What is beneficial ownership information reporting?
A couple of years ago, not many people outside financial institutions, regulators, and law enforcement agencies had heard of beneficial ownership. That's changing quickly, thanks to new rules recently introduced in the U.S. In its first year of operation, the Corporate Transparency Act will require most business entities, including limited liability companies (LLCs) and corporations, to report their beneficial ownership interests to the federal government. It is part of an international effort to prevent financial crimes.
The Corporate Transparency Act went into effect Jan. 1, 2024. Those affected must report beneficial ownership information to the U.S. Financial Crimes Enforcement Network (FinCEN) to stay compliant. This article explores the beneficial ownership information reporting requirement under the FinCEN beneficial ownership rule, covering what you must do to file a BOI report, and when you must file.
Defining beneficial ownership
A beneficial owner controls or maintains a certain level of ownership interest in a limited liability company or one of several other entities.
Identifying beneficial owners is important because, without transparency, criminals or politically exposed persons may try to disguise their ownership of assets through anonymous shell companies or other proxies. These serve to funnel money through illegal activities like money laundering or tax evasion.
Beneficial ownership information reporting helps law enforcement follow the money trail and helps curb tax evasion. Finally, beneficial ownership information reporting can bolster financial market integrity by revealing conflicts of interest and preventing undisclosed influence over companies.
A history of beneficial ownership
International standards for beneficial ownership transparency began emerging in the late 2000s. By 2015, the European Union's fourth Anti-Money Laundering Directive required EU countries to establish central beneficial ownership registries. These would enable them to track beneficial ownership mechanisms such as anonymous shell companies to prevent money laundering and other crimes.
This was one of the earliest substantial legal developments regarding beneficial ownership registration. In 2021, the U.S. passed the Corporate Transparency Act. This law is part of the scope of the Anti-Money Laundering Act, which was, in turn, part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA).
The act prompted the creation of three rules by FinCEN. The first beneficial ownership rule dictates how to report information on each beneficial owner and their ownership interest in a reporting company (a company required to report information to FinCEN). The second governs access to that information. The final rule will revise existing FinCEN rules to accommodate the Corporate Transparency Act.
When the U.S. passed its law, 81 jurisdictions had already established beneficial ownership registries. This number had increased rapidly from 34 in 2018, and it is likely to increase more following a move by the international Financial Action Task Force (FATF). In March 2022, the Task Force introduced a requirement for governments to hold beneficial ownership information, meaning that over 200 countries and jurisdictions must do this if they wish to remain committed to FATF standards.
Reporting beneficial ownership to the Financial Crimes Enforcement Network (FinCEN)
Companies already have to report beneficial ownership information to financial institutions under existing FinCEN rules, but the Corporate Transparency Act now requires them to make a beneficial ownership report directly to the federal government under the FinCEN beneficial ownership final rule. This will include submitting assets such as an identification document in the form of a driver's license or passport.
The Department of the Treasury has created a registry, the Beneficial Ownership Secure database (BOSS), to record FinCEN beneficial ownership information. Companies can report beneficial ownership information via a BOI Report. To do so, they must provide identifying information to FinCEN for all individuals who qualify as beneficial owners, unless an exception applies. LegalZoom can help your business file the report and stay in compliance.
BOSS will use a secure filing method to contain records submitted by reporting companies through a BOI report. Individuals whose information may be included in BOSS include those named in an initial report, individuals who request FinCEN identifiers, and company applicants who submit a BOI report on behalf of reporting companies, sometimes from a third party such as a law firm. Reporting companies will report information electronically through FinCEN's secure portal, rather than via paper-based documents.
Under the reporting requirement, FinCEN must maintain each reporting company's beneficial ownership information for at least five years after the company terminates.
Who are beneficial owners in the U.S.?
Different jurisdictions will have their own definitions of beneficial ownership. The Department of the Treasury has made those definitions as directed by the Corporate Transparency Act. The beneficial ownership final rule defines a beneficial owner as an individual who fits at least one of the following criteria:
- Has or controls at least 25% of a reporting company's ownership interest
- Exercises substantial control over the reporting company
Broadening the beneficial ownership reporting requirement to include the concept of substantial control enables the Treasury Department to look past formal ownership to the de facto control exercised over the company. The term "substantial control" has a specific meaning under the act. An individual exercises substantial control if they satisfy any of the following criteria:
- Serving as a senior officer of the company
- Having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar governing body)
- Directing, determining, or having substantial influence over important decisions made by the company. These span areas including the nature of the company's business, major expenditures, operating budgets, selection of business lines, compensation schemes, or the termination of significant contracts.
Control can be direct or indirect, such as through board representation, majority voting power, or financial arrangements.
Company applicants are not considered beneficial owners themselves. Nevertheless, BOI reporting requirements still apply to these representatives.
Exemptions to beneficial ownership
The Corporate Transparency Act does not impose any maximum limits on the number of a reporting company's beneficial owners. However, there are some exemptions that would place individuals outside the scope of beneficial ownership.
Some exemptions are based on the types of companies they control. For example, a large operating company and other entities, such as publicly traded companies, are not considered reporting companies under the FinCEN beneficial ownership rule. Also, sole proprietorships do not need to file the report since they are not business entities formed with the state government.
Exemptions based on individual status also exist. The following people would not be considered beneficial owners of a reporting company:
- Minors: If an individual is a minor, they can be exempted from reporting requirements on the condition that the reporting company substitutes beneficial ownership information about their parent or legal guardian
- An individual acting as a nominee, intermediary, custodian, or agent on someone else's behalf
- Employees who are not senior officers and whose only interest or control is derived solely from their employment status
- Individuals whose only interest in a reporting company is derived solely from right of inheritance
- Contingent trust beneficiaries
- Creditors whose only interest is to recover business debts
Examples of beneficial ownership
Examples of individuals who would qualify as beneficial owners include these roles.
Owners of limited liability companies, corporations, and more
Limited liability companies, corporations, and entities created and registered in the U.S. are considered domestic reporting companies. An owner holding at least 25% interest in such a company or a senior officer who makes important business decisions in an LLC would both be considered beneficial owners.
The trustee of a trust with the authority to dispose of at least 25% of a company's assets would be considered to have a significant portion of the ownership interests, and, therefore, subject to beneficial ownership information reporting.
Owners of foreign reporting companies
A person living overseas who has 25% ownership or substantial control over a company created in a foreign country falls in scope if their company is registered to do business with the secretary of state or similar office in a U.S. state or Tribal jurisdiction.
Required beneficial ownership reporting information
The beneficial ownership report is the form that reporting companies must submit to FinCEN to comply with beneficial ownership disclosure requirements. This will include information about the reporting company, the beneficial owners, and for existing reporting entities created before Jan. 1, 2024, information on company applicants.
The beneficial ownership report must include the following information about the reporting company:
- Its full legal name
- Any trade or dba names
- Its address
- Its federal taxpayer identification number
- The jurisdiction where it was created
Note that the reporting company must report information itself. It cannot rely on a parent company to report information for it.
In addition to information about the reporting company and company applicants that file on their behalf, companies must also provide several key pieces of beneficial ownership information in their initial BOI reports:
- Full legal name
- Date of birth
- Current street address
- Unique identifying number and issuing jurisdiction from an acceptable identification document (such as a driver's license or passport)
- An image of the acceptable identification document
If a beneficial owner's control, ownership interests, or future interest in a reporting company are solely through multiple exempt entities, the company can include the names of those exempt entities instead of providing personal details of the individual beneficial owner in the initial Beneficial Ownership Information Report. However, this rule does not apply if the beneficial owner has ownership interests in a reporting company or controls it through a combination of exempt and non-exempt entities.
Individuals or companies can electronically request a FinCEN identifier, which is an identifying number for a beneficial owner or company applicant. An individual's FinCEN identifier can be used as a marker in a business ownership information report that FinCEN can use to look up their information, making the process simpler for reporting companies.
Initial beneficial ownership information reporting
Reporting companies that exist prior to Jan. 1, 2024, must file their initial BOI report within a year of the Corporate Transparency Act's Jan. 1, 2024, effective date (meaning they must submit by Jan. 1, 2025).
Reporting companies created after Jan. 1, 2024, were originally given 30 days to file their reports from the date of formation, but after concern from Congressional members and industry representatives, this was adjusted to 90 days through a September 2023 FinCEN Notice of Proposed Rulemaking (NPRM) in the federal register.
While this extension would triple the length of the filing window, it would only apply to reporting companies created in the first year after the January 2024 effective date. This means reporting companies created on Jan. 1, 2025, or later would still be required to file their initial BOI reports within 30 days of receiving their registration documents.
Beneficial ownership reporting rules also require that any changes to previously submitted beneficial ownership information must be reported within 30 days of the change. That includes any updates to:
- Inaccurate information
- The departure or arrival of new beneficial owners
- Changes to any beneficial ownership reporting on beneficial owners, such as their legal name or address
- The addition or removal of beneficial owners
- Minor status: When a previously reported minor beneficial owner reaches the age of majority, the reporting company must file an updated report identifying them as an adult beneficial owner
- Estate settlement: Changes resulting from a beneficial owner's death must be reported within 30 days of the deceased owner's estate being settled
Information on company applicants need not be updated.
The consequences of not reporting
Intentionally failing to comply with beneficial ownership reporting requirements carries serious consequences, including both civil and criminal penalties.
FinCEN can issue civil penalties of up to $500 for each day that a reporting company is in violation of the reporting requirements. Criminal penalties for willful violations include imprisonment of up to two years and fines of up to $10,000.
Penalties may also apply to companies that have filed and failed to update inaccurate information. However, FinCEN will not impose penalties on companies submitting a corrected report within 90 days of a deadline.
Rather than penalizing the companies themselves, FinCEN can hold senior officers personally accountable for a company's failure to file required reports.
How to get a beneficial owner report
Getting access to information in BOSS is not easy. The Beneficial Ownership Information Access rule will define who gets to see information, and how they may use it. This rule has not yet been finalized at the time of writing. FinCEN issued a notice of proposed rule-making in December 2022 that was logged as a public notice in the federal register.
The rule proposed that the information reported to BOSS by reporting companies will be accessible to various classes of institutions for authorized purposes:
Government entities at the federal, state, local, and Tribal levels include law enforcement agencies that might need access to the data during criminal cases such as money laundering.
Foreign law enforcement agencies, judges, prosecutors, and competent authorities might be permitted access to information from BOSS through an intermediary federal agency. Foreign government agencies not within a trusted country could request the information under an international treaty.
Financial institutions might be able to access the information to satisfy FinCEN's customer due diligence rules, but only with the reporting company's permission. They would not be able to search BOSS themselves. Instead, they would provide specific identifying information about the reporting company to FinCEN, which would return the results.
Federal regulators could request information already obtained by financial institutions as part of due diligence compliance efforts as part of efforts to regulate those institutions. They would also have access to this information for law enforcement purposes.
Some self-regulatory organizations could obtain beneficial ownership information on a reporting company for compliance reviews.
U.S. Treasury Department employees
Treasury department workers could be authorized users for BOSS, having access to business ownership information about reporting companies as part of their official duties. As beneficial ownership reports are considered confidential, no one else would be able to access beneficial ownership data from FinCEN, even via Freedom of Information Act requests.
While the goals of the Corporate Transparency Act are laudable, compliance will create new burdens for legitimate businesses, which will need to identify their beneficial owners and submit reports to FinCEN. Given the complexity of ownership structures, meeting disclosure requirements could prove challenging in some cases.
To ensure proper compliance, businesses should consider seeking help from third-party companies with expertise in this area. These services can help companies correctly identify beneficial owners, file required reports, and establish ongoing compliance procedures around ownership transparency. LegalZoom can help you prepare for compliance with the latest beneficial ownership rules.
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