Background
The Beneficial Ownership Rules (BOR) issued by FinCEN were first proposed as part of the Bank Secrecy Act (BSA). FinCEN’s stated aim was to improve financial transparency and prevent criminals and terrorists from misusing entities to disguise illegal activities. The BOR became effective July 11, 2016 and made mandatory May 11, 2018.
For accounts that were opened before May 11, 2018, those were grandfathered, except for any subsequent change of beneficial ownership. For all accounts, the beneficial ownership is required to be recertified at each new account opening.
These rules remained unchanged until the Corporate Transparency Act (CTA) was enacted in 2021. Pursuant to that legislation, FinCEN was tasked with issuing proposed regulations requiring most legal entities to register their Beneficial Ownership Interests (BOI) with FinCEN, and to conform the current BOR to the expanded definitions and scope of BOI.
On Dec. 8, 2021, FinCEN issued its proposed regulations under the CTA.
After evaluating public comments on the proposed regulations, the Final Rule was announced on Sept. 29, 2022. The Final Rule places the burden on reporting companies, not the financial institutions, to report their BOI to FinCEN. The reporting requirements of the Final Rule take effect Jan. 1, 2024.
However, the Final Rule does not dismiss the customer due diligence requirements imposed on financial institutions. Instead, FinCEN also announced that the Final Rule is only one of three rulemakings planned to implement the CTA. FinCEN will also issue rules setting forth who may access BOI, for what purposes and what safeguards will be required to ensure that the information is secured and protected, and will revise FinCEN’s customer due diligence rule to conform with the Final Rule.
On Dec. 15, 2022, FinCEN issued a Notice of Proposed Rulemaking (NPRM) concerning BOI access and safeguards. As of this writing, no proposed rulemaking has been published about the conforming rule.
It is worthwhile for financial institutions to have a working knowledge of the Final Rule in order to anticipate its effects on customer due diligence and anticipate the yet-to-be-issued regulations conforming the customer due diligence rules to the Final Rule.
The Final Rule, Proposed Access and Safeguard Rules, and Next Steps
The Final Rule describes who must file a BOI report, what information must be reported, and when a report is due. The Final Rule requires reporting companies to file reports with FinCEN that identify two categories of individuals — the beneficial owners of the entity and the company applicants of the entity.
Reporting Companies
The Final Rule describes two types of reporting companies: foreign and domestic.
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. A domestic reporting company is a corporation, limited liability company, or any entity created by the filing of a document with a secretary of state or any similar office.
The Final Rule also lists 23 types of entities that are exempt from the definition of reporting company. Those exemptions are primarily designed to avoid duplication of reporting BOI in other forms. Exempt companies include financial institutions, bank holding companies and producers, most publicly traded entities, insurance companies, tax exempt entities, large operating entities (over 20 full-time employees in the U.S., and over $5 million in gross receipts in the aggregate reported on its most recent federal income tax return and has an operating presence and physical office in the U.S.), and inactive entities.
FinCEN anticipates that, in addition to LLCs and corporations, reporting companies would include (subject to applicable exemptions) limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships since these are generally formed by filing with a secretary of state or similar office.
FinCEN also has noted that some entities are not involved in filing a formation document with the secretary of state or similar office and therefore would be excluded from the definition of reporting company. For instance, in many states, trusts do not file a formation document. The author anticipates that general partnerships would also be excluded in those states that do not require them to file a formation document. It remains to be seen whether any states would change their filing requirements for such entities, though at this time FinCEN is not requiring that.
Beneficial Owners
The Final Rule defines a “beneficial owner” as any individual who, directly or indirectly, either exercises substantial control over a reporting company, or owns or controls at least 25% of the ownership interests of a reporting company. The Final Rule defines “substantial control”, in broad language, to capture anyone who is able to make important decisions on behalf of the entity. The Final Rule also provides standards and mechanisms for determining whether an individual owns or controls 25% of the ownership interests. There are also detailed rules for multi-tier entities, including those which may have exempt entities in the chain of ownership.
Company Applicants
The Final Rule requires the reporting company to identify the company applicant, which is defined to be (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 reporting company to do business in the United States; and (2) the individual who is primarily responsible for directing or controlling the filing of the formation document by another. For instance, this could be the reporting company’s attorney and that attorney’s paralegal, or the relevant employee(s) of the reporting company.
Given that there are millions of entities currently in existence, some of which are over 100 years old or older, FinCEN recognized that it could be overly burdensome or impossible to report the identity of many of those company applicants. Consequently, the Final Rule does not require reporting companies existing or registered at the time of the effective date of the Final Rule (Jan. 1, 2024) to report on their company applicants.
BOI Reports
The BOI reports will provide four pieces of information about each of its beneficial owners: name, birthdate, address, and a unique ID number and issuing jurisdiction from an acceptable ID document (and the image of that document).
For reporting companies formed after the effective date (Jan. 1, 2024), these same four pieces of information and document image are required for company applicants.
If any individual provides their four pieces of information directly to FinCEN, they will be given a “FinCEN identifier” which can be provided to FinCEN in a BOI report in lieu of repeating that information again on the report.
Enforcement
The Final Rule allows for the imposition of civil and criminal penalties for willful violations of the Final Rule. The enforcement will be imposed against the person who causes the violation or is a senior officer of the entity at the time of the failure.
Timing
The effective date of the Final Rule is Jan. 1, 2024.
Reporting companies created or registered before Jan. 1, 2024, have one year (until Jan. 1, 2025) to file their initial BOI reports; reporting companies created or registered after Jan. 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports. Consequently, we expect the BOI report forms and the reporting system to be in place before the end of this year.
Changes in beneficial ownership are to be reported within 30 days of the change. If a BOI is incorrect or inaccurate, the BOI must be corrected within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy.
FinCEN is developing the infrastructure to administer the requirements of the Final Rule and safeguard the confidentiality of the information to be reported, including the information technology to be used to store BOI, what FinCEN has called the Beneficial Ownership Secure System, or “BOSS” for short. It will be cloud-based and will meet the highest Federal Information Security Management Act level (FISMA High rating). The target date for the system to begin accepting BOI reports is Jan. 1, 2024.
Proposed BOI Access and Safeguards Rules
A Notice of Proposed Rulemaking for BOI Access and Safeguards was issued on Dec. 15, 2022. As anticipated, it proposes to allow financial institutions using BOI to facilitate compliance with their customer due diligence requirements to access the BOSS. Others authorized to access the BOSS includes the U.S. Treasury Department; federal, state, local, and tribal government agencies requesting BOI for specific purposes; and foreign law enforcement agencies requesting BOI for specific purposes.
The Proposed BOI Access and Safeguards Rules also impose requirements on the recipients of the BOI information, to have standards and procedures for storing the information in a secure system to which only authorized personnel have access and only for authorized purposes. These standards and procedures are subject to audit and include requirements to certify compliance with the CTA and these proposed regulations.
For financial institution access, a financial institution must obtain consent from the reporting company for its BOI from the BOSS. The financial institution would then submit identifying information specific to a reporting company and, in return, receive an electronic transcript with that entity’s BOI.
Civil and criminal penalties can be imposed against anyone who knowingly discloses or unlawfully uses BOI obtained from a BOI report to, or disclosure of BOI from, FinCEN.
Click the link below to submit written comments on the Proposed Access and Safeguard Rules to FinCEN on or before Feb. 14, 2023.
FinCEN is in the process of developing rulemaking to revise FinCEN’s customer due diligence rule in light of the Final Rule. FinCEN expects to issue the revisions no later than Jan. 1, 2024.
FinCEN will be publishing drafts of BOI report forms to be used by reporting companies and will provide a period of time for public comment before finalizing the forms. FinCEN says it will publish the draft forms “well in advance” of the effective date of the Final Rule.
FinCEN is also in the process of drafting and issuing compliance and guidance documents to assist reporting companies, including a Small Entity Compliance Guide pursuant to federal statute.
Conclusion
FinCEN’s Final Rule implementing the reporting of beneficial ownership information of reporting companies is just the first of three rule makings in connection with the Corporate Transparency Act.
For financial institutions, the Proposed Access and Safeguard Rules make it clear that they will be given access to BOSS to obtain their customer’s BOI, and it indicates that financial institutions will continue to have customer due diligence requirements, but we await the rulemaking designed to conform our existing Customer Due Diligence processes and procedures to the Final Rule.
Spencer Fane attorney Ed Burdzinski can be reached at (713) 212-2670 and eburdzinski@spencerfane.com.
