Clarity and granularity: FinCEN updates BOI guidance

October 2024  |  FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

October 2024 Issue

Understanding beneficial ownership reporting under the US Corporate Transparency Act (CTA) is crucial if those within its scope are to successfully comply with the federal legislation’s nuances.

Enacted in January 2021, the CTA aims to combat illicit activity including tax fraud, money laundering and financing for terrorism by capturing more ownership information for specific US businesses operating in or accessing the country’s market.

Under the legislation, companies that meet certain criteria must submit a Beneficial Ownership Information (BOI) Report to the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), providing details identifying individuals associated with the reporting company.

However, despite the existence of an extensive set of FAQ best practices on the FinCEN website, the BOI reporting process has proved problematic for many companies, smaller business owners in particular, with many remaining unaware of the scope and triggers for the filing of BOI reports.

To provide some much needed clarification, on 10 June 2024, FinCEN released an updated version of its FAQs on BOI – a comprehensive update intended to provide essential clarifications on a range of topics, including reporting companies and exemptions, beneficial owners and reporting requirements.

“The CTA outlines requirements, but it is up to FinCEN to set detailed guidance on what those requirements mean and how to implement them,” says Michelle Frasher, head of compliance and regulatory strategy at Silent Eight. “Building a registry is a complicated multiyear process and these updates are a natural progression of FinCEN efforts to provide information that fits individuals and groups across many sectors.”

Notable updates

While the updated FAQs provide essential clarifications on a range of topics (FinCEN’s website features over 100 FAQs covering 15 different categories), the items outlined below constitute the most notable.

Indian Tribe definition. Under the CTA, ‘Indian Tribe’ includes any tribe acknowledged by the US secretary of the interior. This list is updated annually in the Federal Register.

Homeowners Associations (HOAs). Not all HOAs are reporting companies. Only those created by filing with a state office and not exempt under section 501(c)(4) of the Internal Revenue Service must report BOI.

Entities formed under Tribal Law. Such entities must report BOI if they meet the reporting company definition and are not exempt. This includes entities formed through filing with a Tribal office that functions similarly to a state office.

Beneficial owners in Tribal entities. Entities owned by Indian Tribes must report beneficial owners who exercise substantial control or own at least 25 percent of the entity. However, the Tribe itself is not reported as a beneficial owner.

Acceptable identification for reporting. The CTA requires a unique identification number from a valid US driver’s licence, state, local, tribal identification or passport.

Public utility exemption. Regulated public utilities, including those providing telecommunications, are exempt from BOI reporting.

Large operating company exemption. A company can qualify for this exemption if it filed a federal income tax return in the previous year showing over $5m in gross receipts or sales.

“The updates are designed to answer recurring questions posed to FinCEN staff and to generally help resolve uncommon fact patterns that cast uncertainty on compliance with the CTA,” notes Shamim Mohandessi, an associate at Seyfarth Shaw LLP. “This should make it easier for businesses to comply with the law.

“Additionally, as the regulatory environment evolves and new challenges arise, the FAQ updates continue to reflect any changes in legislation, enforcement priorities or technological advancements,” he continues. “This ensures that the guidance remains relevant and effective. Providing detailed and updated FAQs enhances transparency regarding the BOI reporting process, helping companies understand their reporting obligations and the importance of accurate and timely submissions.”

On the horizon

The updated FinCEN guidance provides in-scope companies with the requested clarity regarding the implementation of beneficial ownership reporting requirements under the CTA, and further updates are potentially on the horizon.

“I am in favour of updating guidance when it is done in response to industry feedback,” asserts Ms Frasher. “It can improve the clarity of obligations or set restrictive boundaries – either intentionally or unintentionally. I anticipate more discussion on access rights, especially for due diligence and sanctions technology and data providers.”

Additional updates that may be under consideration by FinCEN include those pertaining to technological integration and reporting systems, sector-specific guidance, clarifications on penalties and enforcement, expanded definitions and examples, and periodic reviews incorporating stakeholder feedback.

“We expect that FinCEN’s BOI FAQs will continue to be updated to provide greater clarity and granularity for reporting companies by addressing specific ambiguities and offering detailed guidance on various aspects of reporting requirements,” concludes Mr Mohandessi. “However, with the FAQs being updated approximately every 30-60 days, those potentially covered by the CTA’s BOI reporting requirements should determine their obligation to file or not, and to memorialise such determination.”

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Fraser Tennant