Shorter timelines and increased reporting requirements
Sanctions and individual responsibility
On December 7, 2021, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) released draft regulations containing details to begin compiling a beneficial ownership registry for U.S. businesses under the Corporate Transparency Act. (CTA). This article is the fourth in a series summarizing those details and focuses on when information should be reported and the penalties for non-compliance.(1)
Adopted on January 1, 2021, the CTA establishes a beneficial ownership reporting regime for U.S. corporations, under which reporting corporations must submit a report containing information on the “beneficial owner” and the “applicant corporation” (together, the “beneficial ownership information” (BOI)). For more details, please see “Beneficial Ownership Declaration of Certain US Corporations – Details of the New Corporate Transparency Act”.
The proposed regulations are intended to clarify the various requirements of the LTC’s Investigation Committee, including:
- who must file an EC report;
- what constitutes beneficial ownership;
- what information should be disclosed in an EC report; and
- when the information must be declared.
This article summarizes the proposed regulations regarding when information must be reported and the associated penalties for non-compliance. Under the proposed regulations, the timing of the Board of Inquiry report depends on:
- when a reporting company was created or registered; and
- if the report in question is:
- an inception report;
- an updated report providing new information; or
- a report correcting erroneous information in a previous report.
Under the draft regulations, the time limit for filing an initial report with the EC depends on whether a reporting company was formed or registered before the effective date of the final regulations (the effective date effective) or after that date. For more details on what constitutes a “Reporting Company”, please see “Beneficial Ownership Declaration of Certain U.S. Corporations: Proposed Regulations on Who Must File a Beneficial Ownership Declaration”.
Any domestic filing company formed and any foreign company registered to do business in the United States on or after the Effective Date must file within 14 calendar days of its date of formation or registration, respectively. . FinCEN is developing the infrastructure needed to administer CTA filing requirements, such as the beneficial ownership information technology system.
On the other hand, any domestic reporting company created and any foreign entity registered to do business in the United States prior to the effective date must file their initial BOI report within one year of the effective date. vigor.
Modified exemption status
In addition, any entity that no longer meets the criteria for a particular exemption and becomes a reporting company must file a report within 30 calendar days of the date it no longer meets the criteria for such exemption.
The proposed rule requires reporting companies to update a BOI report within 30 calendar days of the date there is a change from any information previously reported to FinCEN. This includes any changes to:
The requirement to update EC reports, as currently provided for in the draft regulations, could be onerous, especially if there are many beneficial owners to report due to the very broad definitions of ” substantial control” and “interests”. Reporting companies will be required to file updated reports whenever there are changes in the directors, management or shareholders of the company. In addition, an updated report will be required each time there is a change in the information previously provided regarding these individuals (for example, a change of address). In either situation, the updated BOI report must be submitted within 30 days of this change.
Similarly, a reporting company is required to correct inaccurately filed information within 14 calendar days of the date the reporting company becomes aware or has reason to know that any required information contained in any BOI report filed with FinCEN was inaccurate.
Shorter timelines and increased reporting requirements
The one-year deadline proposed by FinCEN in the draft regulations for existing reporting companies to submit their initial BOI report is significantly shorter than the maximum two-year deadline granted under the CTA. Additionally, for updated and corrected reports, the timelines offered by FinCEN are significantly shorter than the timelines originally provided by law.
The requirement to update a FinCEN BOI Report whenever there is a change from previously reported information is different from the requirement to file a FinCEN Foreign Bank Account Report annually (commonly referred to as an “FBAR”). ”), which is provided only once a year, regardless of any changes during the year (for details, please see “U.S. Treasury Department Issues Final Rule for Accounts Reporting foreign banks”). As a result, BOI statements could be much more cumbersome in practice, unlike FinCEN’s statement that:
In crafting the proposed regulations, FinCEN also sought to minimize burdens on reporting companies, including small businesses. It is expected that reporting companies will cost less than $50 each to prepare and submit an initial CE report. By comparison, the state incorporation fee for setting up a limited liability company (LLC) can cost between $40 and $500, depending on the state.(2)
Sanctions and individual responsibility
The CTA provides that any willful violation of BOI reporting requirements may result in penalties, including:
- civil penalties of up to $500 per day if a violation has not been corrected; and
- criminal penalties of up to $10,000 and imprisonment for up to two years.
The CTA itself does not specify who will be liable if the required information is not properly reported (for more details, please see “Beneficial Ownership Reporting for Certain US Corporations: Relevant Observations for Private Client Structures”). With respect to LTC penalties, the draft regulations provide:
It is illegal for any person to knowingly provide or attempt to provide false or fraudulent beneficial ownership information, including a false or fraudulent photograph or identification document, to FinCEN pursuant to this Section; or willfully fail to provide complete or updated beneficial ownership information to FinCEN in accordance with this Section.
Importantly, the proposed Regulations specify that a “person” includes any individual, reporting company or other entity. Thus, the proposed regulations specify that any person, in addition to the reporting company and any other entity, will be liable and subject to civil and criminal penalties.
The proposed rule also clarifies that liability may arise for direct or indirect violations, and for acts (for example, reporting inaccurate information) or omissions (for example, failure to provide or update information required). In addition, a person fails to report complete or up-to-date beneficial ownership information if that person “directs or controls another person” with respect to such failure to report or exercises “substantial control” over a reporting company. when it fails to provide a complete statement or updated beneficial ownership information to FinCEN.
The scope of penalties in the Proposed Rule appears to deviate from the wording of the CTA, under which penalties are arguably only imposed on the reporting company itself and on any reporting person who lies or fails to update the information, and not to affiliated persons or persons completing the file. The current wording of the Proposed Rule clearly extends the LTC sanctions to a greater number of persons, including a beneficial owner who exercises substantial control over a reporting company and any person who directs or controls a filer or claimant.
Since the LTC’s sanctions are tied to willful behavior, applicability hinges on the question of what it means to be “willing”. In order to impose penalties, the government must demonstrate that the violations were intentional, an issue that has been and continues to be hotly contested in the context of FBAR filings.
This series of four articles on the CTA’s proposed regulations and the first two articles on the details of the new CTA and observations on private customer structures(3) highlight the fact that the United States has joined the trend. continues toward corporate transparency, addressing at the federal level the fact that few jurisdictions in the United States require corporations to disclose information about their beneficial owners or the individuals who comprise them. This is a new step in the global fight against money laundering, terrorism, financial crime and tax evasion. Even the governments of all British Overseas Territories have pledged to introduce publicly accessible beneficial ownership registers by the end of 2023.
The rollout of mandatory BOI reporting in the United States requires the immediate attention of family offices and family advisors whose estate planning structures include US entities. These professionals should begin to explain the new EC reporting requirement, identify who to report, and gather relevant details. We hope that the final regulations will provide more certainty. Further regulations are expected from FinCEN to establish rules on who can access the BOI and for what purposes, and what safeguards will be required to ensure the information is secure and protected. FinCEN is also expected to revise its customer due diligence rule after the final BOI reporting rule is enacted.
For more information on this subject, please contact Severiano E Ortiz to the Washington DC office of Kozusko Harris Duncan by phone (+1 202 454 6721) or email ([email protected]). Otherwise, contact Jennie Cherry or Bryan Hoseok Okay Kozusko Harris Duncan’s New York office by phone (+1 212 980 0010) or email ([email protected] or [email protected]). Please note that the authors are unable to provide legal advice to non-clients. The Kozusko Harris Duncan website can be accessed at www.kozlaw.com.
Copyright in the original article belongs to the named contributor.
(1) For previous articles in the series, see:
(2) FinCEN, “Notice of Beneficial Ownership Information Statement of Proposed Rulemaking.”
(3) For the first two articles in the series, see: