Understanding the New US Beneficial Ownership Reporting Requirements
Staying ahead of new financial regulations is not just a strategic advantage; it's a necessity. The Corporate Transparency Act (CTA) in the US has changed beneficial ownership requirements from January 1, 2024, and it’s vital to know how to respond.
The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) took another major step in support of U.S. Government efforts to reign down on illicit finance and enhance corporate transparency by issuing a final rule on December 22, 2023 that establishes the framework for access to and protection of beneficial ownership information (BOI).
What is a Beneficial Owner Under the Corporate Transparency Act?
The CTA defines “beneficial owner” as any individual who, directly or indirectly, (a) exercises substantial control over a reporting company or (b) owns or controls at least 25% of the ownership interests of a reporting company. The Proposed Rule defines “substantial control” and “ownership interests” broadly, and FinCEN has not capped the number of beneficial owners a reporting company must report. Therefore, a reporting company would be required to list and provide BOI for each and every individual that satisfies either of the two prongs of the definition of “beneficial ownership,” subject to specific exceptions.
What is the Final Rule on Beneficial Ownership Reporting?
Issued pursuant to the bipartisan Corporate Transparency Act (CTA), this final rule prescribes the circumstances under which BOI reported in compliance with FinCEN’s September 30, 2022, final BOI Reporting Rule may be disclosed to Federal agencies; state, local, tribal, and foreign governments; and financial institutions, and how it must be protected. FinCEN also issued two interagency statements to give banks and non-bank financial institutions guidance on the interplay between the final rule and FinCEN’s existing Customer Due Diligence Rule.
“This final rule is a significant step forward in our efforts to protect our financial system and curb illicit activities,” said FinCEN Director Andrea Gacki.
“BOI can provide essential information to law enforcement, intelligence, and national security professionals as they work to protect the United States from bad actors who exploit anonymous shell companies to engage in money laundering, corruption, sanctions and tax evasion, drug trafficking, fraud, and a host of other criminal offenses with impunity, while legitimate businesses suffer from their misdeeds.”
The final rule is the second of three key rulemakings planned to implement the CTA. The first of these rulemakings, the BOI Reporting Rule, requires certain corporations, limited liability companies, and other similar entities created or registered to do business in the United States to report information about their beneficial owners to FinCEN. The reporting requirements took effect on January 1, 2024, the same day that FinCEN launched its beneficial ownership information technology system to securely collect, process, and store that information. FinCEN will undertake a third rulemaking to revise FinCEN’s Customer Due Diligence rule, as required by the CTA.
All of this spells out the circumstances under which BOI reported to FinCEN may be disclosed to authorized recipients and how that information must be protected. The agency will take a phased-in approach to providing access to its BOI system, starting with a pilot program for a handful of key federal agency users in 2024 and then gradually expanding the list of authorized users. Financial institutions will gain direct access in the final phase of the rollout, although that access will be more limited than that of domestic government agency users, according to FinCEN.
Enabling Information Sharing
Banks will also be able to share information with their overseas branches, except for Russia, China and countries that have been designated as state sponsors of terrorism or comprehensively sanctioned jurisdictions.
“The final rule further requires that financial institutions notify FinCEN within three business days of receiving a demand from a foreign government for beneficial ownership information obtained from FinCEN, such as by subpoena,” Gacki said. “This notification requirement will alert FinCEN when foreign governments intend to obtain BOI reported to FinCEN outside of the procedures established in the Corporate Transparency Act.”
Prior to accessing the BOI database, financial institutions must continue to obtain consent from customers as the final rule does not alter existing requirements in relation to FinCEN’s CDD rule and its aim to improve transparency and prevent misuse of companies for illicit activities.
The access rule is the second of three planned rulemakings by FinCEN to implement the Corporate Transparency Act. The first concerning reporting of BOI to the agency goes into effect Jan. 1. The third will revise FinCEN’s customer due diligence rule and has yet to be released for review.
Complying with the Customer Due Diligence (CDD) Final Rule
The CDD Rule aims to improve financial transparency and prevent criminals and terrorists from misusing companies to disguise their illicit activities and launder their fraudulent gains. The CDD Rule clarifies and strengthens customer due diligence requirements for U.S. banks, mutual funds, brokers or dealers in securities, futures commission merchants, and introducing brokers in commodities. It also requires these covered financial institutions to identify and verify the identity of the natural persons (known as beneficial owners) of legal entity customers who own, control, and profit from companies when those companies open accounts.
The CDD Rule has four core requirements and requires covered financial institutions to establish and maintain written policies and procedures that are reasonably designed to:
- Identify and verify the identity of customers
- Identify and verify the identity of the beneficial owners of companies opening accounts
- Understand the nature and purpose of customer relationships to develop customer risk profiles
- Conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information
With respect to the requirement to obtain beneficial ownership information, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity.
Embedded within the 2021 National Defense Authorization Act (NDAA), the CTA seeks to combat anonymous shell companies and/or opaque ownership structures used to facilitate money laundering, terrorist financing, sanctions evasion, the sheltering of illicit funds in the US, and other crimes.
The CTA mandates that companies, termed "Reporting Companies", file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN). BOI reporting requirements take effect on January 1, 2024. For entities created thereafter, reports are due within 90 days of formation, while preexisting entities must comply by January 1, 2025. Failure to comply carries significant civil and criminal penalties, emphasizing the urgency for businesses to prepare. The Reporting companies can be domestic (filed with a secretary of state or similar office in the U.S.) or foreign (formed under foreign law and registered to do business in U.S.). Both must report BOI to FinCEN.
Companies subject to the CTA will be required to file disclosures regarding BOs and company applicants on a cloud-based Beneficial Ownership Secure System (BOSS). The beneficial ownership information (BOI) will be made available to the following groups: (a) federal, state, local, and Tribal officials and foreign officials who request access for activities related to national security, intelligence, and law enforcement; (b) financial institutions in certain circumstances with the consent of the reporting company; and (c) regulators, when they supervise those financial institutions.
The Expansive Reach of Reporting
Reporting Companies (RC), encompassing various business entities, are required to disclose personal information about their Beneficial Owners. This includes legal names, dates of birth, residence addresses, identifying numbers, and images of associated identification documents. The substantial control test under the CTA extends beyond ownership interests, incorporating individuals in senior officer roles.
The CTA provides 23 exemptions from the RC definition, which generally apply to already highly regulated businesses. There are also exemptions for large operating companies, pooled investment vehicles, subsidiaries of certain exempt entities, and inactive entities. While exemptions exist for public companies, tax-exempt entities, and certain trusts, the CTA casts a wide net. Excluded from the definition of Beneficial Owners are minors, nominees, employees not in senior officer roles, those with future interests through inheritance, and creditors.
New impact for corporate service providers
An important impact of the new requirement is dismantling the infrastructure that enables financial crimes by imposing liability on the corporate service providers (such as lawyers, trustees, accountants) that knowingly or unknowingly allow bad actors to hide and launder money.
The CTA has created a federal disclosure requirement necessitating that corporate service providers “know their customers” by declaring their association with the entities they create and understand as the true owners. The CTA requires that individuals who create new entities be reported to the government as company “Applicants” and therefore will be associated in a federal database with the entities they create. Along with this disclosure comes liability and penalties for wrongdoing as well as non-compliance.
Where Compliance Meets Innovation
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The Corporate Transparency Act is not merely a compliance hurdle; it's a call for innovation and resilience. Financial institutions need a partner that understands the nuances of regulatory change and provides solutions that go beyond meeting requirements and offer a strategic edge.
*This article contains general, condensed summaries of actual legal matters, regulations, and opinions for informational purposes. It is not meant to be and should not be construed as legal advice.