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FinCEN Final Rule on Beneficial Ownership Reporting.

As Businesses work to comply with the regulations governing Beneficial ownership reporting, it’s critical to stay up-to-date on new regulatory changes that have been implemented. FinCEN (Financial Crimes Enforcement Network) recently issued a final rule on beneficial ownership requirements under the Bank Secrecy Act. This landmark ruling imposes stricter rules on financial institutions and other companies required to report information about their ultimate beneficial owners (UBOs). In this blog post, we’ll discuss what these changes are, how they will affect your business, and what steps you can take now to ensure compliance with the regulation.

The Corporate Transparency Act’s (“CTA”) beneficial ownership and company applicant information reporting requirements were implemented by the Financial Crimes Enforcement Network (“FinCEN”) in a final rule (the “Final Rule”) that was published on September 29, 2022. The purpose of the Final Rule is “to protect the U.S. financial system by making it more difficult for bad actors to conceal their financial activity through firms with unclear ownership structures.”

The contents of the FinCEN Notice of Proposed Rulemaking, which was released on December 8, 2021, are mainly adopted by the Final Rule.

According to the Final Rule, certain domestic and international companies that do not fall within the list of exemptions must submit reports to FinCEN that contain the following information:

  1. Basic details about the reporting companies:
  • The reporting company’s complete legal name, any trading names, or names under which it conducts business.
  • The full current address, which may be the street address of a reporting firm having its primary business location in the United States or the street address of the reporting company’s main office in the United States   
  •  The State, Tribal, or overseas jurisdiction where the reporting corporation was founded or first registered
  •  The reporting company’s Employer Identification Number (EIN) and Taxpayer Identification Number (TIN) from the Internal Revenue Service, or, in the case of international reporting corporations without an EIN, a tax identification number and the name of the foreign jurisdiction from which it was issued.
  1. Information that can be used to identify its beneficial owners (the individuals who ultimately own or control the entities)
  1. Company Applicants (those who file to form the entities)

Business street address for Company Applicants and an identifying number for each Beneficial Owner and Company Applicant (e.g., passport or driver’s license number (and a copy of the applicable document) or a FinCEN Identifier)

Definition of a Beneficial Owner

Any natural person who controls the reporting corporation directly or indirectly is considered to be the beneficial owner or owns or controls at least 25% of the interest of the reporting company. It is important to note that if the entities of the exempt reporting company are the beneficial owners of the reporting company, the information on the owners of the exempt entity does not need to be included in the declaration of the reporting company, unless such owners are otherwise held Substantial control over the reporting company. Instead, the name of the exempt entity will be included in the reporting company’s report.

Substantial Control

The Rule identifies three distinct instances where someone has “Substantial Control”:

  1. carries out the duties of a senior officer of the reporting company, such as the president, chief financial officer, general counsel, chief executive officer, chief operating officer, or a person with a comparable role
  2. possesses the power to nominate or dismiss any senior officer or the majority of the board of directors (or equivalent)
  3. directs or significantly influences key choices made by the reporting company, either directly or indirectly. The Rule covers a lengthy list of actions that are deemed to constitute significant choices, such as the approval of budgets, the sale of big assets, major purchases, the issuing of shares, and the incurrence of debt. The rule further stipulates that Substantial Control may be exercised in a number of ways, such as by board representation, possession of a majority of the voting rights, agreements, rights derived from any financing arrangements, or ownership interests in a corporation.

Who needs to Report? 

Both domestic and overseas reporting companies are subject to the final BOI reporting rule. A corporation, LLC, or other firm established through the filing of a document with a secretary of state is referred to as a “domestic reporting company.”or other office that is of similar nature as defined by the laws of a state or tribal authority. A corporation, LLC, or other entity established under the laws of a foreign nation that files a document with the secretary of state or a similar authority to register to conduct business in any state or tribal jurisdiction is referred to as a “foreign reporting company”. The District of Columbia and any other US territory or possession are included in the definition of “state”.

Among the reporting companies are business trusts, limited liability partnerships, and limited liability limited partnerships, and the majority of limited partnerships normally formed by filing with a secretary of state or comparable office, subject to certain exceptions. In general, the concept of reporting corporations does not include legal entities (such as certain trusts) that are not established by the filing of a document with a secretary of state or other comparable office. 23 different sorts of companies are exempted from the reporting rule’s definition of a “reporting firm.”

those exempted entities include:

  • certain securities issuers with Securities and Exchange Commission registration
  • A few financial organizations, such as national banks, bank holding companies, federal or state credit unions, and money service businesses registered with FinCEN
  • A few federal, state, and public utilities in the United States
  • Advisors and investment firms
  • Insurance providers and insurance firms
  • Companies that are Commodity Exchange Act-registered
  • registered public accounting companies with the Sarbanes-Oxley Act of 2002
  • certain investment products that pool money
  • some tax-exempt organizations, such as 501(c) organizations, political parties, and charitable trusts
  • “large operating companies” in the United States
  • firms whose ownership interests are controlled, directly or indirectly, or entirely owned by one or more corporations that are themselves exempt from certain of the aforementioned requirements.

Company applicant information and Timing of reports

The CTA mandates that all corporate entities, whether newly formed or already in existence, submit initial Reports to FinCEN detailing their beneficial ownership and information regarding company applicants, as well as updated Reports whenever it is discovered that the beneficial ownership information is inaccurate or changes. The Proposed Rule’s framework for the submission of Reports is essentially adopted by the Final Rule, however the period for submission of those Reports has undergone significant revisions. The Proposed Rule required newly created or registered entities to submit reports within 14 days of their creation or registration, and it required existing companies to submit first Reports within one year of the regulations’ effective date.

Additionally, it required updated Reports to be filed within 30 days of a change in information requiring an update, and it required corrected Reports to be filed within 14 days after a reporting corporation learns or has cause to know that reported information is wrong. For initial Reports by recently formed or registered businesses, updated Reports, and corrected Reports, the Final Rule consolidates these reporting deadlines at 30 days. Companies that were already operating on January 1, 2024, when the Final Rule became effective, must submit with FinCEN no later than January 1, 2025.

The final rule removes the need that businesses founded prior to the regulations’ implementation date provide company applicant information. Newly formed organizations will no longer be required to update business applicant information, but they must still report it in accordance with the Final Rule.

Penalties

Significant financial and criminal penalties, including a two-year maximum jail sentence and a minimum civil penalty of $500 per day (up to $10,000), may result from failure to comply with the CTA’s reporting obligations.

Data protection and Confidentiality

The data in these reports must be kept by FinCEN in a private, secure, and non-public database.

To help financial institutions comply with their due diligence obligations, FinCEN is permitted to disclose the information it has collected to certain domestic and foreign government authorities as well as to financial institutions with the approval of the reporting company. To ensure the security and confidentiality of the information, FinCEN must adopt protocols for all releases of information.

Information on beneficial ownership is not made available to the general public or subject to FOIA requests under the CTA. The guidelines for the confidentiality and protection of the data contained in the reports have not yet been released (even in proposed form).

Conclusion

Following the publication of the BOI reporting final rule, FinCEN intends to revise its customer due diligence rule and issue two additional sets of rules to establish guidelines to establish guidelines for who can access Data and for what purposes, as well as what security measures are required to keep the information safe and secure. The proposed rules will provide much-needed clarity on the protection and confidentiality of beneficial ownership information.

The new regulations will likely result in an increase in compliance costs for financial institutions, and companies should be prepared to comply with the reporting requirements and ensure that their beneficial owners are accurately reported to FinCEN. Companies must also be aware of the potential penalties for noncompliance and ensure that they are adequately protecting the data in their Reports. Despite the challenges, these requirements are necessary to help prevent and identify criminal activity, protect against terrorist financing, and strengthen national security.

Overall, the Final Rule provides an important step forward in establishing a beneficial ownership reporting regime in the US and is likely to have a long-term positive effect on financial crime prevention and national security. Financial institutions should take the necessary actions to comply with the new requirements and make sure they are aware of their reporting duties under the CTA. By taking preventive measures, organizations can help safeguard their business operations, protect confidential information, and maintain compliance with beneficial ownership reporting requirements.

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