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The US Corporate Transparency Act was primarily introduced to help tackle illicit activities by increasing transparency of company ownership structures. By requiring companies to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), the Act aims to prevent misuse of corporations and limited liability companies for criminal gain - preventing money laundering, fraud, financing of terrorism, and so on.
In September 2022, FinCEN finalized a rule introducing a reporting obligation for beneficial ownership information (BOI) under the CTA. Now, many business entities are obligated to start disclosing their ownership and control data, with FinCEN accepting reports on January 1 this year.
But what is beneficial ownership information according to FinCEN, and why is it important?
1. What is beneficial ownership information?
Beneficial Ownership Information encompasses details about individuals who directly or indirectly own or control a company. Identifying these owners is crucial to understanding who you are doing business with so decisions can be made with confidence and within risk tolerance.
BOI helps you establish trust with legitimate businesses and business owners; contributes to understanding risk exposure in relation to, for example, higher risk jurisdictions, sanctioned individuals, or politically exposed persons; and it can help reveal when an entity sits outside risk-tolerance, so the relationship can be ended. BOI can also direct the level of monitoring required to limit risk and report issues efficiently.
2. Why is beneficial ownership information important?
Accurate data about beneficial ownership makes it harder for wrongdoers to hide behind or benefit from opaque ownership structures. Shell companies, for example, can be used to disguise illicit activities and the money generated from them. It can be difficult and time-consuming to identify patterns of shell company risk without access to beneficial ownership information.
Beneficial ownership information is important to financial institutions as part of their basic due diligence processes and collecting the information is typically a regulator requirement. It’s important to governments who may be issuing export licenses or approving loans and grants or government contracts. And it’s important to businesses in all areas of commerce as part of their third-party risk management strategies. Without beneficial ownership information it’s impossible to measure risk exposure, and therefore to mitigate against it, and to comply with laws on sanctions, terrorist financing, fraud, and money laundering.
3. What does substantial control mean?
Someone can exercise substantial control over a company in different ways, and there are different regional variations for the definition of substantial control, as well as beneficial ownership. Adding individuals with significant control is a newer concept in the US introduced as a requirement in the CTA. According to FinCEN, if an individual fits any of the following criteria, they could be deemed to be exercising substantial control:
- Someone who is a senior officer (the company’s president, chief financial officer, general counsel, chief executive office, chief operating officer, or any other officer who performs a similar function).
- Someone with the authority to appoint or remove certain officers or a majority of directors of the reporting company.
- Someone who is an important decision-maker within or for the reporting company.
- Someone with any other form of substantial control over the reporting company (such as someone with influence over important decisions).
4. Who has to file beneficial ownership information?
There are two types of reporting companies that fall within the BOI rules set out by FinCEN:
- Domestic reporting companies – these are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar US office.
- Foreign reporting companies – these are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the US by the filing of a document with a secretary of state or any similar office.
There are some exemptions to these reporting companies, including publicly traded companies meeting specified requirements, some nonprofits, and certain large operating companies. However, the reporting obligation is far-reaching and impacts millions of businesses in the US and businesses around the world who operate in the United States.
5. Under the Corporate Transparency Act, who can access beneficial ownership information?
Under the Act, authorized entities, including federal, state, local, and tribal officials, along with certain foreign officials, can access beneficial ownership information for national security, intelligence, and law enforcement purposes.
Financial institutions may also gain access under specific circ*mstances, with consent from reporting companies. However, access to this information isn’t a given; it’s not ubiquitous, even though other organizations and entities may benefit from accessing it for due diligence and risk management purposes.
6. When and how do entities need to file beneficial ownership information?
Companies that are required to report their beneficial ownership information to FinCEN, need to do so electronically through a secure filing system available via the FinCEN website. Information on beneficial owners includes names, dates of birth, addresses and identifying numbers such as a passport or driver’s license. The report can be filed by anyone with authority from the reporting company such as an employee, owner or third-party service provider.
FinCEN launched the BOI E-Filing website for reporting beneficial ownership information on January 1, 2024.
- Any reporting company created or registered to do business before January 1, 2024, will have until January 1, 2025, to file its initial BOI report.
- Any reporting company created or registered in 2024 will have 90 calendar days to file after receiving actual or public notice that its creation or registration is effective.
- Companies created or registered prior to January 1, 2024, have until January 1, 2025, to file.
- Any reporting company created or registered on or after January 1, 2025, will have 30 calendar days to file after receiving actual or public notice that its creation or registration is effective.
Any changes to the ownership or control will also require businesses to file with FinCEN within the associated timeframe.
7. What are the consequences of not filing or mis-filing beneficial ownership information?
The penalties for violations or misreporting can be severe. Anyone willfully violating the reporting requirements could be liable for penalties of up to $500 for each day of continuing violation and criminal penalties include up to two years imprisonment and up to a $10,000 fine.
Currently mistakes or omissions can be corrected within 90 days of the deadline for the original report. However, firms could face civil and criminal penalties for disregarding their BOI reporting obligations.
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Orbis
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Grid
Grid provides an extensive, curated, risk-relevant database for use in anti-money laundering and counter-terrorist financing processes. Information about a person or organization is collated into a risk profile using continuous monitoring of thousands of data sources and coverage of adverse media, sanctions and watchlists, and politically exposed persons information.
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Summary
The Beneficial Ownership Information reporting framework established by the CTA is a crucial step toward transparency and accountability put in place by the US authorities. Organizations need to be diligent in understanding and meeting their obligations. However, the data submitted to FinCEN will not be openly available to the public, and therefore its use in due diligence, compliance, and risk management processes is limited.
Outside the BOI reported to FinCEN, there are existing and robust sources of beneficial ownership data and other risk-relevant information available to organizations globally to help them achieve corporate transparency, so decisions can be made with confidence when deciding who to work with.
Moody’s has a range of tools and datasets to facilitate entity verification, confirm ownership information, identify shell company risk, and screen for PEPs, sanctions, and adverse media stories.
For more information about how Moody’s can help you access beneficial ownership information and integrate that into your compliance and risk management processes, please get in touch – we would love to hear from you.
