In 2021 Congress passed the Corporate Transparency Act (CTA) creating a new Beneficial Ownership Information (BOI) reporting requirement, set to go into effect on January 1, 2024.
The CTA is a large-scale effort by the US government intended to counter money laundering, tax fraud, terrorism financing and other illegal acts by unveiling the true owners behind companies and preventing the use of shell corporations. The Act mandates the reporting of BOI for certain entities and requires the disclosure of individuals who directly or indirectly control the entity.
The BOI reporting requirement will be implemented by US Treasury’s Financial Crimes Enforcement Network (FinCEN), which is estimating that more than 30 million businesses, mostly small businesses, will be impacted by this new compliance requirement.
Who is a Beneficial Owner?
Under the CTA, a beneficial owner is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the company. This includes individuals who have the authority to manage and direct the entity’s affairs. Due to this part of the definition, it is the prevailing industry standpoint that the high-ranking officials of a company will also qualify as beneficial owners irrespective of their ownership percentage.
What is a Reporting Company?
A reporting company, as defined by the CTA, includes a broad spectrum of entities, such as corporations, limited liability companies (LLCs), and other similar structures that are created by filing with a state or Indian Tribe.
Reporting companies fall into two categories:
Domestic – are corporations, limited liability companies, and any other entity created by the filing of a document with a secretary of state or any similar office in the United States.
Foreign – are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office.
Exemptions
Exceptions exist for entities already subject to rigorous reporting and disclosure requirements, such as publicly traded companies and certain regulated entities as well as large operating companies (more than 20 full-time employees and $5 million USD in gross receipts or sales).
Specifically, FinCEN lists the following entities as exempt from the BOI filing requirements:
- Securities reporting issuers
- Governmental authorities
- Banks
- Credit unions
- Depository institution holding companies
- Money services businesses
- Brokers or dealers in securities
- Securities exchange or clearing agencies
- Other Exchange Act registered entities
- Investment companies and investment advisers
- Venture capital fund advisers
- Insurance companies
- State-licensed insurance producers
- Commodity Exchange Act registered entities
- Accounting firms
- Public utilities
- Financial market utilities
- Pooled investment vehicles
- Tax-exempt entities
- Entities assisting a tax-exempt entity
- Large operating companies
- Subsidiary of certain exempt entities
- Inactive entities
Companies should carefully review the qualifying criteria before concluding that they are exempt by referring to the checklists for each of these categories provided in FinCEN’s Small Entity Compliance Guide.
What Information Needs to be Disclosed?
Entities are required to disclose the names, dates of birth, addresses, and unique identification numbers of the beneficial owners.
With this information, FinCEN will establish a secure, confidential, and centralized database to store reported BOI. This will enhance law enforcement and regulatory agencies’ ability to access and analyze data to investigate and prevent financial crimes. It is important to note that, based on the wording of the legislation and the publications of FinCEN, the data can only be accessed and used by authorities for the purposes of law enforcement.
Implementation and Reporting Deadlines
During the following specified time periods, entities falling under the scope of the CTA must submit accurate and up-to-date beneficial ownership information to FinCEN:
Existing Companies – those that are created or registered to do business in the United States before January 1, 2024, will have until January 1, 2025 to comply and file their initial BOI report.
New Companies – those that are created or registered to do business in the United States on or after January 1, 2024, and before January 1, 2025, will have to comply within 90 calendar days (extended from 30 days as per FinCEN’s announcement on November 29, 2023) of receiving actual or public notice that the creation or registration of the reporting company is effective. Entities created or registered on or after January 1, 2025, will have 30 calendar days to file their initial BOI reports with FinCEN. This extension will allow companies created or registered in 2024 additional time to get a better understanding of the reporting and compliance requirements.
Change Reports – Updated reports will be required to be filed if there are any changes in the previously reported information about the reporting company or its beneficial owners such as changes in name, address, or any other identifying data including new driver’s license or passport numbers. Such updated reports must be filed within 30 days after the change.
Penalties for Non-Compliance
Non-compliance with CTA requirements is subject to civil and criminal penalties. Civil penalties can be up to $500 per day and criminal penalties can be up to $10,000 and imprisonment of up to 2 years for willful failure.
There are no penalties if inaccuracies in previously filed BOI reports are corrected within 30 calendar days of their discovery.
Best Practices
It goes without saying that companies will need to implement best practices in compliance procedures, including monitoring changes in the reported information on an ongoing basis. This is likely to pose a significant administrative challenge for many small businesses.
Turn to Grassi’s compliance specialists for guidance with this new area of reporting and assistance with implementing best practices in gathering, securing and organizing BOI records.
