Beneficial Ownership Reporting Requirements
| Publication year | 2023 |
| Pages | 36 |
TRUST AND ESTATE LAW
This article discusses the beneficial ownership reporting requirements imposed by the new FinCEN rule that becomes effective on January 1, 2024.
The US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued the final beneficial ownership information (BOI) reporting requirements rule (BOI rule or rule) on September 29, 2022. The rule takes effect on January 1, 2024, and will impose disclosure obligations on more than 32.5 million existing entities. All entities that are created by filing a document with a secretary of state will be required to submit BOI unless the entity qualifies for an exemption. While the rule imposes obligations at the entity level and does not directly subject lawyers to its requirements, it will significantly impact trust and estate and business lawyers' practices. This article addresses the rule's background and purpose; key provisions of the rule, including who is considered a beneficial owner and what information is required to be reported; penalties for noncompliance; and practical guidance for trust and estate and business lawyers.
Background and Motivation for the Rule
FinCEN promulgated the BOI rule to implement section 6403 of the Corporate Transparency Act (CTA),[1] a federal law passed in 2021 requiring reporting of company and beneficial owner information to FinCEN. A main objective of the rule is to "prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity."[2] The rule is intended to address deficiencies in the United States' existing regulations combating threats to the integrity of the international financial system.[3]
Many of these threats are carried out through shell companies, which are entities that can be used to conceal their owners' true identities.
" Over 30 countries have implemented some form of central register of beneficial ownership information, and more than 100 countries, including the United States, have committed to implementing beneficial ownership transparency reforms."
Although shell companies have legitimate and legal uses, they provide anonymity that can facilitate illicit and illegal acts around the globe. They allow billions of dollars to be transferred across borders every year to unknown owners.[4] Shell companies are used to evade taxes and government sanctions, launder money, and finance terrorists.[5] The Treasury Department estimates that roughly $300 billion from financial crime is susceptible to money laundering every year in the United States alone.[6] Federal legislative and regulatory efforts to combat money laundering gained momentum following the 2022 Russian invasion of Ukraine, when domestic and foreign shell companies were used to evade sanctions imposed on Russia.
The rule complies with recommendations provided by the Financial Action Task Force (FATF), an international, intergovernmental task force that the United States helped found. Over 30 countries have implemented some form of central register of beneficial ownership information, and more than 100 countries, including the United States, have committed to implementing beneficial ownership transparency reforms.[7] By requiring the reporting of BOI and providing law enforcement, the intelligence community, regulators, and financial institutions access to a central BOI registry, the rule is intended to "diminish the ability of illicit actors to obfuscate their activities through the use of anonymous shell and front companies."[8]
Who Does the Rule Affect?
The rule applies to domestic and foreign entities and requires a reporting company to provide information to FinCEN regarding (1) the reporting company itself, (2) each beneficial owner of the reporting company, and (3) the reporting company's company applicant(s). Reporting companies created before January 1, 2024, are not required to report company applicant information but must report information regarding the reporting companies and each beneficial owner. The rule places the obligation to disclose
INFORMATION REQUIRED FOR BOI REPORTS
REPORTING COMPANY INFORMATION
BENEFICIAL OWNER AND APPLICANT INFORMATION[1]
Full legal name and any alternative names through which it engages in business
Full legal name and date of birth
Street address of its principal place of business
Current residential or business street address
Jurisdiction of formation or registration
A unique identifying number from an acceptable identification document (e.g., a nonexpired US passport; state, local, or tribal identification document; state-issued driver's license; nonexpired foreign passport)
Taxpayer Identification Number
An image of the identification document from which the unique identifying number was obtained
NOTE
[1] 31 CFR § 1010.380(b). Companies formed before January 1, 2024, are not required to report this information for company applicants.
information on the reporting company itself and does not impose any direct obligation on lawyers. The information required to be reported is listed in the accompanying table.
Reporting Companies
A "reporting company" is defined broadly to include any entity that is "a corporation, limited liability company, or other similar entity" and that is either (1) created by filing a document with a secretary of state or a similar office under the laws of a state or Indian tribe or (2) formed under the laws of a foreign country and registered to do business in the United States by filing a document with a secretary of state or a similar office under the laws of a state or Indian tribe.[9]
Because this definition includes only entities created by filing a document with a secretary of state or similar office, it may exclude many sole proprietorships, general partnerships, and certain types of trusts.[10] Registering for a business license or similar permit does not in itself make an entity a reporting company.
The rule also provides 23 categories of entities that are exempt from the new reporting requirement. Many of the exempt entities are already required to disclose BOI under other state or federal laws, including publicly traded companies, banks, and insurance companies.[11]Other entities are exempt because they are unlikely to be shell companies used for illicit purposes, including companies with (1) more than 20 full-time employees, (2) more than $5 million in gross sales, and (3) a physical office in the United States (large operating entities). Tax-exempt entities are also exempt from the rule. Inactive entities are exempt if they (1) were formed before January 1, 2020, (2) are not owned by any foreign persons, (3) are not engaged in an active business, (4) hold no assets, (5) have had no change in ownership in the prior 12 months, and (6) have not received more than $1,000 in the last 12 months.
FinCEN estimates that approximately 11% of the 36.5 million entities expected to exist by January 1, 2024 (the effective date) will be exempt from the rule.[12] Large operating entities and tax-exempt entities are projected to represent nearly 70% of exempt entities. FinCEN estimates that it will cost reporting companies with a simple ownership structure $85 to prepare and submit their initial BOI reports, but for reporting companies with complex ownership structures the estimated cost exceeds $2,500.[13]
Beneficial Owners
FinCEN requires a reporting company to identify and provide information for all beneficial owners of the reporting company. Beneficial owners are the persons who ultimately own or control the company. Consistent with the CTA, the BOI rule defines a beneficial owner as any individual who, directly or indirectly, (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the ownership interests of the reporting company.[14]
The "substantial control" component for identifying beneficial owners is likely the most subjective aspect of the rule. Substantial control can be exercised directly or indirectly, including by a trustee of a trust. An individual may be determined to have substantial control and deemed a beneficial owner if they (1) serve as or exercise the authority of a senior officer of the reporting company (including as general counsel); (2) have authority over the appointment or removal of any senior officer; (3) direct, determine, or have...
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