Category Archives: criminal tax law

The Financial Crimes Enforcement Network (FinCEN) has issued proposed regs implementing the beneficial ownership information reporting provisions of the Corporate Transparency Act. The proposed rules address, among other things, who must report beneficial ownership information (BOI), when BOI must be reported and what BOI must be reported.

These proposed regulations would implement the requirement in the CTA [1] that a reporting company submit to FinCEN a report containing beneficial owner and company applicant information (together, “beneficial ownership information” or BOI). This proposal fulfills the statutory direction to Treasury to promulgate regulations to implement the CTA and reflects FinCEN's careful consideration of public comments received in response to an advanced notice of proposed rulemaking (the “ANPRM”).[2] To the extent practicable, and as required by the CTA, the proposed regulations aim to minimize the burden on reporting companies and to ensure that the information collected is accurate, complete, and highly useful. More broadly, the proposed regulations are intended to protect U.S. national security, provide critical information to law enforcement, and promote financial transparency and compliance. The CTA and these proposed regulations represent the culmination of years of efforts by Congress, the Department of the Treasury (Treasury), other national security agencies, law enforcement, and other stakeholders to bolster the United States' corporate transparency framework and to address deficiencies in BOI reporting noted by the Financial Action Task Force (FATF), Congress, law enforcement, and others. The proposed regulations address: (1) Who must file; (2) when they must file; and (3) what information they must provide. Collecting this information and providing access to law enforcement, the intelligence community, and other key stakeholders will diminish the ability of malign actors to obfuscate their activities through the use of anonymous shell and front companies. The proposed regulations would also specify circumstances in which a person violates the reporting requirements.

The proposed regulations describe two distinct types of reporting companies that must file reports with FinCEN—domestic reporting companies and foreign reporting companies. Generally, under the proposed regulations, a domestic reporting company is any entity that is created by the filing of a document with a secretary of state or similar office of a jurisdiction within the United States. A foreign reporting company is any entity formed under the law of a foreign jurisdiction that is registered to do business within the United States.

The proposed regulations also describe the twenty-three specific exemptions from the definition of reporting company under the CTA. The CTA also includes an option for the Secretary of the Treasury (Secretary), with the written concurrence of the Attorney General and the Secretary of Homeland Security, to exclude by regulation additional types of entities. FinCEN does not currently propose to exempt additional types of entities beyond those specified by the CTA.

The proposed regulations describe who is a beneficial owner and who is a company applicant. A beneficial owner is any individual who meets at least one of two criteria: (1) Exercising substantial control over the reporting company; or (2) owning or controlling at least 25 percent of the ownership interest of the reporting company. The proposed regulations define the terms “substantial control” and “ownership interest” and describe rules for determining whether an individual owns or controls 25 percent of the ownership interests of a reporting company. The proposed regulations would also describe five types of individuals who the CTA exempts from the definition of beneficial owner.

The proposed regulations also describe who is a company applicant. In the case of a domestic reporting company, a company applicant is the individual who files the document that forms the entity. In the case of a foreign reporting company, a company applicant is the individual who files the document that first registers the entity to do business in the United States. The proposed regulations specify that a company applicant includes anyone who directs or controls the filing of the document by another.

Under the proposed regulations, the time at which a required report is due would depend on: (1) When the reporting company was created or registered; and (2) whether the report is an initial report, an updated report providing new information, or a report correcting erroneous information in a previous report. Domestic reporting companies created, or foreign reporting companies registered to do business in the United States, before the effective date of the final regulations would have one year from the effective date of the final regulations to file their initial Start Printed Page 69921 report with FinCEN. Domestic reporting companies created, or foreign reporting companies registered to do business in the U.S. for the first time, on or after the effective date of the final regulations would be required to file their initial report with FinCEN within 14 calendar days of the date on which they are created or registered, respectively. If there is a change in the information previously reported to FinCEN under these regulations, reporting companies would have 30 calendar days to file an updated report. Finally, if a reporting company filed information that was inaccurate at the time of filing, the reporting company would have to file a corrected report within 14 calendar days of the date it knew, or should have known, that the information was inaccurate.

The proposed regulations also describe the type of information that a reporting company is required to file. First, the reporting company would have to identify itself. The proposed regulations describe the information that a reporting company must submit to FinCEN about: (1) The reporting company, and (2) each beneficial owner and company applicant. This includes, for example, the name and address of each beneficial owner and company applicant, among other things. In lieu of providing specific information about an individual, the reporting company may provide a unique identifier issued by FinCEN called a FinCEN identifier. The proposed regulations describe how to obtain a FinCEN identifier and when it may be used. The proposed regulations also describe highly useful information that reporting companies are encouraged, but not required, to provide. This additional information would support efforts by government authorities and financial institutions to prevent money laundering, terrorist financing, and other illicit activities such as tax evasion.

The CTA provides that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent BOI to FinCEN, or to willfully fail to report complete or updated BOI to FinCEN. The proposed regulations describe persons that are subject to this provision and what acts (or failures to act) trigger a violation.

In addition to the proposed information reporting rules, FinCEN has issued another Advance Notice of Proposed Rulemaking soliciting public comment on a potential rule to address the vulnerability of the U.S. real estate market to money laundering and other illicit activity.

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Footnotes

1.  The CTA is Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116-283 (January 1, 2021) (the “NDAA”). Division F of the NDAA is the Anti-Money Laundering Act of 2020, which includes the CTA. Section 6403 of the CTA, among other things, amends the Bank Secrecy Act (BSA) by adding a new Section 5336, Beneficial Ownership Information Reporting Requirements, to Subchapter II of Chapter 53 of Title 31, United States Code.

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2.  86 FR 17557 (Apr. 5, 2021).

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According to Law360, the Sixth Circuit affirmed in a split decision Monday that Whirlpool owes the Internal Revenue Service taxes on more than $45 million in income generated by a Luxembourg affiliate's sales to a Mexican subsidiary.

Income that a Whirlpool Corp. subsidiary in Luxembourg received from appliance sales to Whirlpool-US and Whirlpool Mexico in 2009 constituted foreign base company sales income under Internal Revenue Code Section 954(d)(2) and should have been included in Whirlpool's income for that year, the court majority said in the 2-1 decision.

The court majority said the income plainly met a two-part test laid out in the statute to be considered foreign base company sales income, or FBCSI. The first condition required Whirlpool's Luxembourg subsidiary conducting activities through a branch or similar establishment outside the company where it was incorporated. The second condition was that the purpose of the arrangement was to defer U.S. tax, the court said, upholding a decision by the U.S. Tax Court. 

"We therefore agree with the Tax Court that, under the text of the statute alone, '[Lux's] sales income is FBCSI that must be included in petitioners' income under subpart F,'" U.S. Circuit Judge Raymond Kethledge said in the majority opinion.

Whirlpool Corp. told Law360 in a statement that it follows all tax laws where it operates and pays its fair share of taxes.

"We are disappointed in the Sixth Circuit's decision, but we are reviewing the ruling in detail to determine our legal options going forward," the company said.

The decision affirmed a May 2020 ruling by U.S. Tax Court Judge Albert Lauber, who found that $45 million of profits connected to appliance manufacturing in Mexico fell under the Subpart F regime that immediately taxes some earnings from U.S. companies' foreign affiliates.

Whirlpool lawyers argued before the Sixth Circuit that the income in question came from a Mexican branch's manufacturing operations and isn't taxable as FBCSI, while the government argued that the company's Luxembourg affiliate effectively earned the income and it should be deemed FBCSI.

In a dissenting opinion, Circuit Judge John Nalbandian said the Tax Court incorrectly granted summary judgment to the IRS. The statute provides for an exception that wasn't adequately considered by the court majority, he said.

"In my view, Lux didn't generate taxable foreign base company sales income because it 'manufactured' the property it bought and sold," Judge Nalbandian said.

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According to Law360, The U.S. Department of the Treasury's financial crimes unit rolled out a new rule proposal Tuesday that would establish a so-called beneficial ownership database to help prevent the illicit movement of funds through shell companies.

The rule would require that corporations, limited liability companies, and similar entities submit the full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable identification document, such as a passport, for all beneficial owners, according to the proposal.

"The current lack of a centralized U.S. [beneficial ownership information] reporting requirement and database makes the United States a jurisdiction of choice to establish shell companies that hide the ultimate beneficiaries," the proposal says. "This makes it easier for bad actors to exploit these companies for the placement, laundering, and investment of the proceeds of crime."

"Collecting this information and providing access to law enforcement, the intelligence community, and other key stakeholders will diminish the ability of malign actors to obfuscate their activities through the use of anonymous shell and front companies," the Financial Crimes Enforcement Network (FinCEN) added.

A beneficial owner is defined in the rule as any individual who meets at least one of two criteria: exercising "substantial control" over the reporting company, or owning or controlling at least 25% of the ownership interest of the company. 

If the rule is finalized after a 60-day comment period, domestic reporting companies — or foreign reporting companies registered to do business in the U.S. for the first time — would be required to file their initial report with FinCEN within 14 calendar days of the date they are created or registered, respectively, according to the proposal. 

Reporting companies that were created or registered before the effective date of the final regulation would have a year to file their initial reports.

FinCEN was required under the Corporate Transparency Act — part of the Anti-Money Laundering Act within the National Defense Authorization Act for fiscal year 2021 — to create and hash out the rules governing the database.

FinCEN sought initial public input on the rulemaking in April, requesting extensive feedback at the time spanning 48 questions that included questions addressing potential cybersecurity and privacy concerns, compliance and cost burdens, and according to the proposal has taken those comments into "careful consideration."

The rule would aim to "minimize the burden" on reporting companies and to ensure that the information collected is "accurate, complete, and highly useful," FinCEN said, noting that the agency expects the "amount of additional time and effort required to comply with the proposed rule to be minimal" and that the secure nature of the database would prevent security issues.

"While FinCEN's approach could be viewed to raise concerns about the disclosure of personal information about a broader range of individuals, the privacy impact of reporting [beneficial ownership information] to FinCEN is relatively light, because, unlike beneficial ownership registries in many other countries, FinCEN's database will not be public and will be subject to stringent access protocols," according to the proposal.

FinCEN is tasked with additional rulemaking requirements under the NDAA and its sweeping new anti-money laundering legislation, including the crafting of regulations that would enforce a set of risk priorities the agency issued in June.

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The U.S. has agreed to settle a dispute with a former Illinois resident who now lives in China over his alleged failure to report foreign bank accounts in Beijing and Hong Kong, the government told an Illinois federal court in U.S. v. Changlin Wu, case number 1:20-cv-04519, in the U.S. District Court for the Northern District of Illinois.

Changlin Wu has agreed to settle more than $813,000 in penalties, interest and fines for willful failure to file report of foreign bank and financial account forms for 2011 through 2013, according to the filing by the government. 

Wu started a company called Longwoods Resources LLC, referred to as Longwoods US in the complaint, in 2007 and filed federal income tax returns for the three tax years in question. His self-prepared tax returns weren't timely filed, and he also didn't file a Schedule B, listing interest and ordinary dividends, with these tax returns even though he owned bank accounts that earned interest, the government said.

In October 2014, Wu told the Internal Revenue Service in an interview that he had one foreign bank account with the Bank of China in the name of a company called Longwoods Science & Technology Development Inc., referred to in the complaint as Longwoods China, with an account balance under $10,000. He later gave the IRS bank statements from that account showing a balance of approximately $48,000 in May 2012, the complaint said.

Wu gave conflicting statements about his ownership interests in Longwoods China, initially claiming he owned 19% but later stating he owned 100%, the government said. In addition, he informed the IRS in April 2015 that he held no personal bank accounts in China during 2011 through 2013, according to the complaint. 

The government said Wu had an interest in a foreign bank, securities or other financial account during each of the years at issue in which the aggregate balance, at some point during each year, exceeded $10,000. He failed to submit FBARs on time for the three years in question, and the FBARs he eventually submitted didn't disclose all the accounts in which he had an interest during those years or the correct highest balance amounts, the government said.

Wu's failure to submit the FBARs timely and accurately in each instance was willful, the U.S. government asserted.

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