Are You Ready for the New FinCEN Reporting Requirements?
Articles by: Richey May, May 05, 2023
Very few U.S. states or territories require companies to disclose information about their beneficial owners—the individuals who own or control companies. In 2021, Congress passed the Corporate Transparency Act (CTA) to tackle a lack of transparency that allowed criminals and corrupt officials to hide their identities in an effort to launder funds through shell companies. This landmark legislation makes it mandatory for U.S.-based entities as well as foreign businesses operating within American boundaries to submit information regarding beneficial owners; this data is then securely provided by FinCEN (the Treasury Department’s Financial Crimes Enforcement Network) only upon request from authorized parties such as government agencies, banks, and select users.
By collecting beneficial ownership information (BOI) and sharing it with law enforcement, financial institutions, and other authorized users, FinCEN is making it harder for bad actors to hide or benefit from their ill-gotten gains.
In September 2022, FinCEN published its Final Rule, effective January 1, 2024. In addition, FinCEN issued guidance in March 2023 on the beneficial ownership information (BOI) reporting requirements.
Under the new BOI rules, the following entities are required to report BOI information.
- A domestic reporting company would include a corporation, limited liability company, or any other entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe.
- A foreign reporting company would include a corporation, limited liability company, or other entity formed under the law of a foreign country and that is registered to do business in any state or tribal jurisdiction.
In keeping with the CTA, twenty-three types of entities would be exempt from the definition of “reporting company.” Many of these exempt entities are already subject to substantial federal and/or state regulation or already have to provide their beneficial ownership information to a governmental authority. FinCEN expects it will not include Sole Proprietors, General Partnerships, and most Trusts as they are not created by filing a document with a Secretary of State. However, we recommend all entities review their potential requirement under CTA to report BOI information. Overall, it appears this rule affects mostly small businesses, but has an expansive reach.
One of the largest exemptions that may apply to Independent Mortgage Bankers:
Exemption 21 – Large operating company
Any entity that: (A) employs more than 20 full time employees in the United States, with “full time employee in the United States” having the meaning provided in 26 CFR 54.4980H-1(a) and 54.4980H-3, except that the term “United States” as used in those sections of the CFR have the meaning provided in 31 CFR 1010.100(hhh), (B) has an operating presence at a physical office within the United States, and (C) filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales, as reported as gross receipts or sales (net of returns and allowances) on the entity’s IRS Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065, or other applicable IRS form, excluding gross receipts or sales from sources outside the United States, as determined under Federal income tax principles. For an entity that is part of an affiliated group of corporations within the meaning of 26 USC 1504 that filed a consolidated return, the applicable amount shall be the amount reported on the consolidated return for such group.
What Does This Mean for Independent Mortgage Bankers?
While Exemption 21, will reduce compliance needs for many IMB’s, there are further exemptions for subsidiary entities. Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in exemptions 1, 2, 3, 4, 5, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 19, or 21 are also exempted (see link above for full list). However, the exemptions do not speak to tiered structures where the operating entity is the lower tier.
Therefore, many tiered structures with the operating entity at a lower tier may likely have reporting requirements. As such, it appears if an IMB is just starting up, part of a tiered structure, or has other affiliated entities/investments these BOI rules will need to be fully reviewed.
Potential Consequences – Penalties
The CTA makes it unlawful for any person to willfully provide, or attempt to provide, false or fraudulent BOI to FinCEN, or to willfully fail to report complete or updated BOI to FinCEN.
Any person who is in violation of the BOI reporting rules shall be liable to the United States for a civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and may be fined not more than $10,000, imprisoned for not more than 2 years, or both.
There is, however, a safe harbor related to the reporting penalty. In general, a person shall not be subject to civil or criminal penalty if the person— (1) has reason to believe that any report submitted by the person in accordance with the rules contains inaccurate information; and (2) in accordance with regulations issued by the Secretary, voluntarily and promptly, and in no case later than 90 days after the date on which the person submitted the report, submits a report containing corrected information. There are times when the safe harbor doesn’t apply, which involves a person evading the reporting requirements; and has actual knowledge that any information contained in the report is inaccurate.
Initial reports. For entities created or registered to do business in the U.S. before January 1, 2024, initial BOI reports are due by January 1, 2025. For entities created or registered to do business in the U.S. on or after January 1, 2024, their BOI reports are due within 30 calendar days of receiving notice that their entity’s creation or registration is effective.
Updated reports. Updated reports will be required when there is a change to previously reported information about the reporting entity or its beneficial owners. These reports will be due within 30 calendar days after a change occurs.
Corrected reports. Corrected reports will be required when previously reported information was inaccurate when filed. Corrected reports will be due within 30 calendar days of the error’s discovery.
To implement this requirement, FinCEN has been developing the Beneficial Ownership Secure System (BOSS) to receive, store, and maintain BOI electronically. This system is currently in development.
In addition, FinCEN has not previously imposed the BSA’s general recordkeeping and reporting requirements on businesses involved in non-financed real estate transactions, but FinCEN has imposed more specific transaction reporting requirements on title insurance companies in the form of time-limited Geographic Targeting Orders under 31 U.S.C. 5326(a). There was a proposed Advance Notice of Proposed Rulemaking (ANPRM) seeking public comment on whether FinCEN should impose a similar, ongoing, and expanded reporting requirement through regulations promulgated under 31 U.S.C. 5318(a)(2) related to non-financed real estate transactions (comment period now closed). FinCEN believes that any proposed regulation should require certain persons to collect, report, and retain information about specified non-financed purchases of real estate. FinCEN is considering proposing such a rule that would apply throughout the United States and would contain no lower reporting dollar threshold.
The new BOI reporting rules come with deadlines and penalties. Existing companies will want to review their qualification for reporting ahead of the 1/1/24 effective date, and new companies (created on or after 1/1/24) will need to review this upon entity creation to meet the 30-day reporting deadline.
For more information or if you have any questions regarding these new changes from FinCEN, please reach out to your Mortgage Banking Tax Expert at Richey May or contact us at firstname.lastname@example.org.