October 26, 2023
Beginning on January 1, 2024, many companies in the United States will have to report information about their beneficial owners, i.e., the individuals who ultimately own or control the company. They will have to report the information to the Financial Crimes Enforcement Network (FinCEN). FinCEN is a bureau of the U.S. Department of the Treasury.
On September 29, 2022, FinCEN issued a final rule implementing the Corporate Transparency Act’s (CTA) beneficial ownership information (BOI) reporting provisions. The rule will enhance the ability of FinCEN and other agencies to protect U.S. national security and the U.S. financial system from illicit use and provide essential information to national security, intelligence, and law enforcement agencies; state, local, and Tribal officials; and financial institutions to help prevent criminals from laundering or hiding money and other assets in the United States. The collection of BOI will help to shed light on criminals who evade taxes, hide their illicit wealth, and defraud employees and customers and hurt honest U.S. businesses through their misuse of shell companies.
The rule describes who must file a BOI report, what information must be reported, and when a report is due. Specifically, the rule requires reporting companies to file reports with FinCEN that identify two categories of individuals: (1) the beneficial owners of the entity; and (2) the company applicants of the entity.
The following are the key elements of the BOI reporting rule:
The rule identifies two type of reporting companies:
1. A domestic reporting company is a corporation, limited liability company (LLC), or any entity 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.
2. A foreign reporting company is a corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.
Under the rule, twenty-three types of entities are exempt from the definition of “reporting company.” These include accounting firms, banks, SEC reporting issuers, credit unions, governmental authorities, money transmitting businesses, brokers and dealers, venture capital funds and other investment advisers.
A beneficial owner includes either:
1. Any individual who, directly or indirectly, exercises substantial control over a reporting company; or
2. Any individual who, directly or indirectly, owns or controls at least 25 percent of the ownership interests of a reporting company.
In defining who has substantial control, the rule sets forth a range of activities that could constitute substantial control of a reporting company and captures anyone who is able to make important decisions on behalf of the entity.
The rule defines a company applicant to be only two persons:
1. The individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the United States.
2. The individual who is primarily responsible for directing or controlling the filing of the relevant document by another.
Beneficial Ownership Information Reports
When filing BOI reports with FinCEN, the rule requires a reporting company to identify itself and report four pieces of information about each of its beneficial owners:
3. Address; and
4. A unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document).
The effective date for the rule is January 1, 2024.
Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.
Reporting companies have 30 days to report changes to the information in their previously filed reports and must correct inaccurate information in previously filed reports within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports.
Failure to file accurate disclosures could result in substantial monetary penalties of $500 per day if the violation continues, capped at $10,000. You might also face no more than two years of imprisonment.
Beneficial Ownership Access
The CTA authorizes FinCEN to disclose BOI under specific circumstances to five general categories of recipients:
1. Federal agency engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activity;
2. State, local, or Tribal law enforcement agency, if a court of competent jurisdiction, has authorized the law enforcement agency to seek the information;
3. Federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country, including a foreign central authority or competent authority under an international treaty, agreement, convention, or official request made by law enforcement, juridical, or prosecutorial authorities in trusted foreign countries when no treaty, agreement, or convention is available;
4. Financial institution subject to customer due diligence requirements, with the consent of the reporting company, to facilitate the compliance of the financial institution with customer due diligence requirements under applicable law.
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