ABMA would like to highlight a little-known reporting requirement that will be imposed on small and medium-sized businesses at the beginning of next year.
The requirement results from the enactment in 2021 of the Corporate Transparency ACT or CTA. The statute was signed into law to combat money laundering, tax fraud, and other corruption as well as terrorist activity. In general, the law requires most existing and new corporate entities in the United States beginning January 1, 2024, to file reports with the federal government regarding their beneficial owners. Reports are to be filed with the Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN.
The impetus behind this new law was a sense from a majority in Congress at the time that criminals were increasingly exploiting corporate structures such as shell and front companies to hide their identities and move money through the U.S. financial system. As many U.S. states do not require corporations and similar entities to disclose information about their beneficial owners, Congress concluded that federal legislation providing for the collection of beneficial ownership information (BOI) for entities formed under the laws of U.S. states was necessary. Proponents of the CTA, and eventually Congress, viewed such legislation as necessary to protect vital U.S. national security interests, better enable law enforcement efforts to counter money laundering and the financing of terrorism, and bring the U.S. into compliance with international anti-money laundering/combatting the financing of terrorism (AML/CFT) standards.
Who must comply?
Generally speaking, every existing, amended, or new corporation, Limited Liability Company (LLC), or other entity created by filing registration papers with a secretary of state (or foreign entity registering to do business in the state), must file a report with FinCEN. The report must include the business name, current address, state of formation, and Employer Identification Number of each entity, as well as the name, birth date, address, and government-issued photo ID (such as a driver’s license or passport) of every direct or indirect Beneficial Owner of the entity. The law defines “beneficial owner” as any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of its ownership interests. While the required information is not terribly onerous, what has the business community’s increasing attention is the penalties for non-compliance. Failure by a “reporting company” to comply will result in fines of up to $500 a day capped at $10,000, and up to 2 years in jail.
In terms of timing, Reporting Companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports. For Reporting Companies created or registered after January 1, 2024, these entities will have 30 days after creation or registration to file their initial reports.
Who will have access to the beneficial ownership information (BOI) submitted by reporting companies?
All information that is reported to FinCEN will not be public, and it will not be subject to disclosure under the Freedom of Information Act. FinCEN will be required to keep the filed information secure in a restricted-access database. Federal agencies will be able to access the database for certain purposes, including national security, intelligence, law enforcement, and tax administration, and to respond to inquiries from government authorities in certain foreign countries. State, local, and tribal law enforcement agencies can also obtain access, but only with a court order. Banks and other financial institutions can request specific BOI, but only with the Reporting Company’s consent.
A final rule implementing the BOI reporting requirements was finalized in September 2022. More information may be found here: https://www.fincen.gov/boi
It is worth noting that there is an effort afoot to put the brakes on implementing the CTA. A lawsuit initiated by the National Small Business Association to block implementation is in its final stages, and members of Congress have raised concerns over the rollout of the regulations. However, there is no legislation pending to overturn or block the new law.
ABMA will be closely following action on this issue and will regularly report on developments.