FinCEN claims the new BOI reporting requirements will improve the abilities of FinCEN and other agencies to safeguard U.S. national security interests and U.S. financial system interests by serving to thwart the efforts of drug traffickers, fraudsters, and other corrupt actors from laundering or concealing assets in the U.S. Whether or not the BOI reporting requirements will frustrate criminal efforts remains to be seen, but it is clear the changes imposed by the CTA will have a big impact on the process for forming and qualifying new business entities.
We’ve summarized below some of the key details you need to know as the effective date approaches.
As a general matter, FinCEN’s final rule requires foreign and domestic “reporting companies” to file a BOI report with FinCEN. The definition of reporting company includes corporations, limited liability companies and “other entities” created by the filing of a document with a secretary of state or similar office in the U.S. Although the final rule does not include an exhaustive list of “other entities,” the expectation is that entities such as LLPs, business trusts, and most limited partnerships will be required to file BOI reports because these entities are typically created by filing. In addition, non-U.S. entities formed under the laws of a foreign country and subsequently registered to transact business in the U.S. via a filing with a governmental authority must also submit a BOI report.
While the definition of reporting companies is broad, the CTA exempts twenty-three entity types from the definition, meaning those entities are exempt from FinCEN’s BOI reporting requirements. The categories of exempt companies include issuers of publicly registered securities, governmental authorities, banks, venture capital fund advisors, insurance companies, accounting firms, public utilities, tax-exempt entities, and large operating companies with more than 20 employees, at least $5 million in gross domestic sales, and a physical operating presence in the U.S. The exemption requirements in the CTA are detailed, so if you think your company may be exempt from the reporting requirements, you are encouraged to consult with corporate counsel to confirm that your entity qualifies.
The BOI reporting rule requires reporting companies to specifically identify their “beneficial owners” and “company applicants.”
A beneficial owner is any individual who directly or indirectly exercises substantial control over a reporting company. An individual is deemed to exercise substantial control if the individual serves as a senior officer, has authority over the appointment or removal of senior officers, has substantial influence over important decisions or exercises other forms of substantial control.
Individuals who directly or indirectly own at least twenty-five percent of a reporting company’s ownership interests are also considered beneficial owners. The rule provides standards and mechanisms for determining whether an individual owns or controls twenty-five percent of a reporting company’s ownership interests. An “ownership interest” is any instrument, contract, arrangement, understanding or mechanism used to establish ownership, including, but not limited to, stocks, capital or profit interests, convertible instruments, and options. An individual may directly or indirectly own or control an ownership interest through any contract, arrangement, understanding, or relationship, including through joint ownership, an intermediary or custodian, a trust arrangement, or ownership or control of one or more intermediary entities.
The rule defines a company applicant as (1) the individual who directly files the document that creates the reporting company, or in the case of a foreign reporting company, the document that first registers such entity to transact business in the U.S., and (2) the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing. The rule does not require existing reporting companies to identify and report the individuals who made company filings in the past.
When filing a BOI report with FinCEN, a reporting company must provide its full legal name, any trade name, complete current address, jurisdiction of formation (or, for foreign reporting companies, the U.S. jurisdiction where such company first registers) and any applicable taxpayer-identification numbers (including an employer identification number) in the U.S. or relevant foreign jurisdiction.
For beneficial owners and company applicants, the reporting company must provide the individual’s full legal name, date of birth, current residential or business address, and a unique identifying number from an acceptable identification document (and an image of such document) or the individual’s FinCEN identifier.
The rule’s effective date is January 1, 2024. Reporting companies formed prior to the effective date will have one year (until January 1, 2025) to file an initial report (which need not include information regarding past company applicants). Reporting companies formed after the effective date will have 30 days after receiving notice of their formation to file their initial reports. Reporting companies must report changes to outdated or inaccurate information in previously filed reports within 30 days of learning of or having reason to know of such inaccuracy.
The BOI reporting rule is one of three rulemakings planned to implement the CTA. FinCEN intends to engage in further rulemakings to establish who may access BOI and for what purposes, and revise FinCEN’s customer due diligence rule following the promulgation of the BOI reporting rule. FinCEN is developing infrastructure to support these requirements in accordance with the security and confidentiality conditions of the CTA. Additionally, FinCEN will release compliance and guidance documents to assist reporting companies in complying with the rule.
For additional information or assistance regarding compliance with FinCEN’s CTA requirements, please get in touch with our co-authors.