On September 18, 2023, the Financial Crimes Enforcement Network (FinCEN) released a second round of frequently asked questions (FAQ) related to the updated beneficial ownership rule, effective January 1, 2024. It was published as a companion piece to the Small Entity Compliance Guide, which is an information guide intended to help businesses comply with the beneficial ownership reporting rule.
The FAQ and the Small Entity Compliance Guide address the following key changes:
Definition of a reporting company
While the publications were very effective in communicating the beneficial ownership information (BOI) reporting process, they didn’t address the financial institution’s role in accessing and verifying the information and handling registration discrepancies. They also didn’t address documentation and recordkeeping requirements or the circumstances in which a suspicious activity report (SAR) should be filed.
One of the main changes to the May 2018 beneficial ownership rules involves the definition of a reporting company.
The legacy rule required all corporations, LLCs and partnerships to certify beneficial ownership. The new rule narrows the reporting responsibilities down to corporations, LLCs or companies created by the filing of a document with the secretary of state or similar office under the law of the state or tribal government.
The January 2024 rule also expands the list of companies that are exempt from reporting, such as large operating companies.
Another newly exempt category is tax-exempt entities, which includes organizations that are registered as a 501(c)(3), such as nonprofit organizations and political organizations.
Also exempt are inactive entities, defined as those which:
- Were in existence before January 1, 2020.
- Are not engaged in active business.
- Are not owned directly or indirectly by a foreign person.
- Have not experienced any change in ownership in the preceding 12 months.
- Have not sent or received funds greater than $1,000 directly through a financial account the entity had an interest in in the preceding 12 months.
- Do not hold an asset of any type, in the U.S. or abroad, including ownership interest in any corporation LLC or similar entity.
Newly covered entities are those that have fewer than 20 full-time employees, no more than $5 million in gross annual income and at least one physical office in the U.S.
Definition of a beneficial owner of a company
The FAQ more clearly define who would meet the definition of the individual in control by four designations:
- Senior officers (president, CEO, CFO)
- The individual who has the authority to appoint or remove certain officers or a majority of directors
- The individual who is an important decision-maker (one who directs, determines or has substantial influence over important decisions)
- The individual who has any other form of substantial control over the reporting company (as defined by the company)
Based on the enhanced definitions, it is now possible to have more than one beneficial owner that meets the control prong.
Reporting of company applicants
A company applicant is the individual who directly filed or was responsible for directing the filing, creation or first registration document for the reporting company with the secretary of state or similar office. This could include an attorney or an accountant, but it cannot be another entity, such as an accounting firm.
It should be noted that only companies that were created in the U.S. on or after January 1, 2024, need to report the company applicant.
Specific information that must be reported
Most of the reporting information has remained the same from the May 2018 legacy rule; however, one major change is the use of a unique identifying number instead of a taxpayer identification number.
The unique identifier may be issued if the individual requests it and provides a U.S. passport, state driver’s license or other identification issued by a state, local government or tribe. The documents must include the number, issuing jurisdiction and image.
The legacy rule also allowed for the beneficial owner to use either a residential or business address; however, the new rule only allows for a residential address.
For covered entities already in existence prior to January 1, 2024, the initial BOI registration must be conducted by January 1, 2025. For entities created on or after the rule effective date, registration must occur within 30 days of receiving notice the state registration or creation of entity is effective.
Failure to report completed or updated BOI may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues or criminal penalties, including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may also be held accountable for that failure.
Handling changes and inaccuracies in reported information
The Small Entity Compliance Guide lists circumstances in which changes or updates must be reported, such as a change in beneficial ownership or changes with the beneficial owner’s address. The BOI updates must be made within 30 days after which the change occurred. And the same timeline applies to inaccurate information on file about the company, its beneficial owners and its applicants.
FinCEN did provide a safe harbor by stating no penalties would be incurred for filing inaccurate BOI, provided it is corrected within 90 calendar days of when it was filed.
FinCEN has provided a wealth of information to assist covered entities with their requirement to comply with the new BOI reporting regulation. Financial institutions are encouraged to share this information with their business accountholders as soon as possible to allow for a more seamless account opening process in 2024.
How Wipfli can help
With a team of experienced industry professionals, Wipfli understands your compliance realities. We’re ready to help you face challenges in your compliance program, from supporting new services or initiatives to remediating your examination findings. Contact us today to get the guidance you need to manage compliance effectively.
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