FinCEN’s Final Rule for Beneficial Ownership Reporting

On January 1^st, 2021, The Corporate Transparency Act (CTA) was ratified into law as part of the 2021 National Defense Authorization Act (NDAA). Congress enacted the CTA to advance its agenda of deterring criminals from infusing their illicit funds into the U.S. financial system.

However, at the time of the law’s passage, its provisions were not yet in force. FinCEN was still gathering information, and it issued a notice of proposed rulemaking (NPRM) on the topic in December, 2021. The Act’s general parameters were in place, but FinCEN was accepting feedback and ironing out the details. Now, as of September 30^th, 2022, a final rule on the Corporate Transparency Act has been published. Acting FinCEN Direct Himamauli Das has this to say about the final rule:

“For too long, it has been far too easy for criminals, Russian oligarchs, and other bad actors to fund their illicit activity by hiding and moving money through anonymous shell companies and other corporate structures right here in the United States. This final rule is a significant step forward in our efforts to support national security, intelligence, and law enforcement agencies in their work to curb illicit activities”

fincen.gov

Following are some of the final rule’s most pertinent highlights.

Newly-Formed Entities

FinCEN is mostly adhering to their proposed rule, but they have made certain modifications in response to comments they received about the proposed regulations. The changes they have enacted are intended to minimize reporting companies’ burdens. For instance, newly-formed entities—those which register as businesses after the effective date of January 1^st, 2024—will have to file their CTA reports within 30 days of incorporation. This is an extension from the previous directive that domestic reporting companies in this category file their report within 14 calendar days of the date they were officially formed or registered.

Newly-created entities will still be required to report company applicant information in the same time frame. A “company applicant” is a company acting as a service provider assisting with setting up companies, such as a law firm.

Existing Entities

Existing entities—those organized before January 1^st, 2024—must now submit their beneficial ownership reports by January 1^st 2025. In other words, they still have a full calendar year (from the effective date) to do their due diligence, compile their list of beneficial owners and company applicants, assemble all the required information, and get it to FinCEN through their Secretaries of State or similar offices.

The new rule sets the same 30-day deadline for updating and correcting reports, and it eliminates the condition that entities created before the regulation’s effective date report company applicant information. Also, companies created before 2024 will not have to provide information on a company that helped them form, such as an incorporation service.

The Beneficial Ownership Secure System (BOSS)

The CTA has decreed that the Treasury must maintain beneficial ownership information (BOI) “in a secure, nonpublic database, using information security methods and techniques that are appropriate to protect non-classified information security systems at the highest security level.” To that end, FinCEN has created the Beneficial Ownership Secure System (BOSS) to collect, store, and maintain BOI. The BOSS filing system will be secured at the highest information security level.

In regard to paper forms, FinCEN expects that BOI reports will almost invariably be submitted electronically through an online interface. However, they understand that on rare occasions circumstances may arise that preclude a reporting company from filing this way. For that reason, they are still considering ways to address such cases, although no mailing solution is currently available.

Required Information

Business Address

In order for the CTA report to be useful for law enforcement, intelligence, and national security purposes, it must provide “investigative value” to government entities, should they need to scrutinize a company. For that reason, the business address an entity reports must be the principal place of business, as some companies may have multiple locations. PO boxes or registered agent mailing addresses will not be allowed because FinCEN believes third-party addresses “create opportunities for illicit actors to create ambiguities or confusion regarding the location and activities of a reporting
company”

Residential Address

Beneficial owners must also share their residential street address. Business addresses alone have limited value for the CTA’s purposes, as they don’t establish a beneficial owner’s tax residency and can function as “fronts” for illegal tax activity.  For the same reason, PO boxes or business addresses will not be allowed in lieu of residential addresses.

Identification

As stated in the proposed rulings, beneficial owners will need to provide an image from one of three official identification documents: 1) a state ID, 2) a driver’s license, or 3) a U.S. Passport. An overseas passport is permissible ONLY if the beneficial owner does not have U.S. documents.

Also in the proposed rulings, FinCEN originally sought to collect beneficial owners’ TIN numbers on a voluntary basis. However, FinCEN has eliminated that option from the final rule, deeming the benefits to be gained from such voluntary collection to be limited, and the likelihood of companies choosing to collect the information to be slim. Therefore, beneficial owners will NOT have to provide a SSN (social security number) or TIN (tax identification number). Do not confuse this requirement with the requirements for the reporting company itself. Although beneficial owners will not have to share their SSNs, the company itself will have to include its FEIN in the reporting process.

Definition of “Substantial Control”

The definition of “substantial control” that FinCEN proposed is still part of the final rule. The three indicators that an individual has substantial control in an entity are:

1. They serve as one of a reporting company’s senior officers.
2. They have the authority to appoint or remove a reporting company’s senior officers or board-of-director members.
3. They provide direction and determination, making decisions for, or exercising substantial influence over a reporting company’s important matters.

Cost Estimates

FinCEN estimates the cost for companies filing initial reports will be somewhere between $85 and $2600, depending on the complexity of their filing through the BOSS filing system. 

They estimate the cost for updating reports will be between $37 and $560—again, depending on the complexity of filing through BOSS. Updates will be needed when key information about the company changes, such as an owner being added or removed.

In terms of total costs, FinCEN estimates that in the first year, between their own time and costs and the filers’ time and costs, the process will consume over 126 million burden hours and cost almost $23 billion dollars. Going forward, once the system is in place and running smoothly, they estimate those numbers will drop by over 91 billion hours and 17 billion dollars.

It’s a small price to pay for national peace of mind.