FinCEN issues final rule on beneficial ownership information and its effect on creditor-debtor law


The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has released its final rule that requires reporting of beneficial ownership of corporations, limited liability companies, and other forms of business entities that are either formed in a jurisdiction American or are doing business here. This rule is made pursuant to the Corporate Transparency Act (CTA) as found at 31 USC § 5336, the purpose of which is to suppress money laundering and the holding of illicit assets (such as by oligarchs, kleptocrats and drug traffickers, etc.) through the aforementioned business entities.

As noted in FinCEN’s accompanying rules factsheet, the new rules will require business entities to file a Beneficial Ownership Information (BOI) form which, as the title suggests, will require entities businesses to disclose their beneficial owners. Persons required to disclose will include persons who either have “substantial control” of a business entity, such as a general partner or managing member of an LLC, and/or who have a minimum 25% ownership interest. Information to be provided includes full name, address, date of birth and a copy of an identification document such as a driver’s license. These rules will come into force on January 1, 2024.

A giant loophole in this reporting regime is that trusts are excluded. This is remarkable since, historically, and going back at least as far as ancient Roman law, trust has long been the method of choice for hiding ownership of assets. Since trusts are often not required to be filed under state law, their very existence is difficult to find, unlike business entities which are created by filings with local offices of the Secretary of State. State. Presumably, Congress and FinCEN are taking this one bite at a time, tackling commercial entities first, with accompanying legislation and rules for trusts to follow later.

The purpose of this article, however, is not to discuss the new FinCEN rule itself, but rather its potential effect on creditor-debtor law. Debtors frequently attempt to conceal their activities and assets in business entities, as do oligarchs, kleptocrats, and narcos. A common example is the real estate developer being sued on personal guarantees from a previous transaction that went wrong; the real estate developer will frequently create new limited liability companies and attempt to enter into new transactions in these entities and hide the profits from creditors.

To the extent that creditors can obtain copies of BOIs by discovery, this can be a game-changer in favor of creditors. The reason for this is that to establish that an entity is the alter ego of a debtor (called reverse veil piercing), a creditor must establish a number of things, including common ownership and control over the entity. If the obligor is designated as the “controlling person” of an entity in the BOI, then the control element is satisfied. If the debtor discloses ownership of more than 50% of the entity in the BOI, then joint ownership can be demonstrated. The thing is, if such information is found in the BOI and the creditor grabs it, the creditor will already be at third base to attempt a reverse veil-piercing challenge.

Whether creditors will be able to discover BOIs will therefore be a big issue. Reports are submitted to FinCEN and it can be difficult to get the BOI from them as it involves getting information from any federal agency. However, the entity itself ― its registered agent ― will likely retain copies of its BOIs for compliance purposes, and they are more likely to be discovered. Here it is also important to note that the BOI is not a tax return, but a regulatory return, the difference being that tax returns are sometimes difficult or impossible to obtain in some states by laws, but it is not There is often no corresponding protection for regulations. Return.

Where this can most affect asset protection planning is in the use of what is known as nominees, which are basically people put in place to conceal the true owner or controlling person. For example, much has been made of the residence of the Isle of Sark, one of the Channel Islands off the coast of France, who are frequently hired as figureheads to allow their names to be used for instead of the true owner or controlling person. Closer to home, people will frequently use the name of their lawyer, accountant, fiduciary employee or third cousin as their candidates. By requiring the disclosure of beneficial owner within the BOI, the practice of using nominees should decrease significantly.

Ultimately, creditors now have a potentially powerful new tool for uncovering ownership and control of an entity. Conversely, debtors (and those planning to protect their assets from potential future creditors) face a difficult new hurdle. We’ll have to watch how it all pans out, so stay tuned.


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