FinCEN Final Rule on Beneficial Ownership Reporting.

Businesses must stay current with regulations governing beneficial ownership reporting to maintain compliance. FinCEN recently issued a final rule under the Bank Secrecy Act that strengthens beneficial ownership requirements. The rule imposes stricter obligations on financial institutions and reporting companies to identify ultimate beneficial owners accurately. These changes increase compliance responsibilities and regulatory scrutiny. This post explains the updates, business impact, and steps organizations can take to comply.

Adoption of Proposed Rulemaking by FinCEN

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.

2. Information that can be used to identify its beneficial owners (the individuals who ultimately own or control the entities)

3. 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

A beneficial owner is any individual who directly or indirectly controls a reporting company.
This definition also includes anyone owning or controlling at least twenty five percent of the company.
When an exempt entity qualifies as a beneficial owner, companies do not report its individual owners.
This exception applies unless those individuals exercise substantial control over the reporting company.
In such cases, the report lists the exempt entity name instead of individual owner details.

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. Substantial control exists when an individual directs or significantly influences key decisions of a reporting company, either directly or indirectly. These decisions include approving budgets, selling major assets, making large purchases, issuing shares, or incurring debt. The rule recognizes that individuals may exercise substantial control through board representation, majority voting rights, contractual agreements, financing arrangements, or ownership interests.

Who needs to Report? 

The final beneficial ownership reporting rule applies to both domestic and foreign reporting companies. A domestic reporting company includes corporations or LLCs formed by filing documents with a secretary of state or similar authority. A foreign reporting company includes entities formed under foreign laws that register to conduct business in the United States. The definition of a state includes the District of Columbia and all United States territories and possessions.

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 Corporate Transparency Act requires all companies to submit beneficial ownership and company applicant reports to FinCEN. Companies must also file updated reports when ownership information changes or becomes inaccurate. The final rule follows the proposed reporting framework but revises submission deadlines. The proposed rule required new entities to file within fourteen days and existing companies within one year.

The proposed rule required companies to file updated reports within thirty days of ownership changes. It also required corrected reports within fourteen days of discovering inaccurate information. The final rule standardizes deadlines by requiring all initial, updated, and corrected reports within thirty days. Companies operating before January 1, 2024, must submit reports to FinCEN by 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.