Unless otherwise exempted, most companies in the United States, including California Corporations, California S-Corps, California Professional Corporations, California LLCs, California LLPs, California Limited Partnerships, and even some California General Partnerships and California Joint Ventures will be required to commence reporting about their Beneficial Owners to the Financial Crimes Enforcement Network on January 1, 2024. The penalty for non-compliance is a civil penalty of up to $500 per day of non-compliance and/or criminal penalties of up to $10,000 and/or two years of imprisonment.

In this article, we introduce the concept of Beneficial Ownership Information Reporting. This new reporting requirement is a significant new obligation for businesses, carrying heavy penalties for non-compliance. Read on to learn more about these regulations, the businesses they affect, and the consequences of non-compliance.

What is the Corporate Transparency Act?

The National Defense Authorization Act includes the Anti-Money Laundering Act of 2020 and the Corporate Transparency Act. This law became effective on January 1, 2021, following an override of the veto of former President Donald Trump. The Corporate Transparency Act adds a new Title X to the Bank Secrecy Act (BSA), titled “Beneficial Ownership Information Reporting Requirements.” This title aims to combat money laundering, terrorist financing, and other illicit activities by requiring certain companies to report information about their beneficial ownership.

Who is Affected by these Regulations?

The new Beneficial Ownership Information Reporting Requirements apply to certain business entities, including corporations, limited liability companies, and other similar entities. Specifically, the regulations affect any company that falls under the definition of a “reporting company” as defined in Title X of the Bank Secrecy Act. This includes all companies registered to do business in the United States, with a few exceptions.

What is Beneficial Ownership?

Before diving into the reporting requirements, it is useful to understand the concept of beneficial ownership. Beneficial ownership refers to the individuals who ultimately own or control a company and benefit from its activities. These individuals may or may not be listed as owners on official company documents, but they have a significant influence or financial interest in the company. This includes shareholders with at least twenty-five percent (25%) ownership, officers and directors, and anyone else who exercises substantial control over the company.

What is a Reporting Company for Beneficial Ownership Information Reporting?

In the context of Beneficial Ownership Information Reporting, companies created or registered in the United States and abroad may be considered reporting companies.

A domestic reporting company can be defined as any corporation, limited liability company, or other similar entity created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe. A foreign reporting company is a foreign entity registered to do business in the United States. The definition of whether a company is a reporting company is dependent upon its presence in the United States.

The requirement to report beneficial ownership information applies equally to both domestic reporting companies and foreign reporting companies, although the information required from each, and its beneficial owners, will vary, it is this category of companies that are obligated to comply with the beneficial ownership reporting requirements detailed in the Corporate Transparency Act.

The Corporate Transparency Act exempts certain entities, such as publicly traded companies, banks, credit unions, and registered brokers, amongst others, from these reporting obligations. The rationale behind these exemptions is that these entities are already subject to specific disclosure obligations under other federal regulations. Read more about exemptions here.

What Agencies Make Up the Financial Crimes Enforcement Network?

The Financial Crimes Enforcement Network (FinCEN) is an agency of the United States Department of the Treasury. It is dedicated to safeguarding the financial system from illicit use, combating money laundering, and promoting national security through the collection, analysis, and dissemination of financial intelligence. While FinCEN itself is a singular entity, it operates within the network of law enforcement agencies, regulatory bodies, and financial institutions. Entities such as the Federal Reserve, the Securities and Exchange Commission (SEC), the Internal Revenue Service, and the Bureau of Alcohol, Tobacco, Firearms and Explosives often collaborate with FinCEN in its mission to prevent and combat financial crimes.

What Information Must be Reported?

Companies subject to these reporting requirements must submit a report to the Financial Crimes Enforcement Network containing information about their beneficial owners.

There are two categories of individuals; beneficial owners and company applicants.

For detailed information about what specific information a reporting company must report for FinCEN beneficial ownership information reporting, see the linked article.

Beneficial Owners

Beneficial owners are individuals who own or control at least twenty-five percent (25%) of a reporting company or have substantial control over the company.

Company Applicants

Company applicants are individuals who file an application to form a company or register a company to do business in the United States. Depending upon the relationship to the reporting company, what information is required of company applicants will vary, but in some circumstances may be the same information as beneficial owners.

What Information Does the Corporate Transparency Act Require for Reporting Companies to Provide to the Financial Crimes Enforcement Network About Beneficial Owners?

The Corporate Transparency Act requires certain reporting companies to file information about their beneficial owners, which information includes full legal names of individual owners, their home addresses, and their social security numbers with the United States Department of Treasury, Financial Crimes Enforcement Network.

Information about beneficial owners that must be reported includes, but is not limited to, their full legal name, date of birth, current residential or business street address, and the unique identifying number from an acceptable identification document (such as a driver’s license or passport) or a FinCEN identifier for each beneficial owner. This information is intended to establish a clear and comprehensive overview of who holds substantial control or ownership within the reporting company.

The information is not intended be become publicly available, however, the Financial Crimes Enforcement Network is authorized to purposely disclose the information to United States federal law enforcement agencies, to other enforcement agencies subject to a court order, to law enforcement agencies, prosecutors, and judges outside the United States upon the request of a United States federal law enforcement agency, and with the consent of reporting companies to financial institutions and regulators of financial institutions.

When Must Beneficial Ownership Information Be Reported?

Initial Beneficial Owner Information Report for Companies Formed Before January 1, 2024

Companies created before January 1, 2024, are required to submit their initial beneficial ownership information report to the Financial Crimes Enforcement Network starting January 1, 2024, and no later than January 1, 2025.

This means that such companies created before January 1, 2024, should plan to submit their initial report in the 2024 calendar year. However, based on the penalties for non-compliance previously discussed above in this article, it would be prudent for reporting companies to not wait until the last minute to file its report.

Initial Beneficial Owner Information Report for Companies Formed on or after January 1, 2024, but Before January 1, 2025

Companies created on or after January 1, 2024, but before January 1, 2025, are required to submit their initial beneficial ownership information report to the Financial Crimes Enforcement Network starting January 1, 2024, and no later than ninety (90) calendar days after receiving actual or public notice of the creation or registration of the reporting company.

This means that such companies should plan to submit their initial reports within three months of registration in 2024. However, based on the penalties for non-compliance previously discussed above in this article, it would be prudent for reporting companies to not wait until the last minute to file its report.

Initial Beneficial Owner Information Report for Companies Formed On or After January 1, 2025

Companies created on or after January 1, 2025, are required to submit their initial beneficial ownership information report to the Financial Crimes Enforcement Network starting no later than thirty (30) calendar days after receiving actual or public notice of the creation or registration of the reporting company.

This means that such companies should plan to submit their initial reports as a part of the formation or organization of companies created on or after January 1, 2025. Based on the penalties for non-compliance previously discussed above in this article, it would be prudent for reporting companies to not wait until the last minute to file its report.

Subsequent Beneficial Ownership Information Reports

After the initial beneficial ownership report has been filed, the reporting requirements do not end. Within thirty (30) calendar days of any change to any of the information, the reporting company must report beneficial ownership information changes. Read about how to fix inaccuracies or make changes to a beneficial ownership information report by following this link.

Reporting Loss of Exemption Status on Beneficial Ownership Information Reports

If a company previously qualified for an exemption to the reporting company definition but no longer qualifies, the company is required to file a beneficial ownership information report within thirty (30) calendar days of the date on which the company stops qualifying for the exemption.

Reporting Exemption Status on Beneficial Ownership Information Reports

For companies that report beneficial ownership information before becoming exempt from the reporting company definition, the company is required to file a beneficial ownership information report within thirty (30) calendar days of the date on which the company stops qualifying for the exemption.

How is Beneficial Ownership Information Reported?

Commencing January 1, 2024, an individual or reporting company will be able to file its report exclusively via the Financial Crimes Enforcement Network website. However, as of the time of this writing, there are no additional details available about the filing process.

What are the Consequences for Non-Compliance with the Beneficial Ownership Information Reporting Requirements?

The Financial Crimes Enforcement Network has and will continue to provide guidance and outreach for reporting companies regarding their reporting obligations, including their obligations to update or correct beneficial ownership information.

Non-compliance with the beneficial ownership information reporting requirements can lead to serious consequences. The Financial Crimes Enforcement Network may impose civil penalties on those who fail to report or provide false or misleading information.

If an individual suspects that a report submitted to The Financial Crimes Enforcement Network contains inaccurate information, they have the opportunity to rectify it within 90 days of the initial report deadline. By doing so, the Corporate Transparency Act provides a safe harbor from penalties. However, if someone intentionally fails to report complete or updated beneficial ownership details to The Financial Crimes Enforcement Network as required by law, The Financial Crimes Enforcement Network will assess the appropriate enforcement measures based on its published enforcement factors.

The willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.

Senior officers of an entity that fails to file a required beneficial ownership information report may be held accountable for that failure. Providing false or fraudulent beneficial ownership information could include providing false identifying information about an individual identified in a beneficial ownership information report, such as by providing a copy of a fraudulent identifying document. Additionally, a person may be subject to civil and/or criminal penalties for willfully causing a company not to file a required beneficial ownership information report or to report incomplete or false beneficial ownership information to The Financial Crimes Enforcement Network.

For example, an individual who qualifies as a beneficial owner or a company applicant might refuse to provide information, knowing that a company would not be able to provide complete beneficial ownership information to the Financial Crimes Enforcement Network without it. Also, an individual might provide false information to a company, knowing that information is meant to be reported to the Financial Crimes Enforcement Network.

Follow San Diego Corporate Law to Stay Up to Date on Beneficial Ownership Reporting

Beneficial Ownership Information Reporting is a new requirement for certain businesses in, or with a presence in, the United States. This regulation aims to combat money laundering and other illicit activities by requiring reporting companies to disclose information about their beneficial owners. Failure to comply can result in significant penalties, making it crucial for affected businesses to understand and adhere to these regulations.

Follow San Diego Corporate Law for Updates and Additional Resources

For more information on the Corporate Transparency Act and its reporting requirements, follow San Diego Corporate Law here and on social media for updates.

Compliance is Key: Start Preparing for Beneficial Ownership Information Reporting Now

If you own or operate a business that falls under the definition of a reporting company, it will be essential to start preparing for these new reporting requirements now to avoid any penalties or consequences in the future. Compliance is key, and staying informed about these regulations is crucial for the success and integrity of your business.

Beneficial Ownership Information Reporting for San Diego Corporate Law Clients

The experienced attorneys at San Diego Corporate Law are committed to keeping their clients in compliance with all California and federal laws and regulations, so we will be doing our best to reach out to our existing clients once the filing portal opens on January 1, 2024. As more information becomes available, we will be reaching out to our clients to offer corporate attorney services for these reporting requirements.

Beneficial Ownership Information Reporting for Everyone

If you are not yet a San Diego Corporate Law client, please contact us today and ask to be added to our beneficial ownership information reporting list, and we will reach out to you once reporting begins after January 1, 2024, with an offer to assist you with the required filing.