In the press release, FinCEN Acting Director Himamauli Das stated that the agency was committed to ensuring the implementation of the CTA’s BOI reporting obligations was “as simple as possible, particularly for small businesses who may have never heard of or interacted with FinCEN before.”

We have blogged extensively on the CTA and FinCEN’s final and proposed regulations (here, here, here, and here), and will not repeat our analysis of these regulations – other than to note that the stated primary goal of the CTA was to enable law enforcement and regulators to obtain information on the “real” beneficial owners of so-called “shell companies,” including foreign entities registered in the United States, in order to “crack down” on the misuse of such companies for potential money laundering, tax evasion and other offenses.

As we will discuss, these publications from FinCEN appear to be designed to assist the general public in understanding the basic rules regarding the CTA and its implementing regulations.  To that extent, they succeed on their own terms.  But, they do not address more difficult or more nuanced issues presented by the statute and the regulations.  Meanwhile, and as we will discuss, FinCEN has been subject to pressure and criticism from both the U.S. Senate and industry groups regarding many of these same difficult and nuanced issues, including (i) whether FinCEN will or can verify the BOI information reported to it under the CTA, and (ii) revising the CTA reporting form currently proposed by FinCEN, which, as we have blogged, invites bad actors to not answer key questions.

The FAQs

FinCEN explains that it prepared the 16 FAQs to answer inquiries received related to the BOI reporting rule published on September 30, 2022. Further, the agency took the position that the Answers to the FAQs “are explanatory only and do not supplement or modify any obligations imposed by statute or regulation.”  The FAQs addressed are:

1. What is beneficial ownership information?
2. Why do companies have to report beneficial ownership information to the U.S Department of the Treasury
3. Should my company report beneficial ownership information now?
4. When do I need to report my company’s beneficial ownership information to FinCEN?
5. When will FinCEN accept beneficial ownership information reports?
6. Will there be a fee for submitting a beneficial ownership information report to FinCEN?
7. What companies will be required to report beneficial ownership information to FinCEN?
8. Are there exemptions from the reporting requirement?
9. Who is a beneficial owner of a reporting company?
10. Will a reporting company need to report any other information in addition to information about its beneficial owners?
11. Who is a company applicant of a reporting company?
12. What information will a reporting company have to report about itself?
13. What will a reporting company have to report about its beneficial owners and company applicants?
14. How will I report my company’s beneficial ownership information?
15. Who will be able to access reported beneficial ownership information and for what purposes?
16. How will FinCEN protect beneficial ownership information reported to it?

Some Answers provide only background information or reiterate a rule without a helpful “plain English” explanation. (See FAQs 1, 2, 4, 7, 8, 12, 13, 15 and 16.)

Some Answers to FAQs suggest that there has been some confusion amongst the public as to basic components of the CTA and the implementing regulations.  For example, FinCEN felt the need to provide Answers to the following questions: (1) there is no need currently to report BOI to FinCEN because the agency does not even accept any BOI reports at this time, see FAQ # 3 and 5, (2) there is no fee to submit the BOI report when the reporting date becomes effective, see FAQ #6, and (3) the BOI report will be submitted electronically, see FAQ # 14.

Small business and their advisers likely will be most interested in reading the Answers to FAQs #9 and #11. FAQ #9 summarizes the “substantial control” and “ownership” prongs for beneficial owners in “plain English” – which can be helpful to many small businesses trying to gain an initial understating of the CTA’s requirements. The Answer to FAQ #9 included three examples of fairly straight forward facts. Importantly, in all three examples the individuals outright owned stock ownership in the reporting company. Thus, FinCEN completely failed to address the potential complexity that can arise from indirect ownership and ownership interests that are not typical stock holdings, partnership interests, etc.

Relevant to professionals, including incorporation service companies and attorneys or paralegals whose information may have to be reported as “company applicants,” FAQ #11 explains that “[t]here can be up to two individuals who qualify as company applicants” and explicitly provides that “[n]o reporting company will have more than two company applicants.” FinCEN included two examples to illustrate how to identify the “company applicant” in what the agency deemed “common company creation or registration scenarios.” The first example is straight forward and involves only one person who directed and filed the relevant documents. The second example involves two individuals – Individual A who prepared the documents and directed Individual B to file the documents. FinCEN noted that Individual B could be Individual A’s “spouse, business partner, attorney, or accountant.” Under these circumstances, FinCEN explains that “in all cases” Individuals A and B are both company applicants whose information must be reported.

The One-Pagers

FinCEN prepared a one pager tiled “Beneficial Ownership Information Report Filing Dates” giving an overview of the most important dates. We have extracted it below.

Additionally, FinCEN prepared another one pager titled “Beneficial Ownership Reporting – Key Questions” to answer six questions about the general BOI reporting process. While the information is, for all essentially purposes, the same as found in the Answers to the FAQ, the one-pager might be helpful to small businesses trying to understand – at one glace – when the BOI reporting rules become effective and who needs to report what and how.

Recent Criticism of Proposed CTA Access Regulations and Reporting Form

FinCEN issued these publications and videos shorting after receiving significant written criticisms from both the U.S. Senate and industry groups.  It is likely that FinCEN was not reacting to these particular criticisms, but rather already had planned on issuing these publications and videos – which do not address the thornier issues which we now discuss.

First, two Democratic and two Republican Senators (Whitehouse, Wyden, Grassley and Rubio) sent a letter dated March 15, 2023 to FinCEN (the “Letter”), expressing concern that the proposed regulation regarding access to the BOI database “strays from congressional intent and erects unnecessary and costly barriers to accessing” BOI.  The Letter states that FinCEN’s proposed regulation has created an excessive barrier to State, local, and Tribal law enforcement accessing the BOI database by requiring a court order from a judge for such access, rather than, more generally, authorization from a court officer including a judge, magistrate or Clerk of Court.  The Letter also states that the regulation should ensure the ability to use BOI in court cases after any related investigation is concluded.  Turning to financial institutions (“FIs”), the Letter expresses concern about FIs’ ability to timely and effectively access the BOI database for over 30 million reporting companies.  The Letter therefore asks FinCEN to (i) “establish an automated process (ideally one that integrates with existing compliance systems at [FIs]) for fielding and responding to” FIs’ requests; (ii) “clarify in the final rule that [FIs] are not expected to affirmatively obtain new consent from an existing reporting company customer” for every BOI database query; and (iii) ensure that FIs can access and use BOI in order to comply with most of their BSA, anti-fraud and sanctions requirements compliance, rather than merely their compliance with the CDD Rule.  Further, the Letter asks FinCEN to explicitly provide access to the BOI database to the Department of the Treasury’s Office of Inspector General and the Comptroller General of the United States.  Finally, and addressing a particularly thorny issue, the Letter urges FinCEN to issue a final rule which addresses how reported BOI can be verified.  “[I]t is critical that this verification process be automated and built into the BOI reporting process.”  Manual verification by FinCEN would risk overwhelming the agency’s capabilities.

Second, numerous industry and watchdog groups submitted comments criticizing FinCEN’s January 17, 2023 notice and request for comment regarding the currently proposed form to collect and report to FinCEN the BOI for entities covered by the CTA.   For example, and consistent with our own observations regarding the proposed form, the Bank Policy Institute (“BPI”) commented that it was concerned “that the usefulness of the information reported to FinCEN by reporting companies will be greatly limited if the final version of the reporting form to collect [BOI] includes the proposed ‘unknown’ and ‘unable to identify’ response options without necessary clarifications of the extremely limited circumstances where the required information may reasonably be unknowable.”  This is because the frequent availability on the proposed form of “unknown” and “unable to identify” boxes for a filer to check “could discourage reporting companies from undertaking a ‘diligent inquiry’ to secure the requisite information and, further, from ‘tak[ing] care to verify the information’ before reporting it to FinCEN.”  The BPI therefore recommends that FinCEN revise the proposed form so that it requires a reporting company to explain why it was unable, and the efforts that it took, to obtain the required information each time it checks a box stating either that the required information is unknown or that all applicants or beneficial owners could not be identified.  Likewise, the BPI requests FinCEN to do the following in the instructions for the form and in related guidance:

• clearly explain, including through the use of examples, the extremely limited situations in which an “unknown” or “unable to identify” box may be checked and what constitutes “diligent inquiry” and “care to verify”;
• reiterate that, if the reporting company checks one or more of these boxes, it is obligated to subsequently update the reported information as needed and correct any incorrectly reported information, within specific timeframes; and
• confirm that the reporting company may be subject to civil or criminal penalties if it checks “unknown” or “unable to identify” without undertaking diligent inquiry or care to verify, or subsequently updating or correcting the information as required.

The backlash against the proposed form has been sufficiently swift and strong so as to motivate FinCEN to issue a statement, as has been reported recently in the Wall Street Journal, that it is revising the proposed reporting form to address these concerns.

Conclusion

Although the Answers to the FAQs and one-pagers are helpful, general summaries of the CTA reporting framework will – in reality – provide limited insight for small business to determine who is and who is not a beneficial owner.  Presumably, FinCEN will issue more detailed and nuanced FAQs after the CTA regulations become effective on January 1, 2024.  The more interesting questions are how will FinCEN address the issue of BOI verification and improving the reporting form, all in time for the CTA BOI database to become functional on 1/1//24.

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