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| What is beneficial ownership information (BOI)? |
| What is beneficial ownership information used for? |
| Understanding the Corporate Transparency Act (CTA) |
| Best practices for beneficial ownership information reporting |
| Summary |
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Early in 2024, the U.S. Federal Trade Commission (FTC) reported that USA citizens lost $10 billion to scams in 2023—$1 billion more than was lost in 2022. Roughly $752 million of those losses were due to “business imposters” (businesses pretending to be legitimate). Though the FTC report focused on consumer scams, businesses can also be victimized by other “companies” using false identities. Knowing your customers has become more critical than ever for businesses, particularly financial institutions to fight many types of fraud risk.
To help businesses manage this risk, the federal government enacted the Corporate Transparency Act (CTA). In charge of enforcing BOI reporting rules and regulatory requirements, the federal Financial Crimes Enforcement Network (FinCEN) requires most businesses operating in the U.S. to file what’s called beneficial ownership information (BOI). According to proponents, BOI is a necessary weapon in the war against financial crimes such as anti-money laundering, terrorism financing, and tax evasion. It can also help financial institutions and verified businesses build trust with customers as well as with the government.
BOI is a simple idea, but it comes with complications and challenges. Learn how beneficial ownership works in business structures, including who qualifies as a beneficial owner, and how companies can protect themselves from the serious financial risk of BOI noncompliance.
What is beneficial ownership information (BOI)?
Beneficial ownership information (BOI) refers to the specific data and details that identify the true owners and controllers of a business entity. This information typically includes personal identifying information of beneficial owners, ownership information, and chain of ownership details.
Personal identifying details of beneficial owners
- Full legal name
- Date of birth
- Current residential address
- Unique identification number (like a passport or national ID number)
- Nationality/citizenship
Ownership information
- Nature and extent of ownership interest
- Percentage of shares or voting rights held
- Type of control exercised
- Date when beneficial ownership was acquired
- Position within the company (if applicable)
Chain of ownership details
- Information about intermediate entities
- Relationships between different owners
- Trust arrangements if relevant
- Any indirect ownership structures
There are two sides to beneficial ownership. One is the reporting rules that companies need to meet. The other involves the businesses, primarily financial institutions, that are required to verify a customer’s BOI. This identity verification process thus intersects with the customer due diligence that these businesses should perform.
The federal Beneficial Ownership Rule requires financial institutions to collect and verify BOI identification from a legal entity—called a “reporting company”—when that entity seeks to set up a new account or other business relationship with the company.
The rule defines a beneficial owner as anyone who directly or indirectly owns or controls at least 25% of a legal entity’s ownership interests (which can include securities and property) or exercises what’s termed “substantial control” over that entity. Companies required to report include limited liability partnerships, business trusts, corporations, limited liability companies (LLCs), and foreign entities registered to do business in the U.S. Entities exempt from reporting include banks, public accounting firms, securities issuers, publicly traded companies meeting specified requirements, and certain types of trusts.
So, what is considered “substantial control”? According to FinCEN, an owner is exercising substantial control if he or she fits any of the following criteria:
- A senior officer, such as the company’s president, chief financial officer, general counsel, chief executive officer, or chief operating officer.
- Someone with the authority to appoint or remove certain officers or a majority of directors of the reporting company.
- An important decision-maker within or for the reporting company.
What is beneficial ownership information used for?
The federal government established beneficial ownership information reporting rules to achieve the following objectives:
- Prevent money laundering and other financial crimes.
- Enhance tax compliance and collection.
- Support law enforcement investigations.
- Improve corporate transparency.
- Facilitate customer onboarding and transaction due diligence.
- Build trust in business entities.
- Meet international regulatory standards.
Accurate data about beneficial ownership makes it harder for wrongdoers to hide behind opaque ownership structures. BOI reported to FinCEN is exempt from disclosure under the U.S. Freedom of Information Act (FOIA). Some fraudsters, for instance, will lurk inside a shell company, a legally established entity that has no assets or operations. Though shell companies can serve legally as “placeholders” for future operating businesses, they also have been used to disguise illicit activities.
One of the purposes of BOI reporting is to identify owners of shell companies so that a bank or other legitimate enterprise considering doing business with them can determine whether they’re worth the risk—or engaged in financial malfeasance.
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Understanding the Corporate Transparency Act (CTA)
The Corporate Transparency Act (CTA) was passed in 2021 and put into effect on January 1, 2024, to combat money laundering and other fraud risks by requiring more transparency regarding the ownership of specific legal entities operating in or accessing the U.S. market.
That ownership reporting deadline came up fast. Companies that existed as of January 1, 2024, must have filed their initial reports before the end of 2024. Reporting companies created after the effective date have 30 days after receiving notice of their creation or registration.
Penalties for not complying with these and other CTA regulations can range from $500 to $10,000 per violation and up to two years of imprisonment. These fines can accumulate, which can result in substantial financial losses.
Best practices for beneficial ownership information reporting
In addition to name, date of birth, and address, each beneficial owner must report to FinCEN with a photo of the identification document (passport, driver’s license, etc.).
If an individual files this information directly with FinCEN, he or she may be issued a “FinCEN identifier” that the reporting company may use on a BOI report in place of the required information. Understanding and implementing effective reporting practices has become essential for businesses of all sizes.
Challenges
As businesses engage in meeting CTA requirements, they’ll need to manage a number of challenges. Some of the most significant include:
- Meeting filing deadlines
- Verifying complex ownership structures, including multinational ownership
- Maintaining thorough and up-to-date records of verification actions
- Devoting staff time and other resources to handling these requirements
These challenges are not insignificant. That’s why many small businesses view BOI requirements as yet another instance of government red tape. Ongoing efforts—including legislation and lawsuits—are seeking to repeal or scale back the CTA. In response, supporters argue that the CTA’s transparency requirements not only benefit the government and the economy but also can help smaller firms to compete with larger ones. Small businesses can use their openness as a selling point, building trust among potential customers.
That noted, it is true that the CTA’s reporting system’s rollout hasn’t been completely smooth, making future changes very likely. For instance, FinCEN has been actively working to clarify and refine BOI reporting requirements. Among other moves, the agency has proposed extending the initial filing deadline for BOI reports from 30 to 90 days for entities created or registered in 2024. All this suggests that monitoring and being compliant with changes in the CTA will be yet another challenge for businesses.
Best practices
To effectively deal with these and other challenges, a company should follow current BOI best practices. These include:
- Establishing clear internal procedures for CTA compliance, including staff training and awareness along with regular review and updates of procedures as BOI requirements change.
- Maintaining and managing relevant documentation. This practice can include creating a compliance calendar to ensure that the correct documents—including those pertaining to changes in a reporting company and its ownership—are sent when they’re required.
- Using technology solutions to more effectively verify and monitor beneficial owners of entities before engaging in a business relationship.
Summary
To maintain compliance with CTA and BOI rules, financial institutions will need to make sure that the owners of the companies they’re considering as customers are who they say they are. This can be challenging for any institution, even larger ones with staff that can monitor and mitigate this type of risk.
This is why digital solutions are considered a CTA/BOI compliance best practice. Thomson Reuters CLEAR for Financial Institutions is one of those digital solution tools that can help financial institutions thoroughly verify and monitor customers and thus reduce the risk of identity fraud.
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