The FinCEN Beneficial Owner Information Requirement

An Introduction to the FinCEN Beneficial Owner Information Requirement

The Financial Crimes Enforcement Network (FinCEN) Beneficial Owner Information (BOI) reporting requirement contained in the Corporate Transparency Act (2021) commences on January 1, 2024.

While this new mandate seeks to increase transparency in U.S. based corporate entities, as well as fight crimes such as money laundering and strengthen the government’s defenses against illegal financial activities, as of the date of this article, the system for such reporting remains in development and is intended to be available before the deadline for reporting.

This article serves to provide a brief overview of this new requirement, its implications and how businesses can navigate this new regulatory framework.

Understanding the FinCEN Beneficial Owner Information Requirements

The purpose of the FinCEN BOI requirement is to curb certain financial crimes by requiring those who ultimately control and benefit from U.S.-based entities to report their identities.

The mandate defines individuals who either directly or indirectly own or control 25% or more of a U.S.-based legal business entity (including limited liability companies (LLC), corporations, etc.) as “beneficial owners” and requires them to disclose certain information to FinCEN, thereby strengthening the U.S. government’s ability to track and, ultimately, prevent money laundering and other crimes. 

Important Elements of the Requirement

1. Identifying who Qualifies as a Beneficial Owner – pursuant to this mandate, individuals who own or have substantial control of at least 25% of a legal business entity are considered a “beneficial owner”. This definition also includes those with significant managerial authority within the entity, which has resulted in some ambiguity and confusion as to the need for certain individuals such as managers or accountants to report as well.

2. What needs to be Disclosed? – the main reporting requirements are the beneficial owner’s full legal name, date of birth, address, Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), as well as an explanation of the nature and extent of the individual’s ownership or control.

3. Which Entities Must Report? – according to the FinCEN website, companies that are required to report are referred to as “reporting companies.” There are two types of report companies, namely “Domestic Reporting Companies” (which 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) and “Foreign Reporting Companies” (which are entities formed under the laws of foreign countries and have registered to do business in the United States by filing appropriate documents with a security of state).

4. Are there any qualified exemptions? – there is a list of approximately 23 exempted entities that are not required to report beneficial owner information. The most common of which may be entities traded on U.S. stock exchanges, entities with governmental authority, credit unions and certain money services businesses, certain types of trusts and public accounting firms. Essentially, entity types for which there is already a form of ownership report requirement are exempt from this particular requirement. It should be noted that sole proprietorships are also exempt from reporting UNLESS the sole proprietor was created in the United States by filing a document with a secretary of state.

5. How to report an entity’s BOI? – information is set to be reported using a preset form provided by FinCEN which is submitted electronically via a secured filing system available on FinCEN’s website. At the time this article is published, neither the form nor the portal is available to the public. However, further information should be available here when it becomes available.

6. When are the deadlines for reporting? – entities formed prior to January 1, 2023 must comply before the end of 2024. Entities formed between January 1, 2024 through December 31, 2024 must comply with the reporting mandate within 90 days of the formation of the entity. All entities formed on or after January 1, 2025 will have 30 days to comply. Therefore, it is advisable to comply with the mandate as soon as possible and to wrap the reporting procedure into the formation of an entity.

Effects of the Mandate and Implications for Businesses

1. Enhanced Transparency: as mentioned above, this mandate is aimed at revealing the ownership structures of U.S.-based legal entities so that law enforcement has greater insight into potential or existing financial crimes.

2. Compliance Measures: there are very strict penalties for non-compliance, including civil fines and criminal penalties of imprisonment. Civil penalties are up to $500 for each day that the violation continues while criminal penalties involve up to two years imprisonment and a fine up to $10,000. Therefore, it is extremely important that all reporting businesses accurately and timely report all beneficial owner information.

3. Privacy Concerns: creating a balance between the need for transparency and each beneficial owner’s privacy remains a challenge of this requirement. Certain businesses, especially those specifically created to ensure the privacy of the owner’s identity, may have contentions with the privacy implications of this mandate.

4. Streamlined Investigations: the goal is for this mandate to create a FinCEN database that will be a valuable tool in tracking and investigating financial crimes for law enforcement agencies throughout the country.

Compliance Requirements

It is suggested that all businesses analyze their entities to determine their reporting status. If it is determined that the entity does in fact qualify as a Report Company and does not fall under an exemption, then the business management should conduct a thorough review to collect the necessary information to identify all Beneficial Owners and gather their personal information.

Secured systems, such as secured databases and encryption measures, should be utilized when collecting such information to protect sensitive data.

Further, making sure that all necessary owners and staff are properly made aware of and trained on the new requirements is crucial. This includes fully understanding who may or may not be considered a Beneficial Owner, as well as, the specific information that needs to be reported. 

It is imperative to consult legal advice to assist your business entity through this process, as well as compliance considerations and risk mitigation efforts. However, keep in mind that the novelty of this mandate and the limited information provided to date have created ambiguity throughout the legal industry. 

Potential Compliance Challenges

As mentioned, the balance between the general need for transparency and individual rights of privacy is blurred. This results in businesses having to find ways to report BOI while maintaining the privacy rights of individual members of the entity. 

While there is no cost charged by FinCEN to file reports, this reporting requirement may prove burdensome to certain entities, especially small businesses, due to the need to hire the counsel of professionals. It may also become administratively problematic when dealing with small entities with limited resources.

The requirement may also prove difficult for international organizations, who will very likely need to coordinate with U.S.-based legal and accounting professionals to comply. 

Beneficial Owner Requirement Conclusions

While this new mandate brings about potential challenges for business entities, the requirements also provides an opportunity for entities to examine and evaluate their internal structures and strengthen compliance measures. 

By understanding the requirements, staying informed, and seeking professional guidance, business entities can manage this mandate successfully and with ease.