The Impact of the U.S. Corporate Transparency Act on Bulgarian Business in View of the Anti-Money Laundering Regulations

Gergana Chushkova, managing associate at DRP, Bulgaria and

The Act and the Final Rule direct a wide range of private business enterprises to report certain information to FinCEN: (a) corporations; (b) limited liability companies; and (c) other entities that are created or registered to do business by filing a document with a secretary of state or any similar office. The vast majority of U.S. affiliates of Bulgarian businesses, existing and future, will have to report certain information to FinCEN. In addition, foreign entities registered to do business in the United States are required to report to FinCEN, possibly directly capturing a number of Bulgarian business entities potentially in addition to such entity’s U.S. affiliate. Note that publicly-traded companies, banks, credit unions, money services businesses, broker-dealers, investment companies or investment advisers, venture capital fund advisers, and insurance companies, among others, are exempt from the reporting requirements in the Act and Final Rule.

• Private business enterprises subject to reporting requirements must provide to FinCEN (a) their full name; (b) any ‘doing business as’ name; (c) address, jurisdiction of formation or registration; and (d) employer identification number or other unique tax identification number.

• In addition, individuals defined as a “company applicants” must provide to FinCEN their full name, date of birth, address, and photo identification with identification number shown, within thirty (30) days of forming a new entity after January 1, 2024. “Company applicant” is broadly defined as “the individual who directly files the document that first creates the domestic reporting company” and “the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.” This definition contemplates one or two company applicants and likely includes attorneys, paralegals, and accountants if entities are formed by law firms or accountancy firms. Business entities formed before January 1, 2024, do not need to report “company applicant” information and such information does not need to be updated.

• The most significant challenge with the reporting requirements in the Act and Final Rule is identifying the entity’s beneficial owner(s), keeping in mind that there can be multiple beneficial owners per entity. The Final Rule defines a “beneficial owner” as any individual who, directly or indirectly, either: (a) exercises “substantial control” over a reporting company; or (b) owns or controls at least 25% of the ownership interests of a reporting company. This definition could include company officers and directors, to the extent they exercise “substantial control” as well as indirect owners who own more than 25% of the reporting company’s equity through one or more intermediaries. Note that the 25% threshold can be met through ownership of equity, convertible debt, profits interests, and warrants and similar rights; in calculating the 25%, the Final Rule specifies that all options or similar instruments should be treated as exercised and that all interests in the business be treated as a single class.

While determining 25% owners may be straightforward, determining “substantial control” is harder to answer. Under the Final Rule, an individual has “substantial control” over an entity who: (a) serves as a senior officer; (b) has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); or (c) directs, determines, or has substantial influence over important decisions. This is a wide net that could capture many individuals per business entity.

The Final Rule becomes effective on January 1, 2024. Any covered business entity created on or after January 1, 2024, must report required information to FinCEN within thirty (30) calendar days of its creation. Covered business entities created before January 1, 2024, must provide required information to FinCEN by January 1, 2025. Any changes to previously reported business enterprise or beneficial ownership information must be reported to FinCEN within thirty (30) days of such change.

The Act allows for submitted information to be disclosed by FinCEN to certain governmental entities, and final guidance on such access is expected before January 1, 2024. Under the Act, access filed information may be disclosed by FinCEN to: (a) federal law enforcement, national security, or intelligence agencies; (b) state, local and Tribal law enforcement; (c) select foreign law enforcement and national security agencies; (d) financial institutions subject to customer due diligence requirements, and their regulators; and (e) certain Treasury officers and employees, including tax administration.

Penalties for noncompliance or misuse of beneficial ownership information are significant: (a) civil penalties of up to $500 for each day that a violation continues or has not been remedied; and (b) possible imprisonment of up to two (2) years for any person who wilfully (i) provides, or attempts to provide, false or fraudulent beneficial ownership information; or (ii) fails to report complete or updated beneficial ownership information to FinCEN

Guidance on the Act provided to date has errored toward overreporting, as the purpose of its reporting requirements is to broadly begin tracking ownership of the relevant entities. Therefore, potentially impacted companies should seek appropriate advice as far in advance of January 1, 2024, as possible.

Further to the Act and the Final Rule, Bulgarian affiliates of US businesses will have to abide by the above-listed requirements and duly and timely disclose the relevant data to FinCEN. These requirements will add up to the already existing obligations for Bulgarians under Bulgarian law as detailed below:

Beneficial Ownership Disclosing as per Bulgarian Law

Obligations to disclose beneficial ownership before Bulgarian Registry Agency (“Registry Agency”) are in force as of 2018. These statutory requirements are introduced with the new Bulgarian Anti-Money Laundering Act (“AMLA”) adopted based on the EU anti-money laundering directives. The AMLA introduces obligations to disclose information about beneficial owners in several directions:

(i) disclosing information before the respective register held at the Registry Agency – i.e. Commercial Register or BULSTAT Register, as applicable. Non-compliance with the obligation of due and timely reporting of the entity is subject to monetary sanctions imposed by the Registry Agency;

(ii) disclosing information before specific entities, obliged to ensure the anti-money laundering regulations, in case of establishing relations with them – e.g. banks; financial institutions; lawyers; auditors; notaries; bailiffs; brokers; etc. (referred to below as the “Obliged Entities”). The responsibility in this case is of the Obliged Entity who is to perform the Know-Your-Customer check on regular basis; to require the information on the beneficial owner(s) of its clients/customers and to keep the respective information up-to-date and available for a specific term in case of checks by the Bulgarian State Agency for National Security (“SANS”). Non-compliance with these obligations of the Obliged Entities is subject to monetary sanctions;

(iii) As of 16 July 2024, the AMLA introduces further obligations for the Obliged Entities to officially notify the Registry Agency in case they establish any discrepancy between the beneficial ownership information about their clients/customers registered with the Registry Agency, on the one hand, and the information gathered by the Obliged Entity during performance of Know-Your-Customer checks, on the other hand. Non-compliance with this obligation of the Obliged Entities is subject to monetary sanctions imposed by SANS. As of 16 July 2024, consistency of beneficial ownership information disclosed in the registers and the information presented before the respective Obliged Entities is to become of paramount importance. Once an Obliged Entity notifies the Registry Agency about inconsistency in the beneficial ownership information of a client/customer, the latter will be notified in the register batch and instructed by the Registry Agency to confirm/clarify/amend the disclosed information. Non-compliance with the obligation of due and timely response to this notification shall be subject to monetary sanctions imposed by the Registry Agency.

Penal Law Liability

As detailed above, the Act and the Final Rule stipulate penal liability for every person who wilfully (i) provides, or attempts to provide, false or fraudulent beneficial ownership information; or (ii) fails to report complete or updated beneficial ownership information to FinCEN.

By comparison, under Bulgarian Criminal Code, there is general prohibition to declare any false facts in writing before the authorities when such declaring is obligatory for purposes of certifying the veracity of certain circumstances. False declaring may include confirming untrue facts or not telling the truth about the circumstances. The penalty for false declaring is up to 3 years imprisonment.

However, there is no specific penal liability under Bulgarian law in case of failing to report complete or updated beneficial ownership information before the Registry Agency or the Obliged Entities. In such cases, the above discussed administrative monetary sanctions apply. The Registry Agency can impose administrative monetary sanctions within the range of BGN 1,000 – BGN 10,000 (while as of 16.07.2024 the sanction shall be fixed to BGN 5,000). The Agency is strictly checking for non-compliances and has started imposing sanctions even more often.

Gergana Chushkova is a Managing Associate at Dinova Rusev & Partners Law Office. She is resident in Sofia, Bulgaria and can be reached out on Gergana.Chushkova@drp-legal.com. This update should not be construed as legal advice and does not reflect the opinions of the Law Office or its clients.

Michael E. Burke is a partner in, and chair of the Island of le Ireland practice group of, Arnall Golden Gregory LLP. He is resident in the firm’s Washington, DC office and can be reached at mike.burke@agg.com or +1.202.677.4046. This update should not be construed as legal advice and does not reflect the opinions of the firm or its clients.