Doria Keys
Associate Editor
Loyola University Chicago School of Law, JD 2025
In a time when financial transparency holds unprecedented significance, the Beneficial Ownership Information (BOI) mandate has emerged as a pivotal tool in combatting illicit financial practices through the enactments of various acts during recent years. In 2021, Congress enacted the Corporate Transparency Act, which went into effect January 1, 2024. This legislation was introduced as part of the Anti-Money Laundering Act of 2020 in an effort to increase transparency and hinder individuals from concealing or profiting from unlawfully acquired assets using shell companies or similar obscure ownership setups. On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN) issued a final BOI reporting rule which went into effect on January 1, 2024. The law mandates those businesses employing 20 or fewer individuals, generating $5 million or less in gross annual revenue, and that have been established or registered in the United States and conducting business within the country to disclose their beneficial ownership details to FinCEN.
Who is FincCEN and Why Is This Happening?
FinCEN, or the Financial Crimes Enforcement Network, is a bureau of the U.S. Treasury Department. It is tasked with safeguarding the financial system from illicit activity and combatting money laundering, terrorist financing, and other financial crimes. FinCEN collects and analyzes financial transaction data, enforces anti-money laundering regulations, and oversees the implementation of laws aimed at detecting and preventing financial crimes.
The CTA and BOI Reporting Rule represent the effort to bring the United States more in line with international standards regarding corporate transparency, and in particular, identifying the true owners of companies. The United States is a member of the Financial Action Task Force (FATF), an international organization that establishes global standards for financial crimes compliance. FATF experts conducted a periodic review to assess the country’s compliance with the international standards for combatting compliance, and identified deficiencies in the US in the areas of corporate transparency and identifying beneficial ownership. Because it is particularly easy for one to set up a shell corporation in the US, the CTA was designed to address this issue by capturing more information regarding the true owners of small businesses operating in or accessing the US market.
What is a reporting company and who is the “beneficial owner” under the BOI reporting rule?
Two types of “reporting companies” exist under the Corporate Transparency Act. A “Domestic Reporting Company” is a corporation, limited liability company (LLC), or another similar entity created in the United States by filing a document with a secretary of state or similar office or Indian tribe. A “Foreign Reporting Company” is a non-US company that is admitted to do business in the United States by filing a document with a secretary of state or similar office or Indian tribe. However, there are 23 specific entities that are exempted from the requirement to submit BOI reports to FinCEN.
After a company has identified it is a reporting company, it must next identify its beneficial owners. A “beneficial owner” is any individual who, directly or indirectly, (a) exercises substantial control over a reporting company, or (b) owns or controls at least 25 percent of ownership interests of a reporting company. Under this rule, an individual exercises substantial control over a reporting company if they: (1) are a senior officer, (2) have the authority to appoint or remove certain officers or a majority of directors of the reporting company, (3) are an important decision-maker in the reporting company, or (4) has any other substantial control over the reporting company. A reporting company may have several types of ownership interests. An individual has an ownership interest if they have: (1) any equity, stock, or voting rights; (2) capital or profit interest; (3) convertible instruments; (4) option or privilege; or (5) any other instrument, contract, arrangement, relationship, understanding, or mechanism used to establish some kind of ownership.
When are reporting companies required to submit their initial beneficial ownership information report with FinCEN?
Reporting companies that have existed prior to January 1, 2024 have been given until January 1, 2025 to submit their initial report. Reporting companies formed from January 1, 2024, to December 31, 2024, must provide an initial report to FinCEN within 90 days of their formation or registration notification. Reporting companies created on or after January 1, 2025 are required to file their initial BOI report within 30 calendar days after receiving actual or public notice of their registration.
BOI Effect on Small Businesses
Over 32 million small businesses are affected by this legislation, yet a National Federation of Independent Business (NFIB) survey revealed that 83% of business owners are unaware of its requirements. The House Financial Services Committee has expressed concerns over the lack of education provided to small business owners about the new rule, which leaves small businesses vulnerable to civil and criminal penalties for non-compliance. Adhering to the regulations is crucial, especially considering the gravity of consequences. Failure to provide accurate and current information can result in civil penalties amounting to $500 per day, alongside potential criminal penalties of up to 2-year imprisonment.
Balancing Burdens and Benefits to enhancing transparency and combatting crimes
Nearly every small business in America will be affected by the overly complex and burdensome BOI reporting requirement. These businesses typically lack resources or expertise to efficiently gather and report detailed ownership information. In addition, there may be high costs associated in order to comply with this new legislation, such as hiring legal counsel or an accounting professional. Further costs may be associated with investing in technology to effectively manage data, especially for businesses with complex ownership structures or frequent changes in ownership. Moreover, business owners may have privacy concerns about the privacy and security of personal sensitive information, especially if it is being stored in a centralized federal database accessible to various government agencies.
Reporting companies have been given an option to state that they were “unable to identify” or “unable to attain” ownership information, thus, enabling wrongdoers to conceal the identity of a company’s owners. These options have completely undermined the goal of having transparency and identifying true owners. Such options need to no longer be given, in order to help achieve transparency. In addition, this will undermine national security efforts to effectively enforce the rule. A major role in protecting national security is preventing foreign adversaries from abusing our financial system through illicit activity. Addressing these issues will be critical in order for policymakers to ensure that the reporting requirement achieves its intended goals of enhancing transparency and combating financial crimes without imposing undue burdens on small businesses.