Effective January 1, 2024, the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury will implement new “beneficial ownership” reporting requirements that will have a significant impact on businesses. The new regulations, which implement the Corporate Transparency Act of 2020 (CTA), aim to enhance transparency of company ownership to combat money laundering, tax fraud, and other illicit activities.
Many businesses in the Pacific Northwest and beyond may be surprised to find that the breadth of FinCEN’s regulations means that they soon will need to report detailed information about their businesses and their owners and officers to the federal government.
Who must report?
The regulations impose federal filing requirements on “domestic reporting companies,” among other entities. A domestic reporting company generally includes any private entity, such as a corporation, limited liability company, or partnership, which does not meet one of the 23 exemptions set out by FinCEN. A few of the most notable exemptions include:
- Large operating companies (i.e., a business with more than 20 full-time employees and more than $5 million in gross receipts from U.S. operations, as shown on its federal income tax return)
- Banks, credit unions, insurance companies and many other entities in the financial services sector
- Governmental authorities and public utilities
- Federally tax-exempt entities
- Subsidiaries of certain exempt entities and inactive entities
Despite these exemptions, FinCEN estimates that this new requirement will impose reporting obligations on tens of millions of businesses, plus the more than two million new entities that are formed each year.
What information must be reported?
The regulations require reporting companies to file identifying information about the reporting company’s “beneficial owners.” The term “beneficial owner” means any individual who directly or indirectly exercises substantial control over a company or owns or controls at least 25 percent of the ownership interests in the company. “Ownership interests” are broadly defined to include any form of equity, voting rights, profits interests, stock, convertible instruments (including debt), warrants, options, put rights, call rights, and any other similar arrangements or mechanisms. “Substantial control” is defined broadly and will capture many executive officers. The term includes senior officers and those individuals who have authority to appoint or remove any senior officer or a majority of the board of directors, as well as individuals who have substantial influence over other important matters affecting the company. There are limited exemptions for creditors, minors (parent/guardian information required), employees who are not senior officers, future inheritance interests, and certain advisers.
The reporting company must also file identifying information about the “company applicants” if the company is formed on or after January 1, 2024. The term “company applicant” means the individual who directly files the document that creates the reporting company, as well as the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved. The company applicant may be the same individual as the beneficial owner. Companies formed before January 1, 2024, need not report information about company applicants.
With respect to each “beneficial owner” and each “company applicant,” a reporting company must report: (i) the full legal name of the individual; (ii) the individual’s date of birth; (iii) each beneficial owner’s residential address and each company applicant’s business address; (iv) a unique identifying number from a government issued ID such as a driver’s license or passport; and (v) a scanned copy of the government issued ID that includes a photograph of the individual.
FinCEN will be sharing this information with federal, state, local, and tribal officials, as well as with foreign officials who submit requests through a U.S. federal government agency for national security, law enforcement, and intelligence purposes. Financial institutions will also have access to this information in certain circumstances, with the consent of the reporting company, and financial institution regulators will have access via their supervision activities.
When is the reporting deadline?
The reporting deadline varies based on when the company was formed. Any reporting company formed before January 1, 2024—such as companies that are currently operating—will have one year (until January 1, 2025) to file their initial report with FinCEN. A reporting company formed on or after January 1, 2024, but before January 1, 2025, will have 90 days to submit an initial report to FinCEN. Finally, a reporting company formed on or after January 1, 2025, will have only 30 days to submit an initial report.
In addition to the initial reporting requirements, reporting companies are required to file updates with FinCEN within 30 days of a change in their beneficial ownership information. Thus, companies will need to continuously monitor pertinent beneficial ownership details and promptly update their beneficial ownership information with FinCEN. Importantly, as soon as a reporting company becomes aware, or has reason to know, of an inaccuracy in the information reported, it has 30 days to file a corrected report.
How do companies report beneficial ownership information to FinCEN?
FinCEN will begin accepting beneficial ownership information report forms (BOIR Forms) on January 1, 2024. The BOIR Form is not yet available. Once it is available, it will be posted on FinCEN’s beneficial ownership information website. Reporting will take place electronically through a filing system available on FinCEN’s website which is intended to be nonpublic and secure. There is no fee for submitting a BOIR Form with FinCEN.
What should businesses do to prepare for this new regulation?
This new FinCEN rule is likely to require a major compliance undertaking for some companies— particularly entities with complex ownership structures that do not qualify for an exemption. Companies should consider taking the following steps to prepare for FinCEN’s reporting requirements:
- Determine whether the company is a “domestic reporting company” or if the company qualifies for an exemption under the regulations.
- Determine which company owners qualify as “beneficial owners” who will need to be included in the filing. Note that determining ownership can involve some complexities because ownership or control may arise through joint ownership (e.g., with a spouse), through control of an intermediary entity that owns the underlying business, or through a trust.
- Determine which company officers exercise “substantial control” over the business and will need to be included in the filing.
- Consider whether the business needs to form any new entities in the near future. If so, consider forming the company before January 1, 2024. As noted above, reporting companies formed before January 1, 2024, will have until January 1, 2025, to file their initial report with FinCEN, whereas reporting companies formed after January 1, 2024, will have only 90 days to file.
- Develop processes for monitoring beneficial ownership information on an ongoing basis to ensure ongoing compliance with the regulations. Non-compliance can result in penalties, fines, imprisonment, and potential reputational damage.
- Continue to monitor for updates to the regulations, including how financial institutions may obtain customer consent to access the database—final rules concerning access to the BOI database are forthcoming and additional changes to the regulations may be implemented.
What are the consequences of noncompliance?
The consequences for noncompliance include civil penalties of $500 per day, penalties of up to $10,000, or imprisonment for up to two years (or all of the foregoing). Inadvertent inaccuracies are forgiven without penalty if the petitioning party can prove that: (i) the information was corrected within 90 days of the applicable filing; (ii) it had no knowledge of the inaccuracy at the time of filing; and (iii) it was not knowingly trying to evade the reporting requirements.
Our attorneys are ready to help you work through these new and evolving regulations. We welcome the opportunity to speak with you about policies or agreements your business may want in place to comply with these new regulations, or to assist you in determining whether your business qualifies for an exemption. Given the firm nature of these deadlines, we urge you to proactively consider what you will need to do to comply. We are also happy to provide legal assistance should you choose to expedite entity formation in advance of January 1, 2024.
Feel free to contact us with any questions that arise for you or your business as the regulations go into effect. You can also reach out to Danielle Hunt, Erich Merrill, Mary Ann Frantz, or your Miller Nash point of contact to learn how we may be of assistance.
This article is provided for informational purposes only—it does not constitute legal advice and does not create an attorney-client relationship between the firm and the reader. Readers should consult legal counsel before taking action relating to the subject matter of this article.