New FinCEN BOI Reporting Rule Requires Ownership and Control Disclosures that Previously Allowed for Complete Anonymity in Entity Formation
By: Sheridan DeJong
On September 30, 2022, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule (the “Rule”) implementing the beneficial ownership information (BOI) reporting provisions of the Corporate Transparency Act (CTA). The purpose of the rule is to assist FinCEN and other agencies in protecting national security and enhancing the integrity of U.S. financial systems by making it more difficult for corrupt individuals to use shell companies to launder money, hide assets, or otherwise abuse the U.S. financial system for illicit purposes. However, these regulations will impact small business owners, real estate holding companies, and other qualifying “Reporting Companies” by requiring disclosures that previously provided owners with total anonymity. FinCEN estimates that there will be at least 32.6 million Reporting Companies in existence at the time the rule goes into effect, with the obligation to report the BOI information continuing for each new Reporting Company formed.
What: Reporting Requirements
The Rule requires all qualifying Reporting Companies to report beneficial ownership information upon formation and provides an ongoing obligation to update this information when ownership changes. The required information will be filed with FinCEN and incorporated into a database which is only accessible to certain individuals. To implement the CTA and carry out the Rule, FinCEN will develop additional guidelines regarding who and what agencies may access the BOI reports, for what purposes, and what safeguards will be put in place to ensure information is secure and protected.
The current Rule provides that FinCEN is only authorized to disclose the reported BOI to a defined group under certain circumstances. For example, federal agencies may only obtain access to BOI when it will be used in furtherance of a national security, intelligence, or law enforcement activity; for state, local, and tribal agencies, a court of competent jurisdiction must authorize the agency to seek BOI as part of a criminal or civil investigation; foreign government access is limited to requests made by foreign law enforcement agencies, prosecutors, and judges in specified circumstances; FinCEN may also disclose BOI to financial institutions, with certain required consents, to help them comply with customer due diligence requirements under applicable law.
The information required in the BOI report includes the following:
- Identification of the Reporting Company
- The following information about each Beneficial Owner:
- Unique identifying number and issuing jurisdiction from an Acceptable Identification Document
- “Acceptable Identification Document” includes: (i) a nonexpired U.S. passport, (ii) a non-expired identification document issued by a State, local government, or Indian Tribe acting for the purpose of identification of that individual, (iii) a nonexpired driver’s license issued by a State, or (iv) if none of the foregoing exist for the individual, a nonexpired passport issued by a foreign government.
- An image of the Acceptable Identification Document
- For companies formed after January 1, 2024, the same information provided in 2(a)-(e) is required for the Company Applicant as well.
Who: Reporting Companies, Beneficial Owners, and Company Applicants
All qualifying “Reporting Companies” must provide the BOI report. “Reporting Companies” are defined as either a domestic reporting company or a foreign reporting company. Domestic Reporting Companies include any corporation, limited liability company, or other entity created by filing a document with the secretary of state or similar office under the laws of a State (of the United States) or tribal jurisdiction. Foreign reporting companies include any corporation, limited liability company, or other entity formed under the laws of a foreign country which is registered to do business in any State (of the United States) or tribal jurisdiction by filing a document with the secretary of state or similar office. Therefore, any entity which is formed or registered in a State by filing a document is considered a “Reporting Company” subject to the BOI reporting requirements. This means partnerships, certain types of trusts, and other entities which do not require a filing for formation would be exempt from filing. Additionally, the Rule exempts 23 types of entities from submitting the report: (i) securities issuers, (ii) domestic governmental authorities, (iii) banks, (iv) domestic credit unions, (v) depository institution holding companies, (vi) money transmitting businesses, (vii) brokers or dealers in securities, (viii) securities exchange or clearing agencies, (ix) other entities registered pursuant to the Securities Exchange Act of 1934 entities, (x) registered investment companies and advisers, (xi) venture capital fund advisers, (xii) insurance companies, (xiii) state licensed insurance producers, (xiv) entities registered pursuant to the Commodity Exchange Act, (xv) accounting firms, (xvi) public utilities, (xvii) financial market utilities, (xviii) pooled investment vehicles, (xix) tax-exempt entities, (xx) entities assisting tax-exempt entities, (xxi) large operating companies, (xxii) subsidiaries of certain exempt entities, and (xxiii) inactive businesses. Most of the exemptions apply to larger businesses, meaning many small businesses will be affected by the reporting requirements.
“Beneficial Owners” include any individual who, directly or indirectly, either: (a) exercises Substantial Control over the Reporting Company, or (2) owns or controls at least 25% of the Ownership Interests of the Reporting Company. In light of the purpose of the Rule, the definitions of “Substantial Control” and “Ownership Interests” are complicated and address a variety of activities, standards, and mechanisms for determining which individuals qualify as Beneficial Owners. The Rule aims to capture anyone who makes important decisions for the entity or who has significant ownership of the company, even if that ownership is held indirectly through complex ownership structures. For a majority of Reporting Companies, the Beneficial Owners will be easy to identify. However, for Reporting Companies with complicated structures, identifying and reporting Beneficial Owners may not be as straightforward, and may require disclosure of BOI for individuals that would typically be hidden behind the scenes without the Rule’s requirements.
There are 5 clear exemptions from the definition of Beneficial Owner—(i) minor children, if the information of the child’s parent or guardian is reported; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an individual acting solely as an employee of the Reporting Company and whose control over or economic benefits from such entity is derived solely from the employment status of the person; (iv) an individual whose only interest in the Reporting Company is through a right of inheritance; or (v) a creditor of the Reporting Company, unless the creditor otherwise meets the requirements of a Beneficial Owner (i.e., exercises Substantial Control over the Reporting Company, or owns or controls not less than 25% of the Ownership Interests of the Reporting Company).
Company Applicants are more easily identified than Beneficial Owners. “Company Applicants” include the individual who directly files the Reporting Company’s formation or registration document, and the individual who is primarily responsible for directing or controlling the filing of the formation or registration document by another.
When: Effective Date and Ongoing Obligations
The rule goes into effect on January 1, 2024. Reporting Companies created before the effective date will have until January 1, 2025, to file the BOI report. Companies created after January 1, 2024, will be required to file the BOI report within 30 days of their creation or date of registration. After the initial BOI report, Reporting Companies have an ongoing obligation to report changes to the information initially provided.
How: Next Steps and Filing
FinCEN is still in the process of developing the infrastructure to administer the Rule. The agency will not only need to collect massive amounts of information in an efficient way but must also store the BOI reports in a secure system that complies with the requirements of the CTA. Before any reports can be submitted, the reporting forms must be developed and go through the rulemaking and public comment process, and the BOI storage system must be developed. While this is in progress, FinCEN intends to develop compliance and guidance materials to assist Reporting Companies and other involved individuals, such as Secretary of State offices.
While the Rule’s January 1, 2024, effective date may seem far off into the future, with the number of Reporting Companies that will be impacted, it’s never too soon to start thinking about compliance. Impacted Reporting Companies will need to consider the initial reporting requirements, which individuals in the company may be subject to these reports, and how the company will continue to comply with the ongoing reporting obligations.