US Treasury Enacts Major New Beneficial Ownership Disclosure Requirements for US and International Companies

In an action with major implications for non-US companies doing business in the United States, January 1, 2024, was the effective date for a sweeping new set of company ownership disclosure requirements, requiring disclosure of beneficial ownership of a wide range of entities to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).  These Beneficial Ownership Information (“BOI”) reports require disclosure of the details regarding the “beneficial owners” of companies classified as “reporting companies.”  Foreign entities registered to do business in the United States, as well as US companies, will therefore generally have to disclose their ultimate beneficial owners.

Reporting requirements depend on the date a company was created or registered to do business. A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file the report, whereas a company created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving notice of the company’s creation or registration to file its initial report.[1] Lastly, companies created or registered on or after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file their respective ownership reports.

Treasury Secretary Janet K. Yellen stated that “[t]he launch of the United States’ beneficial ownership registry marks a historic step forward to protect our economic and national security” emphasizing that “corporate anonymity enables money laundering, drug trafficking, terrorism, and corruption.” She further highlighted that a centralized database of BOI information will modernize the financial system in the US, tackling fraudulent money laundering and illicit finance head on.

In each BOI report sent to FinCEN, a reporting company must provide each 2% or more beneficial owner’s name, date of birth, residential or business address, and an identification document. There are no fees associated with submitting the report, nor are CPA’s or other professional service providers required to file. BOI reporting is also not an annual requirement, it only needs to be submitted once and updated as relevant. Further information to file a report, such as the official form and relevant exemptions, can be found on the BOI portal.

Background of Beneficial Ownership Information Reporting

On January 1, 2021, Congress passed the Corporate Transparency Act (“CTA”) which created a BOI reporting requirement for select companies. The Act was passed due to an increasing interest in the US government to compel beneficial ownership disclosure as a tool to facilitate anti-money laundering and sanctions compliance. Congress, through the act, directed FinCEN to establish and maintain a national registry of beneficial owners of entities that are deemed “reporting companies.” As of January 1, 2024, FinCEN has launched the registry by beginning to accept BOI reports.

Reporting Company Definition

The CTA defines a reporting company as “any corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office in any state or territory or with a federally recognized Indian Tribe or formed under the laws of a foreign country and registered to do business in the United States.” There are, as discussed below, a number of exceptions for entities already subject to reporting as the focus of the CTA is on those shell companies and other entities that facilitate fraudulent money laundering.

Reporting Company Exemptions

It is important to highlight that while reporting companies include both domestic and foreign entities, there are 23 types of entities that are exempt from the reporting requirements. Of these exemptions, most pertain to entities that are already subject to similar federally instituted ownership reporting requirements.

Notable exemptions include:

• Banks, credit unions, money service businesses, and insurance companies.
• Investment companies, venture capital fund advisors and securities brokers and dealers that are registered with the Securities and Exchange Commission.
• “Large Operating Compan[ies],” which concerns companies with physical operations in the US, with more than 20 full-time employees in the US, that have filed federal income tax or information return in the US for the previous year end that demonstrate more than $5 million dollars in sales or gross receipts.
• Tax exempt entities, and entities assisting a tax-exempt entity.

For a full list of exceptions and other details please refer to section C.2. in the following FinCEN FAQ.

Beneficial Ownership Standard

Further, the CTA defines a “beneficial owner” of an entity as an individual who, either directly or indirectly, exercises substantial control over the entity or owns or controls no less than 2 percent equity in the entity. Notably, the term “substantial control” was undefined and left for additional interpretation. This has since been further explained in guidance by FinCEN, which states that an individual can exercise substantial control over a reporting company in four different ways:

1. The individual is a senior officer (i.e. the company’s president, chief financial officer).
2. The individual has authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company.
3. The individual is an important decision-maker for the reporting company.
4. The individual has any other form of “substantial control” over the reporting company, as explained further in FinCEN’s Small Entity Compliance Guide.

Finally, there are five instances in which an individual is exempt from the “beneficial owner” standard including carve outs for children, intermediaries, employees, and other circumstances. For detailed information concerning beneficial owner exceptions refer to FinCEN’s Small Entity Compliance Guide.

Impacts of the BOI Reporting Requirements

The impacts of the new BOI reporting requirements are significant, and companies should pay close attention to the new requirements to avoid penalties. Failing to meet the reporting requirements can result in both civil and criminal actions. Failure to file a complete initial report or update a report appropriately may result in a $500-per-day fine with a cap at $10,000, along with imprisonment for up to two years. Further, an individual who knowingly discloses BOI, without the appropriate authorization, is subject to a $500-per-day penalty with a cap at $250,000 and up to five years’ imprisonment.

The new registration requirements also pose several issues concerning the privacy of owners higher up in the business stream and the respective ability of subsidiaries, for example, to compel disclosure of indirect ultimate owners’ private information. These issues are only exacerbated when considering the various bodies of foreign law that may raise privacy issues.

Companies should also be evaluating sanctions risks considering the new BOI registration requirements. In making beneficial ownership disclosures, companies should pay close attention to applicable regulatory regimes, most notably the Treasury Department’s enforcement of various sanctions through the Office of Foreign Assets Control (“OFAC”). Disclosures that subsequently tie back to sanctioned individuals (on the Specially Designated National list) or entities owned 50% or more by a blocked individual can result in a company being designated itself. Designation of a company by OFAC carries harsh repercussions including all property and interests in property located in the United States being blocked.

Relatedly, the existence of the BOI reporting requirement may ultimately facilitate sanctions compliance, because a party’s Treasury BOI disclosures can be requested and reviewed by a transactional counterparty as part of sanctions diligence. Because US sanctions apply to any entity 50% or more owned by a sanctioned person or entity, sanctions screening and diligence should include all available beneficial ownership information.

The CTA combined with FinCEN’s launch of the BOI registry creates, however, a significant new burden on entities formed or operating in the United States. While BOI reports may only require a relatively limited amount of information, companies will have to monitor changes in ownership over time to ensure that reporting obligations are met, and disclosures are updated as necessary.

[1] Note that the 90-day deadline runs from either the time the company receives actual notice that its creation or registration is effective, or after a secretary of state (or similar office) provides public notice of its creation or registration, depending on whichever is earlier.

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