Fincen issues small-business guide to beneficial ownership rules

Bloomberg News

WASHINGTON — The Treasury Department's Financial Crimes Enforcement Network announced Monday most U.S. corporations, limited-liability companies and U.S. operations of foreign companies will need to report information about their beneficial owners as of the new year.

"This is a critical step towards implementing the Corporate Transparency Act, which will help the Treasury Department and Fincen expose bad actors abusing the U.S. financial system by hiding their identity behind opaque corporate structures," noted Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson in a press release. 

While most companies will be subject to these new reporting requirements, if a company falls into one of 23 categories, it may be exempt from reporting requirements. Many exempt industries outlined in Fincen's compliance guide released Monday include certain highly regulated entities for which BOI reporting would likely be redundant including banks, credit unions, government authorities, securities exchanges and insurance companies. Tax-exempt organizations, subsidiaries of certain exempt companies, inactive companies and public utilities are also exempted.

The agency defines an individual as exercising "substantial control" over a business if they hold the position of a senior officer, have authority to hire and fire a majority of company directors, play a crucial role in decision-making or maintain substantial control, as defined by Fincen. This broad definition will provide the agency substantial flexibility in identifying beneficial owners, especially in less conventional business structures which may evade the criteria.

The guidance also includes a definition of ownership interest, encompassing various financial instruments.

"​​Any of the following may be an ownership interest: equity, stock, or voting rights; a capital or profit interest; convertible instruments; options or other non-binding privileges to buy or sell any of the foregoing; and any other instrument, contract, or other mechanism used to establish ownership," the guidance noted. 

As with determining substantial control, the agency said it may, on a case-by-case basis, determine whether an individual's holdings in these instruments qualify as ownership interests.

Additionally, the guidance mandates that individuals involved in the formation of a company, including affiliated spouses, business partners, attorneys or accountants, must also be reported under the new rule.

The Corporate Transparency Act — enacted in January 2021 — mandates that Fincen compile beneficial ownership information for specific U.S. and foreign reporting companies in a Beneficial Ownership Secure System, and Fincen announced it would release three rules implementing the registry before the database becomes operational on January 1, 2024. So far, the agency has issued two of three rules it was charged with writing under the act. The first rule governing BOI reporting was issued by the regulator in September 2022 and the second rule governing law enforcement access was issued last December. The third yet-unreleased rule will revise Fincen's existing Customer Due Diligence Rule to align with the new reporting regime.

Today's guidance attempts to address a cacophony of critiques from lawmakers, state attorneys general and anti-corruption advocates alike who have voiced concerns about the registry's access rule in particular since its publication in the federal register in December of last year.

The American Bankers Association urged Fincen to withdraw the rule earlier this year, saying it was fatally flawed and onerous. Of particular concern to ABA was Fincen's proposed privacy safeguards, which it deemed too onerous and would hinder banks' access to the registry.

Bipartisan lawmakers have also requested the agency amend the December "access" rule to enable financial institutions to utilize beneficial ownership information to aid in satisfying a broader set of their compliance requirements.

Fincen had a major change in leadership in recent months, as former director of the Treasury Department's Office of Foreign Assets Control Andrea Gacki replaced outgoing Fincen head Himamauli Das in July. Das was previously the agency's acting director over the last two years. Gacki assumed the position as Fincen was writing the new regulations, and she said Monday she hopes the guide will be easy to use for entities.

"This guide is the latest in our ongoing efforts to educate the public about these important new requirements," noted Director Gacki in a release. "We are committed to making this process as simple as possible, particularly for small businesses."