Jan. 31, 2023
The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued final rules on Sept. 30, 2022, implementing Section 6403 of the Corporate Transparency Act, also called the BOI Rules.
Intended by FinCEN to “protect the U.S. financial system from illicit use” when they take effect on Jan. 1, 2024, these final rules will introduce a new federal framework by which businesses operating in the U.S. will be broadly subject to beneficial ownership information reporting requirements, both at the time of a business’s initial formation and upon certain ownership change events.
Who is Subject to the Rules
In general, an entity will be subject to the BOI Rules if it is:
Note that this generally excludes legal entities such as trusts and sole proprietorships, to the extent that such entities are not created by the filing of a document with a secretary of state or a similar office.
However, even if an entity fits within the above criteria, FinCEN provides 23 separate exemptions which, if applicable, provide safe harbor for an entity to not submit a Beneficial Ownership Information Report (BOI Report). Some of these 23 exemptions apply to:
Importantly, unlike, for example, entities that are engaged in the business of banking or venture capital fund advising, none of the 23 enumerated exemptions specifically tie in with an entity’s business of real estate ownership. Entities engaged in the business of real estate ownership are therefore subject to FinCEN’s reporting requirements unless they happen to fit within a particular exemption.
Who Must Report
In addition to the reporting company itself, there are two categories of persons or entities that must file BOI Reports:
What Must be Reported
The BOI Rules establishes two groups of information which must be reported: company information and beneficial owner and company applicant information.
As an alternative, reporting companies and individuals may apply to FinCEN and obtain a “FinCEN identifier” number that may be submitted to FinCEN in lieu of this information. Entities and individuals must update and correct information in an updated application for a FinCEN identifier, similar to the requirements to update and correct BOI Reports, discussed below.
Note, entities already formed or registered to do business in the U.S. on Jan. 1, 2024 do not need to provide this information with respect to company applicants. Reporting companies are also not required to update information regarding company applicants.
When to First Report
Reporting entities also have 30 days to report changes to their initial filing or correct errors in a previous filing.
How to Report; Penalties
Reporting entities will submit their BOI Reports through the Beneficial Ownership Secure System (the “BOSS”) being developed by FinCEN to receive, store, and maintain BOI. Notably, all reports submitted through the BOSS will be exempt from search and disclosure under the Freedom of Information Act.
The BOI Rules provide for civil and criminal penalties for willful violations, including civil penalties of up to $500/day and criminal penalties of up to $10,000 and/or imprisonment for up to two years.
Proposed Rulemaking to Further Implement the BOI Rules
FinCEN proposed additional rules on Dec. 15, 2022, that would govern the disclosure of BOI to certain authorized recipients and the protection of BOI once disclosed. As proposed, FinCEN would be allowed to disclose BOI to:
The level of access to BOI would also vary depending on the recipient and circumstances. For example, authorized users from governmental agencies engaged in law enforcement activity would be able to log into the system directly and run searches, and would also have to submit justifications to FinCEN for their searches. By contrast, financial institutions would only be able to request BOI for purposes of complying with customer due diligence requirements, and rather than running direct searches, would instead have to submit a query specific to a reporting company and obtain a transcript with that entity’s BOI.
The proposed rules also require requesting financial institutions to obtain the reporting company’s consent prior to submitting a request for BOI and to maintain a record of such consent, to develop safeguards to protect the confidentiality of BOI, and to limit access to BOI only to the financial institution’s directors, officers, employees, contractors, and agents located in the United States. In addition, financial institutions would have to make certain certifications in connection with their requests for BOI. Comments on these proposed rules must be submitted on or before Feb. 14, 2023.
FinCEN published the proposed form on Jan. 17, 2023, for BOI Reports. Comments on such proposal must be submitted on or before March 20, 2023.
The final rules issued by FinCEN introduce a new and sweeping regulatory regime generally applicable to all businesses operating in the U.S., with limited exceptions. Consistent with the rules themselves, we expect that FinCEN will take an expansive approach to enforcement. The BOI Rules are expected to impact more than 32.5 million entities that will be required to file their first BOI Reports in 2024, and an estimated five million new companies in each following year. In its initial fact sheet related to the BOI Rules, FinCEN anticipated that it would cost a reporting company with a “simple” management and ownership structure approximately $85 to prepare and submit its initial BOI Report. Contrast that with a reporting company with “complex beneficial ownership structures,” which FinCEN estimates will incur costs of approximately $2,600 in connection with submission of its initial BOI Report. For many entities that will be subject to the BOI Rules, including, for example, real estate investors who tend to co-invest with others via LLCs and may own interests in multiple LLCs, these costs are not insignificant. Potential reporting companies should be on the lookout for additional guidance from FinCEN and consult with their legal and other advisors to understand their compliance obligations prior to the date that the BOI Rules take effect.
In addition, banks and other financial institutions that will need to access BOI should remain abreast of FinCEN’s proposed rulemaking and be prepared to develop and implement appropriate protocols to safeguard such information and otherwise comply with the eventual rules.
The above is only a summary, and you should contact one of the authors or your primary Nelson Mullins contact for additional information on the above if desired.
These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.