On January 1st, 2024, the Financial Crimes Enforcement Network's (FinCen) Final Rule regarding Beneficial Ownership Information Reporting will take effect under the Corporate Transparency Act. The US Federal Government believes such rules are necessary to protect the financial system from abuse by illegitimate, corrupt, and criminal activities. However, such rules will require new federal filings for small businesses or other companies not exempted under the new reporting requirements. Therefore, it is essential to be informed about these new disclosure requirements. 

Pre-2024 Ownership Reporting Rules

Prior to the finalization of the new rules, passed pursuant to the Corporate Transparency Act of 2021, few jurisdictions in the US required legal entities to disclose beneficial owners' information. This allowed individuals to to hide the true owners of business. According to FinCen, Criminal actors were able to use legally sanctioned, legitimate entities to "purchase real estate, conduct wire transfers, burnish the appearance of legitimacy…and control legitimate businesses for ultimately illicit ends…" 

Limitations of the Old Rules

Gaps in reporting beneficial ownership information may have worked against the United States' geopolitical objectives by allowing foreign actors to avoid sanctions. Specifically, Russian business interests who may have been subjected to sanctions levied in response to the Russian invasion of Ukraine in 2022 utilized shell companies to hide their ownership. 

In a particularly high-profile case that made news headlines, the Spanish government, working with US law enforcement, seized the luxury yacht of Russian billionaire Viktor Vekselberg, one of several large assets seized in compliance with US sanctions and money-laundering statutes. The United States government alleged that the Russian billionaire had utilized shell companies to hide the true ownership of the luxury $90 million yacht. 

Threats to the Financial System and National Security

Here at home, domestic actors have also abused lax reporting requirements to defraud the US government and taxpayers, stealing COVID-19 Paycheck Protection Program funds through shell companies. 

Before the promulgation of FinCEN's BOI reporting rule, no "centralized or complete store of information" existed about the ownership or operation of legal corporate entities. Such an information gap made enforcement of money laundering statutes extremely difficult. 

Requiring entities to disclose information about their "beneficial ownership" will reduce the capabilities of bad actors to abuse the corporate chartering system. A database of beneficial ownership information, accessible to law enforcement and government agencies, will allow enforcers to track and connect the movement of money between shell companies. 

National security experts and government officials have argued that gaps in the beneficial ownership reporting scheme have allowed criminal and terrorist actors to finance their activities utilizing US entities. Terrorist organizations frequently have criminal arms that participate in financial fraud, corruption, and human, weapons, and drug trafficking. 

Lack of means to track ill-gotten gains through the complex web of corporate charters and relationships can often mean that such proceeds are laundered through "legitimate" financial and corporate systems, assisting criminal entities and implicating legitimate businesses in illegal activities. 

FinCEN's New BOI Rule: Reporting Entities, Timing of Reports, Content of Reports, and Exemptions 

To meet these challenges, the FinCEN promulgated its final beneficial ownership information reporting rule, which took effect on January 1, 2024. The following section will closely analyze the burdens placed on affected companies, the information required to be reported under the rule, and the various exemptions. The rule focuses on smaller companies, which are particularly susceptible to abuse as shell companies. 

What Entities Must Report Beneficial Ownership Information?

The Final Rule applies its reporting requirements to "reporting companies." In the rule, domestic reporting companies are defined as any entity that is "a corporation, a limited liability company; or created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe." This broad definition subjects nearly all corporate entities to the enhanced reporting requirements, provided they are not subject to any exemption discussed below. 

Timing of Reports 

Under the new rule, a Beneficial Ownership Information (BOI) report must be filed by a certain date.

·      Entities created on or after January 1, 2024, a BOI report must be filed within 30 calendar days of when the entity receives an actual notice that it has been created or the date on which the secretary of state issues a public notice of the creation of the entity, whichever is earlier.

·      Entities created before January 1, 2024 have one year to file their BOI repore (until January 1st, 2025).

·      Entities subject to exemptions (described below) must file a report within the 30 calendar days after the date at which it no longer qualifies for an exemption.

Finally, if the information that a reporting company has submitted in its BOI report becomes outdated, or there is "any change concerning required information previously submitted to FinCEN," the reporting company must file an updated report within the 30 calendar days of the date the change became affected. 

Content of Reports

The Final Rule details the form and manner with which a reporting entity must report its beneficial ownership information. A reporting company making an initial report to FinCEN must include the full legal name of the company; a company's "trade name" or its "doing-business-as" name; a complete current address which consists of the company's principal place of business; the IRS taxpayer identification number of the reporting company; and a full list of all individuals who are "beneficial owners" under the Final Rule. The identity of such individuals must be reported in the BOI Report, including:

·      The full legal name of each individual;

·      The date of birth of each individual;

·      A complete current address;

·      A unique identifying number, which may consist of a passport number, a government or state identification number, a driver's license number, or a foreign passport number; and

·      An image of the document that the unique identifying number was on.

Who is a beneficial owner under the Final Rule? 

Title 31 of the US Code defines a “beneficial owner” as that “individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise – exercises substantial control over [an] entity or owns or controls not less than 25 percent of the ownership interests of [an] entity…” 

In short, a “beneficial owner” is an individual who “actually own[s] or control[s] an entity.” The Final Rule defines a “beneficial owner” as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” 

What does substantial control mean?

Substantial control is a qualitative rather than quantitative measure of ownership. The Final Rule provides some definitions of significant control. An individual exercises substantial control over a reporting entity if the individual:

·      Serves as a senior officer in the company;

·      Has authority over the appointment of a senior officer or officers or a majority of the board of directors;

·      Has authority over removing a senior officer or officers or a majority of the board of directors;

·      Has substantial influence over, or directs and/or determines, important decisions made by the reporting company; or

·      Has exercised direct or indirect substantial control through other means, including controlling at least one intermediary entity that separately, or collectively, exercise substantial control over the reporting entity. 

Exceptions and Exemptions 

The final rulemaking contains certain exceptions to the definition of "beneficial owner," providing that certain classes of owners are not within the definition and certain exemptions, which exempt classes of corporate entities from reporting requirements entirely. 

The Final Rule contains five exceptions to the definition of beneficial ownership. These exceptions include that entities are not required to report the beneficial ownership of:

·      A minor child, given that the parent or guardian's information is duly reported;

·      An individual acting as a nominee or custodian on behalf of another individual;

·      An individual who owns only a future interest in the entity; and

·      A creditor of the reporting entity.

As for exemptions from the reporting requirements altogether, the Final Rule contains several. For the purposes of the reporting requirements, a “reporting company” does not include:

·      Any issuer of securities registered under the Securities Exchange Act;

·      Governmental entities;

·      Banks, under various statutory definitions;

·      Credit unions;

·      Depository institution holding companies;

·      Money transmitting businesses registered with FinCEN;

·      Brokers or dealers in securities;

·      Securities exchanges are statutorily defined;

·      Investment companies or investment advisers;

·      Venture capital funds;

·      Insurance companies;

·      Companies registered under the Commodity Exchange Act;

·      Public utilities;

·      Financial market utilities designated by the Financial Stability Oversight Council;

·      Pooled investment vehicles;

·      Tax-exempt entities;

·      Large operating companies; and

·      Certain subsidiaries of exempt entities.

Beneficial Owner Secure System 

The provision of beneficial ownership information would be useless without a central database that enforcement agencies can access. FinCEN has been developing the appropriately named "BOSS"  -- the Beneficial Ownership Secure System. This system will contain the information provided by companies to FinCEN on their beneficial ownership. This system will be secured to a “High” compliance level, “the highest information security protection level under the [Federal Information Security Management Act].”  

FinCEN will provide access to Federal, state, local, and Indian Tribal enforcement agencies to the BOSS, allowing them to utilize this database in their investigations and enforcement actions. Financial institutions may be permitted access to this information in compliance with their obligations in certain circumstances. The database will be non-public, accessible only to authorized entities. 

Penalties for Failures to Comply  

Failing to timely file a complete and accurate initial BOI report, or timely file an update report when BOI information changes, can lead to criminal penalties including a $500 per day fine (up to a maximum of $10,000) and up to two years in prison. 

Concluding Thoughts and Resources

The BOI rulemaking will particularly impact small businesses and smaller companies. While the new rule will hopefully provide much-needed protection to the financial and corporate charter system, companies and businesses must be aware of their obligations under the Final Rulemaking and ensure they provide updated, accurate information to FinCEN. 

To that end, companies must ensure their beneficial ownership information is accurate, including periodic reviews of their submitted reports to ensure they are still in compliance. Furthermore, if a company suspects it no longer qualifies for an exemption, it should submit a BOI report as soon as possible. Internal compliance departments should use FinCEN's informational resources, especially its Small Entity Compliance Guide – such resources provide essential and critical information to compliance practitioners. 

If you have any questions, or need help filing your BOI report, contact us today for a free consultation.