On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury (Treasury) issued the first of three regulations to implement Section 6403 of the Corporate Transparency Act. FinCEN was created in 1990 to support law enforcement efforts under the Bank Secrecy Act to “safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.”[1] This first regulation enhances recent updates to a number of sections of the Bank Secrecy Act and the Anti-Money Laundering Act, reflecting the Treasury’s efforts to address increasingly inventive means of sheltering illegal profit-making in U.S. real estate and business organizations.

This regulation will require most business entities created in or registered to do business in the U.S. to report personal identifiable information about their beneficial owners to FinCEN. The required identifying information includes name, address, date of birth, taxpayer identification number, and other information that will help identify those individuals who own or control the company. The effective date of the new regulation is January 1, 2024.

Background

Each year, millions of small businesses are formed in the United States, but only a few jurisdictions require disclosure of information about the owners and/or individuals who submit company applications.[2] As a result, criminals have taken advantage of this lack of transparency by legally creating shell companies to conduct illegal business.[3] Over the past 20 years, FinCEN has found that these shell companies have been used by both domestic and foreign criminals to “purchase real estate, conduct wire transfers, burnish the appearance of legitimacy when dealing with counterparties (including financial institutions), and control legitimate businesses for ultimately illicit ends.”[4] This regulation will require existing companies and companies formed after January 1, 2024, to report the personal information of its owners and applicants in hopes of creating a uniform system to aid law enforcement in investigating shell companies created for illegal purposes, promote transparency, and protect U.S. national security.[5]

The beneficial ownership information regulation (BOI Reporting Regulation) sets out:

1. who must report their personal information,
2. the content, form, and manner of the reports, and
3. when the information must be reported.[6]

Any willfully false or fraudulent information reported or attempted to be reported to FinCEN is a violation of the regulation and is unlawful.[7]

This initiative correlates with governments efforts to increase:

1. information gathering,
2. risk profiles, and
3. ongoing monitoring of those individuals and institutions conducting illegal business enterprises through shell companies and similar machinations.

Whose Information Must be Reported

Reporting companies are required to report information regarding their beneficial owners and their company applicants.[8] The regulation defines “reporting companies,” “company applicants,” and “beneficial owners.” A reporting company can be domestic or foreign.[9] Domestic reporting companies include any entity that is created by filing documents with the secretary of state or similar office under the laws of any state or Indian tribe and include but are not limited to corporations and LLCs.[10] Foreign reporting companies are created under the laws of a foreign nation but are registered to do business in the United States.[11]

The BOI Reporting Regulation recognizes that many businesses are already subject to substantial regulation or have to provide their beneficial ownership interest information to governmental authorities. Therefore, the regulation includes 23 enumerated exemptions.[12] The following companies are exempt from filing reports under this new regulation:

1. securities reporting issuers,
2. governmental authorities,
3. banks,
4. credit unions,
5. depository institution holding companies,
6. money service businesses,
7. securities brokers or dealers,
8. securities exchanges or clearing agencies,
9. Exchange Act registered entities,
10. investment companies or investment advisers,
11. venture capital fund advisers,
12. insurance companies,
13. state-licensed insurance producers,
14. Commodity Exchange Act registered companies,
15. accounting firms,
16. public utilities,
17. financial market utilities,
18. pooled investment vehicles,
19. tax-exempt entities,
20. entities assisting a tax-exempt entity that operate exclusively to provide financial assistance to, or hold governance rights over, such an entity,
21. large operating companies that employ over twenty full-time employees in the U.S. with a U.S. office and over $5,000,000 in gross receipts or sales,
22. subsidiaries of certain exempt entities, including large operating companies, banks, and insurance companies, and
23. inactive entities that existed before January 1, 2020, and have not had more than $1,000 in funds or any assets in the past twelve months.[13]

Company applicants, if they are different than the beneficial owners, are the individuals who actually file the documents to register or create the entity.[14] This definition includes any individual who directs or controls the individual who files documents to create the entity.[15] A beneficial owner is “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company.”[16] In short, the regulation provides three specific indicators of “substantial control”:

1. service as a senior officer of a Reporting Company;
2. authority over the appointment or removal of any senior officer or a dominant majority of the board of directors (or similar body) of a Reporting Company; and
3. direction, determination, or decision of, or substantial influence over, important matters of a Reporting Company.[17]

For the 25% of ownership threshold, the regulation specifies that an individual’s ownership interest includes equity stock options regardless of whether they have been exercised and capital or profit interests.[18] The proposed regulations also provide a catch-all category for any person who exercises "any other form of substantial control over the reporting company."

Exceptions to the definition of “beneficial owner” include:

1. minor children,
2. individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual,
3. employees whose control is solely derived from employment status, ownership through inheritance, and
4. creditors of the entity unless otherwise meeting the requirements of a beneficial owner.

Content, Form, and Manner of Initial and Updated Reports

Every reporting company must file an initial report that contains

1. a certification that its report is true, accurate, and complete,
2. information about the reporting company, and
3. information about the beneficial owners and the company applicants.[19]

Every reporting company must also issue updated or corrected reports that reflect any changes with respect to the required information that was previously submitted in the initial report concerning only the reporting company and the beneficial owners, not the company applicants.[20]

Reporting companies must report their

1. full legal name, as well as any trade or d/b/a names,
2. street address for the principal place of business if it is in the United States, or if it is outside, then the street address of the primary location in the U.S. where the reporting company conducts business,
3. jurisdiction of formation for both foreign and domestic companies as well as the state or tribal jurisdiction where a foreign company first registers and
4. TIN, including an Employer Identification Number or its foreign tax identification number for a foreign company without one.[21]

The report must contain each of the reporting company’s beneficial owner’s and company applicant’s:

1. full legal name,
2. date of birth,
3. business address for company applicants who create or register companies in the course of their business or a residential address for all other individuals, including beneficial owners, and
4. unique identifying number contained in:
   1. a nonexpired passport,
   2. local or tribal identification document,
   3. nonexpired state-issued driver’s license, or if the individual lacks one of those three, then
   4. a nonexpired foreign passport.[22]

The unique identifying number must be accompanied by the name of the issuing jurisdiction and an image of the document from which the number was obtained.[23]

When Initial and Updated Reports Must be Filed

The effective date of the BOI Reporting Regulation is January 1, 2024.[24] Reporting companies that are in existence before the effective date must file their initial report within one year of the effective date.[25] Reporting companies created after the effective date will have 30 days to file their initial report.[26] Updated or corrected reports must be filed within 30 days of any change of information previously submitted to FinCEN about the reporting company or the beneficial owners, not the company applicants.[27]

Estimated Costs to Reporting Companies

FinCEN estimates that there will be approximately 32.6 million reporting companies in the first year after the effective date of the BOI Reporting Regulation.[28] It anticipates the cost for reporting companies with a simple structure (i.e., one beneficial owner) will be around $85.[29] For reporting companies with complex structures (i.e., up to eight beneficial owners and two company applicants), costs could reach $2,000 in professional fees to collect the necessary information and an additional $600 for the initial report.[30] Updated reports are expected to cost simple reporting companies around $40 and complex reporting companies around $560.[31]

Down the Road

FinCEN plans to pass two more regulations to implement Section 6403 of the Corporate Transparency Act. They will be aimed at establishing protocols for access to and disclosure of beneficial owner information and revising the 2016 Customer Due Diligence Rule.