Unfortunately, you and/or your clients will have yet another filing requirement with the Financial Crimes Enforcement Network (FinCEN) that you’ll have to check off your “to do” list beginning as early as January 1, 2024, unless you fit within one of 23 exempt categories. Like the dreaded FBAR (Report of Foreign Bank & Financial Account, Form 114) that is required to be filed for certain foreign financial accounts held by a U.S. person, this new beneficial ownership information (BOI) report carries heavy civil and criminal penalties for either the failure to timely file or incomplete filings. Here are some bullet points to get you up-to-speed on this new FinCEN filing requirement:
- What is the new filing requirement with FinCEN?
The Corporate Transparency Act added a new section, 31 U.S.C. § 5336, to the Bank Secrecy Act to address the broader objectives of beneficial ownership transparency. The section requires certain types of domestic and foreign entities, called “reporting companies,” to submit specified BOI reports to FinCEN. (And FinCEN already is the repository for filing various other forms such as Report 112, Currency Transaction Report; Report 110, Designation of Exempt Person; Report 111, Suspicious Activity Report; Report 114, Report of Foreign Bank and Financial Accounts; and Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.) In certain circumstances, FinCEN is authorized to share this BOI with government agencies, financial institutions, and financial regulators, subject to appropriate protocols.
- Why is this BOI report required by the government?
Congress recognized that most or all states do not require information about the beneficial owners of corporations, limited liability companies, or other similar entities formed under the laws of various states. With this absence of ownership information, Congress believed that bad actors leveraged this gap of information to engage in illicit activity, including money laundering, tax fraud, financial fraud, and foreign corruption. (Congress enacted new section 5336 to subchapter II of chapter 53 of Title 31 of the United States Code.)
- What are the penalties for failing to comply with the BOI reporting requirement?
Any person that violates the BOI reporting requirement “shall be liable to the United States for a civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and may be fined not more than $10,000, imprisoned for not more than 2 years, or both.” 31 U.S.C. § 5336(h)(3)(A). A violation includes not only the failure to timely file but also the failure to submit correct BOI reports.
- Who is required to file BOI report and when is it due with FinCEN?
- A “reporting company” created or registered to do business before January 1, 2024 – will have until January 1, 2025 to file its initial “beneficial ownership information” report.
- A “reporting company” created or registered on or after January 1, 2024, will have 30 days to file its initial “beneficial ownership information report.” This 30-day deadline runs from the time the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.
- You mentioned “initial report.” Is this a recurring report that must be filed?
No. The BOI report is required to be filed just once. However, If there is any change to the required information about your company or its beneficial owners in a BOI report that your company filed, your company must file an updated report no later than 30 days after the date of the change.
- What is a “reporting company”?
- Domestic reporting companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States.
- Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.
- Who is a “beneficial owner” of a “reporting company”?
A “beneficial owner” is an individual who either directly or indirectly: (1) exercises “substantial control” over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests. An individual can exercise “substantial control” over a reporting company in different ways such as being a “senior officer” (the company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function), possessing the authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company, or being an “important decision-maker” for the reporting company. What would fit within the category of “important decisions” to fall within the “substantial control” net to be considered a beneficial owner? An individual that directs, determines, or has substantial influence over important decisions concerning a reporting company’s business, finances, and structure exercises substantial control over a reporting company. Examples include where a person directs the selection or termination of a business line or geographic focus, deciding whether to enter or terminate a contract, deciding where to make major expenditures or a company’s compensation scheme.
- Are there any exceptions to the “beneficial owner” definition?
Yes. There are five exceptions to the definition of beneficial owner: (1) minor child; (2) nominee, intermediary, custodian or agent (someone who performs ordinary advisory or other contractual services such as tax professionals); (3) employees who are not senior officers with control that is derived solely from their employment status; (4) inheritor (individual’s only interest in the reporting company is a future interest through a right of inheritance); and (5) creditor.
- What is “beneficial ownership information”?
Beneficial ownership information refers to identifying information about the individuals who directly or indirectly own or control a company. Two categories of information will be required in the BOI report: (1) information about the “reporting company”; and (2) information about the “beneficial owners” of the reporting company.
- How much information will be required to be submitted in the BOI report?
- Information regarding the “reporting company” – not that much information is required to be submitted to FinCEN for reporting companies. The BOI report must include the legal name of the company, and DBAs, current address, the jurisdiction of formation or registration.
- Information regarding “beneficial owners” – not that much information is required to be submitted to FinCEN for beneficial owners. However, the problem may come from determining whether a person exercises “substantial control” over the reporting company to qualify as a “beneficial owner.” Once “beneficial owners” are determined, most of the BOI report will include basic data such as the full legal name of the beneficial owner, DOB, and their current residential or business address. The troublesome part for “beneficial owners” is that the BOI report must include a unique identifying number from an image sourced from one of four types of acceptable identification documents: (1) a nonexpired U.S. passport; (2) a nonexpired state, local, or Tribal identification document; (3) a nonexpired state-issued driver’s license; or, (4) if an individual lacks one of those other documents, a nonexpired foreign passport. So, this central BOI database will include not only beneficial owner information but a picture of each beneficial owner. In response to concerns that the government would possess a public database of photos of these beneficial owners, FinCEN responded, “images of identification documents will assist law enforcement in accurately identifying individuals in the course of an investigation because those scans will contain a picture of the person associated with the identifying number.” https://www.
federalregister.gov/documents/ 2022/09/30/2022-21020/ beneficial-ownership-informati on-reporting-requirements# footnote-308-p59567
- Are there any entities that are exempt from the BOI reporting requirement?
Yes. Congress exempted 23 specific types of entities from the BOI reporting requirement:
One exempt category is for “large operating companies,” applicable if all six criteria below apply:
- Are reporting companies required to report their “company applicants” (individuals who assisted in directly filing the document that created a domestic reporting company with the secretary of state or similar office) to FinCEN as part of this process?
The answer depends on when the reporting company was created. If the reporting company was created before January 1, 2024, then the reporting company is not required to report its company applicants. However, if the reporting company was created on or after January 1, 2024, then the reporting company is required to report its company applicants.
- Can accounting firms assist me in filing this new BOI report with FinCEN?
TBD. We’ve heard from a few accounting firms that their insurance carriers believe the preparation and filing of these new BOI reports with FinCEN would involve the unlawful practice of law. As such, a few accounting firms have advised us that they would not engage in this work. However, our law firm will be taking on the work of preparing and filing BOI reports.