Last Updated on January 4, 2024 by Anda Malescu
The article discusses the FinCEN beneficial ownership rule.
On December 7, 2021, FinCEN (US Financial Crimes Enforcement Network) issued a Notice of Proposed Rulemaking to give the public an opportunity to review and comment on a new proposed rule to implement beneficial ownership information (BOI) reporting requirements.
The proposed rule has the goal to improve the ability of the US government to protect the financial system from use by criminals, providing essential information to law enforcement and other agencies in order to prevent corrupt officials, terrorists, and other criminals from hiding money in the United States.
According to FinCEN, the ultimate goal of the beneficial ownership rule is to stop anonymous shell companies that facilitate money laundering in the United States.
The FinCEN beneficial ownership rule is different from the rule that went into effect in May 2018 that requires banks and financial institutions to collect information from their clients, including identifying the identity of beneficial owners of legal entity customers.
Below there is an overview of the FinCEN beneficial ownership rule.
Overview:
- Companies required to submit beneficial ownership report
- Who is a beneficial owner?
- FinCEN beneficial ownership rule exemptions
What companies are required to report beneficial ownership?
The proposed FinCEN beneficial ownership rule identifies two types of companies that have to report: domestic and foreign.
A domestic reporting company is defined as a corporation, limited liability company, or any other entity created by filing of a document with the secretary of state or similar office under the law of a US state or Indian tribe.
A foreign reporting company is defined as a corporation, limited liability company, or other entity formed under the law of a foreign country and that is registered to do business in any US state or tribal jurisdiction.
FinCEN states that the definition of a domestic reporting company includes all limited liability partnerships (LLPs), limited liability limited partnerships (LLLPs), business trusts, and most limited partnerships (LPs), in addition to corporations and LLCs, because such entities are created by a filing with the secretary of state or similar office.
Who is a beneficial owner?
Under the FinCEN beneficial ownership rule a beneficial owner includes any individual who:
- exercises substantial control over a reporting company, or
- owns or controls at least 25% of a reporting company.
The rule has set a list of activities that could establish if an individual has substantial control over a company. This list will be designed to identify anyone who is able to make important decisions on behalf of a company in order to close loopholes that would otherwise allow corporate structuring that obscures who the owners or decision-makers are.
In addition to beneficial owners, reporting companies will be required to report company applicants.
In the case of a domestic reporting company, the proposed rule states that a company applicant is the individual who files the document that forms the entity with a secretary of state or similar office.
In the case of a foreign reporting company, a company applicant is the individual who files the document that first registers the entity to do business in the United States.
For both domestic and foreign reporting companies, the proposed regulation specifies that anyone who directs or controls the filing of the formation or registration document by another individual would also be a company applicant.
Who is exempt from beneficial ownership?
Under the proposed rule 23 types of legal entities would be exempt from the definition of a reporting company.
The companies exempt from FinCEN beneficial ownership reporting are:
- certain trusts that are not created by the filing of a document with the secretary of state or similar office,
- securities issuers,
- domestic governmental authorities,
- banks,
- domestic credit unions,
- depository institution holding companies,
- money transmitting businesses (MSBs),
- brokers or dealers in securities,
- securities exchange or clearing agencies,
- other 1934 Act companies,
- registered investment companies and advisers,
- venture capital fund advisers,
- insurance companies,
- Commodity Exchange Act registered companies,
- accounting firms,
- public utilities,
- financial market utilities,
- pooled investment vehicles,
- tax exempt entities,
- entities assisting tax exempt entities,
- large operating companies,
- subsidiaries of certain exempt entities, and
- inactive businesses.
While most of the exemptions for companies to report beneficial owners are straight forward and based on the type of business and its regulatory status, two require further explanation. These are large operating companies and dormant companies. Below are their definitions under the FinCEN beneficial ownership rule.
Large operating companies.” According to the FinCEN beneficial ownership rule, large operating companies are those that (1) employ more than 20 full-time employees in the United States; (2) have filed in the previous year Federal income tax returns in the United State with more than $5 million in gross sales; and (3) have an operating presence at a physical office location within the United States.
Dormant entities are those companies that (1) have been in existence more than 1 year; (2) that are not engaged in any active business; (3) that are not owned, directly or indirectly, by a foreign person; (4) that have not change in ownership in the past 12 months or sent or received more than $1,000; and (5) that do not hold assets of any type.
FinCEN has identified five types of individuals that will be exempt from the definition of beneficial owner. These include minor children, nominees, employees, inheritors, and creditors.
Minor children are exempt, but the reporting company has to report the required information for a parent or legal guardian of the minor child.
Nominees. The proposed rule states that an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual is exempt from reporting requirements. However, reporting companies must report real owners in interest who exercise control indirectly.
Employees are exempt from the definition of a beneficial owner as long as they are acting solely as an employee, whose control over or economic benefits from a reporting company are derived solely from the employment status of the person. The regulation notes that US common law of agency and corporate law distinguishes between senior officers and employees.
Inheritors. The definition of beneficial owner excludes individuals whose only interest in a reporting company is through a right of inheritance. The proposed rule clarifies that this exception refers only to a future interest associated with a right of inheritance, not a present ownership or control that a person has acquired through inheritance.
Creditors. The definition of beneficial owner according to the proposed rule excludes a creditor of a reporting company. However, if the debt is convertible into any form of ownership interest in the company, that would prevent the creditor individual from claiming the creditor exception.
How does FinCEN verify beneficial ownership?
The proposed rule calls for reporting companies to submit Beneficial Ownership Report (BOI) with FinCEN. The proposed rule would require a reporting company to identify itself and report four pieces of information about each of its beneficial owners and company applicants: name, date of birth, address, and a unique identifying number from an acceptable identification document and the image of such document (passport, government issued ID).
In terms of timing, domestic reporting companies created before the effective date of the final regulation would have one year to file their initial reports while reporting companies created or registered after the effective date would have 14 days after their formation to file. For foreign reporting companies instead of the date of formation, the date the company was registered to do business in the United States will be used.
Reporting companies would have 30 days to file updates to their previously filed reports, and 14 days to correct inaccurate reports after they discover or should have discovered the reported information is inaccurate.
When will the FinCEN beneficial ownership rule go into effect?
The proposed new beneficial ownership rule will be in its comment period until February 7, 2022. After that FinCEN can move forward with enacting the rule. However, this is not expected to happen fast as FinCEN has to engage in additional rulemakings in order to implement the new rule. First FinCEN has to establish rules for who may access the beneficial owner reports, for what purposes, and what safeguards will be required to ensure that the information is secured and protected. Second, FinCEN has to revise its existing customer due diligence rule in order to accommodate the changes. Third, FinCEN has to develop the infrastructure to administer the new requirements. Given that each new rule requires 60-day comment period and developing the infrastructure can take longer, we do not anticipate the new beneficial owner rule to become effective before the fall of 2022.
If you have questions about how the new FinCEN beneficial ownership rule will affect your company and want to make necessary preparations, contact us, your trusted business lawyers and attorneys in Miami, Florida USA or schedule a consultation.
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