The U.S. has lagged other countries in establishing a nationwide, uniform beneficial ownership reporting requirement. In the absence of a nationwide standard, some have raised concern around how easy it is for illicit actors to form shell companies to hide their identities from law enforcement. As such, Congress began analysis and discussions four years ago to establish a nationwide approach to address the issue. Throughout this years-long process, NMHC actively engaged both chambers in:
- educating staff;
- providing input on a reporting framework to ensure that onerous provisions were not included; and
- helping to draft legislation.
Read on for an overview of the latest action in the space and potential compliance considerations.
The information provided herein is general in nature and is not intended to be legal advice. It is designed to assist our members in understanding this issue area, but it is not intended to address specific circumstances or business situations. For specific legal advice, consult your attorney.
Background and Important Compliance Dates
A new beneficial ownership information (BOI) reporting framework, administered by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), will take effect on January 1, 2024. The requirements were created by the Corporate Transparency Act (CTA), which was enacted on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA).
BOI encompasses certain identifying information about the individuals who directly or indirectly own or control a company, and most corporations that operate in the U.S. will be required to submit the outlined information. The materials will be reported to FinCEN electronically and housed in a newly constructed database.
Most multifamily owners utilize financial entities, such as LLCs, that will be included in this new reporting framework. Not only will every qualifying financial entity be required to enter their BOI information but every presently existing and operating financial entity will be subject to this reporting framework as well. The new database is scheduled to go live on January 1, 2024, and will require that any qualifying entity created after that date be entered in the database. All existing entities created prior to the go-live-date must enter their data on each such entity prior to January 1, 2025.
This memo summarizes the current state of play on implementation and outlines requirements impacted entities should be prepared to meet as the effective date approaches. Since this is a new process and a new framework, we should expect that some changes will occur between now and the go live date.
- directly files the document that creates, or first registers, the reporting company; and
- is primarily responsible for directing or controlling the filing of the relevant document.
- These companies only need to provide information about themselves and their beneficial owners. It does not need to provide information about its company applicants.
- These companies will need to report information about themselves, their beneficial owners, and their company applicants.
- Reporting Companies
Legal name; any trade names; the current street address of its principal place of business if that address is in the United States, or, for reporting companies whose principal place of business is outside the United States, the current address from which the company conducts business in the United States; its jurisdiction of formation or registration; and its Taxpayer Identification Number.
- Beneficial Owners and Company Applicants
The individual’s name, date of birth, residential address, and a unique identifying number from an acceptable identification document (i.e. a U.S. driver’s license or passport) They must provide photo evidence of the document and the name of the state or jurisdiction that issued it.
As FinCEN continues the process of preparing and finalizing the materials necessary for impacted entities to comply with the new BOI reporting requirements when they take effect on January 1, 2024, the following section outlines the available information so entities can proactively prepare for implementation.
Key Definitions and Concepts
These are individuals with substantial control and/or ownership interests.
A beneficial owner is defined as any individual who: (1) directly or indirectly exercises “substantial control” over the reporting company, or (2) directly or indirectly owns or controls 25 percent or more of the “ownership interests” of the reporting company.
A range of factors can signify that an individual has “substantial control” over a company, but all senior officers are automatically considered to meet this metric.
The arrangements that qualify as “ownership interests” typically include any that establish rights in the reporting company, including both regular stock and more complex instruments.
Additional information on both of these definitions is provided in the Reporting Requirements final rule.
Under the new requirements, there are two types of reporting companies: domestic and foreign.
A domestic reporting company is defined as a corporation, a limited liability company, or any other entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.
A foreign reporting company is any entity that is a corporation, limited liability company, or other entity formed under the law of a foreign country, AND is registered to do business in any U.S. state or in any Tribal jurisdiction, by the filing of a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.
As a reminder, only companies created/registered after January 1, 2024, must provide this information.
Reporting companies can name no more than two company applicants, and they are the individual(s) who:
Reporting companies will be expected to meet the following timelines.
The creation and/or registration date also impacts the types of information that must be reported.
A reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial beneficial ownership information report.
A reporting company created or registered on or after January 1, 2024, will have 30 days to file its initial beneficial ownership information report. The 30-day clock begins when the company receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier.
Updated and/or corrected reports must be filed within 30 days of when the change occurs or when the company becomes aware of the error.
Note: FinCEN will not accept the submission of any BOI reports prior to January 1, 2024. There will not be a fee associated with filing the reports once the system is online.
The CTA requires that FinCEN provide a unique identifier (FinCEN ID) upon request to: (1) an individual who provides FinCEN with the same information as is required from a beneficial owner or company applicant, and (2) any reporting company that has provided its BOI to FinCEN. In certain instances, beneficial owners, company applicants, and reporting companies may provide a FinCEN ID to a reporting company in lieu of providing required BOI.
A FinCEN identifier is a unique identifying number that FinCEN will issue to individuals or reporting companies upon request, subject to certain conditions.
The statute provides a safe harbor for certain circumstances.
Any person who violates the reporting requirements may be fined up to $500 for every day they are out of compliance and may face a fine of up to $10,000 and/or up to two years in prison.
Any person who is found to have accessed or used reported information in an unauthorized manner may face a fine of up to $250,000 and/or up to five years in prison. If this is found to be part of a pattern of illegal behavior, they may face a fine of up to $500,000 and/or up to ten years in prison.
What a Company Will Need to Report
Reporting companies will be required to provide the following information on the reporting company itself, its beneficial owners, and its company applicants:
If an individual or reporting company provides their information to FinCEN, they may obtain a “FinCEN identifier,” which can then be provided to FinCEN on a BOI report in lieu of the required information. Certain details around the provision and submission of the FinCEN identifier are still being finalized.
The statute provides 23 exemptions from the reporting requirements. They are available here in full, but the list largely exempts banks, securities exchanges and clearing agencies, brokers and dealers, certain investment advisors and money services businesses, credit unions, public accounting firms, regulated public utilities, financial market utilities, and certain tax-exempt entities.
Who Can Access a Company’s Information
Once the information is filed by reporting companies and stored in FinCEN’s forthcoming database, it can be accessed – pursuant to the safeguards mandated under the statute – by the following groups:
- U.S. Federal agencies engaged in national security, intelligence, and law enforcement activities;
- State, local, and Tribal law enforcement agencies with court authorization;
- The U.S. Department of the Treasury;
- Financial institutions using BOI to conduct legally required customer due diligence, provided the financial institutions have their customer consent to retrieve the information;
- Federal and state regulators assessing financial institutions for compliance with legally required customer due diligence obligations; and
- Foreign law enforcement agencies and certain other foreign authorities who submit qualifying requests for the information through a U.S. federal agency.
FinCEN has recently created a suite of helpful resources to answer questions that may arise as the companies prepare to comply with the new framework.
- FinCEN Beneficial Ownership Information Implementation Hub
- FinCEn Beneficial Ownership Small Entity Compliance Guide
- FinCEN Beneficial Ownership Reporting – Key Questions
- FinCEN Beneficial Ownership Reporting – Reporting Dates
- FinCEN Beneficial Ownership Reporting – Frequently Asked Questions
- FinCEN Beneficial Ownership Reporting – Short Introductory Video
- FinCEN Beneficial Ownership Reporting – Informational Video
- 1. Reporting Requirements. This rule concerns the BOI reporting requirements mandated by the CTA. It identifies two types of reporting companies (foreign and domestic) and establishes definitions or procedures for determining the application of several key terms, including: beneficial owner, substantial control, ownership interests, and company applicant. It also outlines the four pieces of information that must be submitted by reporting companies and establishes a timeline for implementation of the requirements.
- Status: This rule was finalized in September 2022. Final Rule | Fact Sheet
- 2. Information Access. This rule concerns who may request BOI that will be reported to FinCEN, who may receive it, how recipients may use the information, how they must secure it, the penalties for failing to follow applicable requirements, and when and how reporting companies may report FinCEN identifiers tied to entities. It would also establish criteria for certain aspects of the secure, non-public information technology (IT) system that FinCEN is building to store BOI and manage disclosures. Some members of Congress have raised concerns with the structure of the proposed rule, which is discussed more below.
Status: This rule was proposed in December 2022. Proposed Rule | Fact Sheet
- 3. Due Diligence. FinCEN must modify its customer due diligence (CDD) rule to bring it into compliance with the statute and to provide for the confirmation of BOI filed directly with financial institutions by reporting companies to ensure the institutions can comply with anti-money laundering (AML), countering the financing of terrorism (CFT), and customer due diligence requirements, including Know Your Customer (KYC) guidelines.
Status: This rule has not yet been proposed.
- A January 2023 proposed rule that contains the report that will be used to collect beneficial ownership information, as required by the Reporting Requirements final rule.
- A January 2023 proposed rule that contains the application that will be used to collect information from individuals who seek to obtain a FinCEN identifier, as required by the Reporting Requirements final rule.
Ahead of the January 1, 2024, effective date, FinCEN must complete three rulemakings to implement the CTA.
FinCEN is also undertaking as series of related rulemakings to support implementation efforts. To date, these include:
NMHC will evaluate the proposed rule once issued and will then determine if and how to formally respond.
Overall, CTA implementation is a closely watched process on Capitol Hill and has drawn interest from lawmakers in both chambers and across the aisle.
For example, in April 2023 a bipartisan, bicameral group of lawmakers asked FinCEN to eliminate an “escape hatch” they said was built into the report proposed in January that will be used to collect BOI. The proposed form includes an option for filers to indicate they were ‘unable to obtain’ certain pieces of information.
The group is concerned that preserving this option would ultimately undermine the effectiveness of the database and render it unusable for financial institutions trying to more efficiently meet their due diligence requirements. The signatories include leadership on the House Financial Services Committee, House Appropriations Subcommittee on Financial Services, Senate Finance Committee, Senate Budget Committee, and Senate Banking Committee—showcasing the widespread consternation with the guidance as released. Several of the signers are in positions to conduct oversight via committee hearings and other means. FinCEN Acting Director Himamauli Das previously told reporters that the agency is already working to reissue a revised form.
House Financial Services Committee Chair Patrick McHenry (R-NC) and National Security, Illicit Finance, and International Financial Institutions Subcommittee Blaine Luetkemeyer (R-MO) also submitted a comment letter criticizing the proposed rule for deviating from the statute.
The construction of the database that will house BOI reported by companies is also being heavily monitored. As the January 1, 2024, implementation date draws nearer, congressional scrutiny will continue to heighten.