitted in reports. If it's an inadvertent submission, if it's reported inadvertently, they didn't intend to file incorrect information, then the reporting company must submit a corrected report to avoid civil and criminal penalties. It does say in the regulations that FinCEN is required to assist in submitting a corrected report if necessary. I don't know quite what that means yet, but that might be something in future rounds of rule-making.

As far as the contents of a corrected report, all it has to be is all the information necessary to make the report complete and accurate.

The deadline for a corrected report is very short, 14 days after the reporting company becomes aware or should have known of the error in an initial report. Now, it has to be within 14 days after that point. The problem is that there is still a 90-day window in which it has to be reported. So even if it's within the 14 days, if it's outside of the 90-day window, then the reporting company may lose the safe harbor that would apply to an inadvertent error. So it's got to be both within 14 days after the reporting company knew or should have known of the error and within 90 days after the inaccurate report was filed.

Some other issues to discuss about the regulations that were proposed in December, one is a FinCEN identifier. The CTA provides that a beneficial owner, company applicant, or reporting company can obtain a FinCEN identifier and just report that number in lieu of the information required in the regulations. To get a FinCEN identifier, they have to provide all the information necessary that would be required for a beneficial owner or reporting company. But an individual can submit an application containing all the information required for a beneficial owner or company applicant, and an entity may obtain a FinCEN identifier when it submits a report as a reporting company or any time thereafter, according to the proposed regulations.

Couple of limitations, number one, a FinCEN identifier is specific to the individual or entity to which it was issued. You cannot have a company applicant, for example, that gets a FinCEN identifier and allows a reporting company to use it regardless of what employee of the company applicant actually filed the document. And also an individual reporting company can only obtain one FinCEN identifier.

There are some issues out there with FinCEN identifiers. An individual can't allow others to use that person's identifier. That could subject them to the civil and criminal penalties of the act. The holder of the FinCEN identifier must keep the information on file with FinCEN updated. So if they move, they get a renewed driver's license, the driver's license number changed, they changed their name, anything that causes a change to any information on file with FinCEN is going to require an updated report to FinCEN by the holder of the FinCEN identifier.

Now there are some problems with this in that there's no provision in the regulations that allow the holder of a FinCEN identifier to cancel or withdraw. And it seems to be a perpetual obligation. Just like with a company applicant, there's no provision to have a sunset on the reporting obligation. And these are important issues about the sunset or withdrawal of a FinCEN identifier because, as I mentioned earlier, there are some fairly harsh penalties out there for non-compliance.

One of the things the proposed regulations do is they clarify who is subject to the penalties, civil and criminal penalties. It includes a person who directs or controls another that provides false or incorrect information or fails to report. So this can include a company applicant who directs another company applicant who failed to report or something along that line. 

Both individuals and reporting companies are subject to the penalty. FinCEN interpreted this to mean that in order to enforce the requirements for a reporting company, that means it has to apply to any person who violates their obligations. You know, in theory, this could be applied to an individual who's an ex-employee of a law firm or a formation agent who refuses to turn over their information to a reporting company, even years and years after the fact.

So these are some important issues that need to be addressed. They probably will. We hope they will in future revisions to the regulations. But that's where it stands for right now. What's online next? We'll see more rounds of rule-making primarily related to the methods of submitting the reports and filing office duties. But hopefully, also they'll take comments on the current Notice of Proposed Rule-Making and adjust some of the issues that are outstanding accordingly.