All Fintech
Reporting Beneficial Ownership Information for CTA Compliance
Oct 7, 2024
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InnReg
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13 min read
Contents
In an effort to combat financial crimes and enhance transparency, the Corporate Transparency Act (CTA) imposes strict requirements for reporting Beneficial Ownership Information (BOI). These rules are crucial for all businesses as they aim to prevent the misuse of shell companies for illegal activities such as money laundering and tax evasion.
Under the CTA, entities must submit detailed information about the individuals who own or control them to the Financial Crimes Enforcement Network (FinCEN). Compliance with these regulations is mandatory, and failure to adhere can result in significant fines and penalties.
This article will guide you through everything you need to know about BOI reporting, including who qualifies as a beneficial owner, what information is required, and how to file your Beneficial Ownership Information accurately and on time to stay compliant with the CTA.
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Overview of Beneficial Ownership Information (BOI)
Beneficial Ownership Information refers to the identification details of individuals with substantial control or ownership interest in a company, either directly or indirectly. They may not always be the legal owners on paper, but they wield significant influence over the business's decision-making or financial interests.
This information is essential for promoting transparency in the corporate world, ensuring that authorities can trace ownership structures and prevent the misuse of legal entities for illegal activities.
Businesses that fail to comply with BOI reporting requirements risk facing substantial fines and legal consequences.
Who Qualifies as a Beneficial Owner?
A beneficial owner is anyone who holds significant power over a company’s decisions or financial interests, even if they are not the legal owner on paper.
It’s important to note that beneficial owners aren’t limited to shareholders or legal owners listed on formal documents. Individuals who exert control or benefit through indirect ownership or complex ownership structures also qualify.
What are the Criteria for Determining Substantial Control and Ownership?
Two primary factors are considered when determining Beneficial Ownership Information under the Corporate Transparency Act: substantial control and ownership. These criteria ensure that the true individuals behind a company are properly identified and reported.
Substantial Control
Substantial control refers to individuals who have significant influence over the company’s decision-making or operational functions.
A person may qualify as having substantial control if they meet one or more of the following criteria:
Executive Decision-Making Authority: This includes individuals who exercise significant influence over the company's policies, business decisions, or operations that impact the company’s strategic direction, such as the CEO, CFO, or other top executives.
Appointing or Removing Senior Executives: Those who have the power to appoint or remove members of the board or key decision-makers qualify as beneficial owners, even if they do not hold a large equity stake.
Influence Over Corporate Policies: Individuals who have authority over the company’s policies or major initiatives, such as controlling the adoption of budgets, policies, or long-term business strategies.
Control Over Major Financial Decisions: Anyone who can approve or veto significant financial transactions, such as mergers, acquisitions, or large capital expenditures, has substantial control.
Voting Power: An individual holding a significant number of voting shares enabling them to influence corporate resolutions also meets the criteria for substantial control.
Substantial Control Example: A CEO who doesn’t own shares but has the authority to make significant business and financial decisions would also be considered a beneficial owner under the CTA.
Ownership
In addition to substantial control, the CTA requires disclosing ownership information. A beneficial owner qualifies if they meet one or more of the following ownership criteria:
Direct or Indirect Ownership of 25% or More: Any individual who owns, directly or indirectly, 25% or more of a company’s equity shares, including ownership through subsidiaries, partnerships, trusts, or other entities.
Control Through Intermediaries: These individuals may not directly own shares but exercise control through other corporate structures, trusts, or legal entities. These indirect ownership stakes are also captured under the CTA.
Economic Benefit from the Company’s Assets: Despite not holding formal ownership, these individuals receive significant financial benefits or profits from the company’s assets or operations.
What’s the Difference Between Direct and Indirect Ownership?
Direct ownership refers to individuals who hold a clear and straightforward stake in the company, typically through equity shares or stock ownership. They appear on legal ownership documents and have an obvious connection to the business.
Example 1:
A business founder who owns 40% of the company’s shares is a direct owner. This person is a beneficial owner because they own more than 25% of the company and can influence key decisions.Example 2:
A shareholder who directly holds 30% of the company’s equity is a beneficial owner under the CTA, as their significant ownership stake gives them influence over the company’s governance.
Indirect ownership refers to individuals holding an ownership stake in a company through one or more intermediaries, such as another company, trust, or legal entity.
While their name may not appear on official documents, their control or financial interest in the company still qualifies them as a beneficial owner.
Example 1:
An investor owns 20% of a holding company, which in turn owns 50% of another business. This individual indirectly controls 10% of the underlying company (20% of 50%), which may not meet the direct threshold for reporting. However, if they exert control over the holding company, they could still qualify as a beneficial owner.Example 2:
An individual owns 15% of a business through a private equity firm. The private equity firm holds a 30% stake in the company. Since the individual’s ownership is connected through another entity, they are considered an indirect beneficial owner and must be disclosed under the CTA if their total influence or financial stake meets reporting thresholds.
Indirect owners may be more complex to track, as they often exert control or benefit financially through layers of corporate structures, legal entities, or trusts.
The Role of FinCEN in Beneficial Ownership Information Reporting
The Financial Crimes and Enforcement Network, FinCEN, plays a central role in the collection, storage, and enforcement of Beneficial Ownership Information under the Corporate Transparency Act.
As the agency responsible for ensuring transparency in US corporate ownership structures, FinCEN is crucial in preventing financial crimes.
Now that you understand who qualifies as a beneficial owner and the criteria for substantial control, let’s explore how this information is reported to FinCEN and their role in enforcing compliance.
Central Repository for Beneficial Ownership Information
FinCEN serves as the secure, centralized database for all Beneficial Ownership Information reported under the CTA.
Businesses are required to submit Beneficial Ownership Information directly to FinCEN through an electronic filing system, ensuring that data on the individuals who own or control a company is readily accessible to authorized government agencies.
Enforcement and Compliance Monitoring
FinCEN is responsible for ensuring that businesses comply with BOI reporting requirements. This includes monitoring submissions to identify inaccuracies, missing information, or non-compliance.
Failure to comply with BOI reporting obligations can result in significant penalties, and FinCEN has the authority to impose fines and even criminal sanctions for intentional violations.
Protecting Sensitive Data
One of FinCEN’s key responsibilities is protecting the sensitive personal and financial information collected during BOI reporting.
While law enforcement and regulatory agencies can access this data for investigative purposes, FinCEN ensures that unauthorized parties do not misuse the information. This balance between transparency and privacy is critical in maintaining the integrity of the BOI reporting system.
Facilitating Law Enforcement Investigations
FinCEN provides access to Beneficial Ownership Information to authorized law enforcement and regulatory agencies to investigate financial crimes.
By having a comprehensive database of Beneficial Ownership Information, FinCEN assists agencies in tracing the individuals behind complex corporate structures, making it easier to detect and prevent financial crimes.
Issuing Guidance and Regulations
FinCEN regularly issues guidelines and updates to help businesses comply with the CTA’s Beneficial Ownership Information reporting requirements.
This includes clarifications on who qualifies as a beneficial owner, deadlines for filing, and details on how to submit BOI electronically. FinCEN also provides educational resources to help businesses effectively navigate their compliance responsibilities.
Electronic Submission Portal
FinCEN has developed a secure online portal for submitting Beneficial Ownership Information. This system streamlines the reporting process, ensuring that companies can quickly and accurately file their Beneficial Ownership Information data.
The portal also supports updates, allowing businesses to modify or correct information as necessary.
Ongoing Compliance Support
Beyond enforcement, FinCEN helps businesses remain compliant with BOI reporting obligations. It provides tools and resources, such as FAQs and training materials, to assist businesses in understanding the process and ensuring that their submissions are accurate and complete.
FinCEN Guidance on Beneficial Ownership Information Reporting
FinCEN has provided detailed guidance to help businesses comply with the Corporate Transparency Act and accurately report Beneficial Ownership Information. Understanding and following this guidance is essential for companies to meet regulatory requirements, avoid penalties, and ensure that their submissions are processed efficiently.
Steps to Reporting Beneficial Ownership Information
Complying with the Corporate Transparency Act requires businesses to follow a straightforward process for reporting Beneficial Ownership Information to FinCEN. To avoid fines and penalties, companies must gather and submit the correct information by the required deadlines.
Here’s how:
Identify Beneficial Owners
The first step is identifying all individuals who qualify as beneficial owners under the CTA.
Carefully review the company’s ownership structure to ensure that all qualifying individuals are identified, including those with indirect control. Companies must also document how these individuals meet the criteria for beneficial ownership, whether through equity ownership or substantial control.
Being thorough in documenting both ownership percentages and control factors is essential for a complete and compliant BOI report.
Gathering the Required Information for Each Beneficial Owner
For each beneficial owner, businesses need to collect the following information:
Full legal name of the individual.
Date of birth to verify their identity.
Current residential or business address.
A unique identifying number from an acceptable identification document, such as a passport, driver’s license, or other government-issued ID.
Ensure that all information is accurate and up-to-date before proceeding to submission. Inaccuracies or missing information can lead to non-compliance penalties.
Electronic Submission Process to FinCEN
Once all Beneficial Ownership Information has been gathered, businesses submit it through FinCEN’s secure electronic filing portal. The reporting process involves:
Access FinCEN’s online portal: Businesses need to register and log in to FinCEN’s system designed explicitly for BOI reporting.
Enter the required information: Complete the form with all the relevant Beneficial Ownership Information details, including each beneficial owner’s personal data.
Review and verify: Ensure the information is accurate and complete before submitting the form.
Submit electronically: Once verified, the submission is finalized through the portal.
FinCEN’s electronic submission system is designed to streamline the reporting process while ensuring the security of sensitive information.
Key Dates and Filing Deadlines
To stay compliant, businesses must adhere to the following deadlines:
New entities: Any corporation or LLC formed or registered after January 1, 2024, must submit Beneficial Ownership Information to FinCEN within 30 days of formation.
Existing entities: Companies formed before January 1, 2024, have until January 1, 2025, to submit their Beneficial Ownership Information.
Meeting these deadlines is critical to avoiding penalties, including fines of up to $500 per day for late or incomplete filings.
Monitor and Update Beneficial Ownership Information
After the initial submission, businesses are required to keep their Beneficial Ownership Information current. This includes:
Changes in ownership or control: If a beneficial owner sells shares or gains a larger stake, or if a new individual gains substantial control, businesses must update their Beneficial Ownership Information within 30 days of the change.
Changes in personal information: If a beneficial owner changes their name, address, or identification document, these changes must also be updated in the BOI submission.
Importance of Beneficial Ownership Information under the CTA
Under the Corporate Transparency Act, US businesses are now required to disclose their beneficial owners to the Financial Crimes Enforcement Network, marking a significant shift in compliance obligations for many companies.
The CTA mandates that most US corporations, limited liability companies (LLCs), and other similar entities provide the FinCEN with up-to-date Beneficial Ownership Information.
The CTA’s broad reach applies to both domestic and foreign entities registered to do business in the US, with limited exceptions such as publicly traded companies, regulated entities, and certain inactive firms.
Here are more key reasons why BOI reporting under the CTA is essential:
Clear Ownership Documentation
Before the CTA, many businesses could shield their true owners behind layers of corporate structures, making it difficult for law enforcement and regulatory bodies to track down individuals involved in financial misconduct.
With the new BOI reporting obligations, authorities now have a clearer view of who is truly behind a company, aiding in the prevention and investigation of crimes such as money laundering, terrorist financing, and tax evasion, ultimately enhancing Anti-Money Laundering (AML) compliance.
Increased Business Transparency
The CTA’s Beneficial Ownership Information reporting rules have transformed how businesses are perceived in the marketplace. By disclosing the individuals behind corporate entities, companies demonstrate a commitment to transparency and ethical practices.
This level of openness strengthens trust with investors, financial institutions, and business partners, who can now make informed decisions based on clear ownership structures. Ultimately, Beneficial Ownership Information reporting fosters a more trustworthy business environment.
Facilitating Global Cooperation
The global nature of financial crimes often requires cross-border cooperation. Before the CTA, obscure US corporate ownership structures hampered international efforts to investigate and prosecute financial wrongdoing.
The new BOI reporting framework aligns the US with global standards, making it easier for authorities to collaborate with international regulators in tracking and investigating financial crimes.
Reducing Corporate Liability Risks
Complying with Beneficial Ownership Information regulations not only helps businesses avoid penalties but also reduces the overall risk of corporate liability.
By providing transparent ownership records, businesses can better protect themselves against being inadvertently involved in illegal activities, such as fraud or money laundering, conducted by undisclosed beneficial owners. This helps protect the company’s reputation and limits exposure to legal challenges.
Finally, transparency in beneficial ownership gives investors more confidence in the legitimacy and integrity of a business. This, in turn, leads to stronger relationships with shareholders, higher investment, and an enhanced corporate reputation.
What Are the Differences Between the CTA and CDD Rule Reporting?
While both the Corporate Transparency Act and the Customer Due Diligence (CDD) Rule require the collection of Beneficial Ownership Information, there are important differences:
Purpose and Scope
CTA:
The CTA primarily focuses on increasing corporate transparency by requiring most US companies to disclose their Beneficial Ownership Information to the FinCEN.
Its main goal is to prevent the misuse of anonymous corporate entities in financial crimes. The CTA also applies to a wide range of business entities, including corporations, LLCs, and similar entities, with few exceptions (e.g., publicly traded companies and regulated entities).
CDD Rule:
The CDD Rule is part of the broader AML framework aimed at preventing financial crimes by requiring financial institutions to "know their customers" and the entities behind them.
It was implemented by FinCEN in 2018 and applies to financial institutions like banks, brokers, and other entities subject to Anti-Money Laundering (AML) laws. Its purpose is to ensure these institutions collect Beneficial Ownership Information when a new account is opened or during certain financial transactions.
Who Must Report
CTA:
The CTA requires most privately owned companies, including corporations, limited liability companies (LLCs), and other similar entities, to submit Beneficial Ownership Information directly to FinCEN. Businesses are obligated to provide ownership details regardless of whether they have a relationship with a financial institution.
CDD Rule:
The CDD Rule applies specifically to financial institutions such as banks, broker-dealers, and mutual funds. Under this rule, financial institutions are required to collect Beneficial Ownership Information from their customers when accounts are opened or when specific types of financial transactions occur.
When Information is Collected
CTA:
Under the CTA, businesses are required to report Beneficial Ownership Information when they are formed or registered with the state, and they must update FinCEN within 30 days of any changes in ownership or control. This is an ongoing obligation for all entities subject to the CTA.
CDD Rule:
The CDD Rule mandates financial institutions collect Beneficial Ownership Information when a new account is opened, or certain high-risk transactions occur.
Unlike the CTA, financial institutions collect this information at specific points in time rather than continuously. However, institutions must keep the information up-to-date during their ongoing due diligence procedures.
Information Collected
Both frameworks require identifying beneficial owners—individuals who own 25% or more of the company’s equity or exert substantial control over the company.
Who Accesses the Information
CTA:
The Beneficial Ownership Information collected under the CTA is submitted directly to FinCEN and is stored in a secure, non-public database. Access to this information is restricted to authorized entities, such as law enforcement and federal regulatory agencies, for investigative purposes.
CDD Rule:
The CDD Rule requires financial institutions to store Beneficial Ownership Information in their own records as part of their AML compliance programs. These institutions are responsible for providing this information to regulators or law enforcement during audits, investigations, or suspicious activity reports (SARs).
Penalties for Non-Compliance
CTA:
Failure to report or update Beneficial Ownership Information under the CTA can result in civil penalties of up to $500 per day, with additional criminal fines of up to $10,000, imprisonment for up to two years, or both.
CDD Rule:
Non-compliance with the CDD Rule can lead to significant penalties for financial institutions, including fines, sanctions, and reputational damage. Violations can also result in enforcement actions by federal regulators, who closely monitor financial institutions' adherence to AML regulations.
While both frameworks aim to combat financial crimes, the CTA focuses on corporate transparency, while the CDD Rule emphasizes due diligence within financial institutions.
By understanding the differences between the CTA and the CDD Rule, businesses and financial institutions can ensure they meet their obligations for collecting and reporting Beneficial Ownership Information.
Compliance with the Corporate Transparency Act and the accurate reporting of Beneficial Ownership Information are vital for maintaining transparency, preventing financial crimes, and upholding corporate accountability.
For businesses, staying compliant means understanding who qualifies as a beneficial owner, gathering the necessary information, and submitting it to FinCEN on time. Failure to comply can result in severe penalties, including significant fines and legal consequences.
As the regulatory landscape continues to evolve, companies must remain vigilant in their compliance efforts. This is where InnReg can help. Our team of regulatory experts provides tailored strategies to help businesses navigate complex BOI reporting requirements, ensuring compliance while minimizing the operational burden.
Contact us today for personalized guidance on Beneficial Ownership Information reporting or other compliance needs.
How Can InnReg Help?
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013.
We are especially effective at launching and scaling fintechs with innovative compliance strategies and delivering cost-effective managed services, assisted by proprietary regtech solutions.
If you need help with compliance, reach out to our regulatory experts today:
Published on Oct 7, 2024
Last updated on Oct 7, 2024
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