On January 1, 2024, corporations, limited liability companies and other entities will be required to begin report information about their “beneficial owners;” people who either exercise significant control over the entity or who own 25% or more of the entity. This mandate comes down from the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). Existing entities have up to one (1) year to report while new entities will have 30 days.
The reason offered for the new reporting requirement is that the government decided that ‘lack of transparency’ allows criminals and corrupt actors to hide their identities and launder funds through US companies. Under current state laws, “Owners” and management types are often anonymous. It is unclear whether this time-consuming rule will “solve” the identified problem, but unless and until the rule is withdrawn or blocked, it is a mandate.
A “beneficial owner” is an individual who (1) directly or indirectly exercises “substantial control” over the entity, or (2) directly or indirectly owns or controls 25% or more of the entity “ownership interests.” “Substantial control” depends on the power the person wields such as influence over important company decisions by a senior officer, whether or not that officer is an “owner.” “Ownership interests” include stock ownership in corporation and Membership Interests in an LLC, among others.
FinCEN claims to place “protecting the security and confidentiality of beneficial ownership” at the top of its priorities. The implementing rule requires FinCEN to create a secure IT system to store the information, and to establish secure processes and procedures to limit the release of beneficial ownership information. FinCEN policies and procedures are “being developed.” The system will be cloud-based and “meet the highest Federal Information Security Modernization Act (FISMA) level” standards of security. This “promise” is not reassuring given that the reporting requirement is “live” January 1, 2024, but the security system is not in place.
Finally, it is important to note that because the new reporting system is mandatory, there are civil and criminal penalties/fines for making false or misleading reports and failure to report.
Subject to FinCEN’s “strict safeguards and controls”, FinCEN will disclose the reported information to certain government authorities, financial institutions, and other authorized users such as law enforcement under certain circumstances. The rule is long and detailed and as such, this note is necessarily a very limited summary. For more information go to: Beneficial Ownership Information Reporting | FinCEN.gov.
If you would like to pursue this matter further, we at Cook, Craig & Francuzenko, PLLC would be happy to work with you to better understand the rule and your responsibilities, as well as the burdens and potential penalties and fines.