By: Oz Halabi and Sasha Samra
The Financial Crimes Enforcement Network (FinCEN) has issued a final rule regarding beneficial ownership reporting under the Corporate Transparency Act (CTA). Starting January 1, 2024, domestic (U.S.) and foreign (non-US) companies are subject to novel reporting requirements concerning beneficial owners. The rule intends to protect U.S. national security while strengthening the integrity and transparency of the U.S. financial system. It will aid in detecting criminal actors such as oligarchs, kleptocrats, drug traffickers, human traffickers, and those who would use anonymous shell companies to hide their illicit proceeds.
The final rule has an extended timeline for implementation. The rule goes into effect on January 1, 2024. Reporting companies established or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports. However, any reporting companies established or registered after January 1, 2024, will have 30 days to file their initial reports.[1] Following the initial report’s filing, current and new reporting companies must provide updates within 30 days of any change in beneficial ownership information. FinCEN is dedicated to enforcing these statutory duties and imposes significant penalties for non-compliant reporting companies.
Who Must Report and How?
The final rule defines” reporting companies “as domestic and foreign corporations registered to do business in any state or tribal jurisdiction in the United States. The rule does provide exceptions for beneficial owners that are minor children (BOI of parent/guardian reported instead), individuals acting as nominees, intermediaries, custodians or agents, employees whose control/benefits are solely from employment, individuals with future interests through inheritance and certain creditors.
A reporting company must submit specific information for each beneficial owner or company applicant, including the individual’s complete name, date of birth, and residential address.[2] They must also supply a unique identifying number derived from an approved identification document and the name of the state or authority issuing the identification document. FinCEN’s requirement for thoroughness during the reporting assures openness and accountability in financial transactions by correctly capturing all involved parties’ critical personal information and identifying credentials.
The address requirement varies depending on the role of the individual. For a beneficial owner, the reporting company must report the residential street address. For a company applicant, the reporting company must report the individual’s residential street address. A unique regulation exists for professionals who help companies get formed, such as attorneys or company registration specialists. If these professionals are filling out the paperwork on behalf of a company, the reporting company must notify them where its business is situated. The example, if a company applicant is a paralegal who filed the document while working at a law firm, the reporting company must report the business address of the law firm where the paralegal worked when filing the document.
The acceptable forms of identification documents are in general, one of the folowing: an unexpired driver’s license issued by any U.S. state, or U.S. commonwealths, territories, or possessions. Alternatively, an unexpired identification document issued by a U.S. state, local government, or Indian Tribe explicitly for identification purposes is deemed acceptable. For example, a non-driver identification card issued by a state Department of Motor Vehicles qualifies. An unexpired U.S. government-issued passport is also recognized as valid identification.
If an individual does not have any identification papers mentioned above, the reporting company may use the identification number from an unexpired passport issued by a foreign government. Furthermore, while giving this information to FinCEN, the reporting company must include a picture of the identification document connected with the unique identifying number, therefore meeting its statutory duties.
A reporting company that is required to submit beneficial ownership information to FinCEN, can do so using a secure electronic filing system available through FinCEN’s official website. The electronic filing system is presently under development but will be fully operational when the initial reporting date is due.
Who Is a Reporting Company’s” Beneficial Owner(s)” and” Company Applicant(s)”?
Furthermore, the regulation would force most corporations, limited liability companies, and other entities formed or registered to do business in the United States to provide BOI information about their beneficial owners. In general, a beneficial owner is any individual who (1) directly or indirectly exerts” substantial control “over the reporting company or (2) directly or indirectly owns or controls 25 percent or more of the reporting company’s” ownership interests.”
The ability and magnitude of an individual’s capacity to influence critical decisions inside a reporting company determine whether such an individual has” substantial control” over that company.[3] This definition also encompasses senior officers,[4] signifying their significant control, while other rights or obligations may also indicate substantial control. The Beneficial Ownership Information Reporting Regulations, [5]include more detailed information on significant control and qualifying requirements. The question of whether any such person has significant control must be properly and thoroughly analyzed.
Furthermore,” ownership interests “cover various arrangements establishing ownership rights in the reporting company, from holding or owning simple ordinary shares to more complex financial instruments.[6]
Penalties for Violations
For various infractions, the regulation imposes both civil and criminal sanctions. Those who give misleading information on purpose or fail to provide Beneficial Ownership Information (BOI) as required, may incur civil fines of up to $500 for every day the infraction persists. Additionally, persons found guilty of intentional offenses may face fines of up to $10,000, imprisonment for up to two years, or a combination of the two.
The final regulation significantly expands the United States’ anti-money laundering and counter-terrorism funding regulatory framework and its strategy for combating illicit finance. As the final rule’s reporting requirements take effect, we are questioning the ability of FinCEN to manage an unprecedented volume of data, including highly sensitive information. As required by the CTA, the development of a secure database, a haven for sensitive information of beneficial owners, is entrusted to FinCEN.
[1] “Fincen Issues Final Rule for Beneficial Ownership Reporting to Support Law Enforcement Efforts, Counter Illicit Finance, and Increase Transparency.” FinCEN Issues Final Rule for Beneficial Ownership Reporting to Support Law Enforcement Efforts, Counter Illicit Finance, and Increase Transparency | FinCEN.Gov, fincen.gov/news/news-releases/fincen-issues-final-rule-beneficial-ownership-reporting-support-law-enforcement. Accessed 08 Sept. 2023.
[2] “Beneficial Ownership Information Reporting.” Beneficial Ownership Information Reporting | FinCEN.Gov, www.fincen.gov/boi-faqs. Accessed 8 Sept. 2023.
[3] “Beneficial Ownership Information Reporting.” Beneficial Ownership Information Reporting | FinCEN.Gov, www.fincen.gov/boi-faqs. Accessed 8 Sept. 2023.
[4] (i) The term “senior officer” means any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function. 31 CFR 1010.380(f)(8).
[5] 31 CFR 1010.380(d)(1).
[6] Further information on ownership interests, including indirect ownership, can be found in the Beneficial Ownership Information Reporting Regulations at 31 CFR 1010.380(d)(2).
