Best Practices: Recent Changes to Beneficial Ownership Information (“BOI”) Reporting, and its Impact on Lending

What is the Beneficial Ownership Information (“BOI”) Reporting Rule?

The Financial Crimes Enforcement Network (“FinCEN”) recently implemented significant changes in beneficial ownership reporting, for the purpose of combating financial crimes. These regulations aim to enhance transparency by requiring companies to disclose the identities of their beneficial owners, defined as individuals who (i) directly or indirectly own 25% or more of the equity interests in a company or (ii) exercises substantial control over a reporting company.  Substantial control is broadly defined and can mean any senior officer, individual who can appoint or remove officers or directors, or be a decision-maker for the reporting company.  There can be many beneficial owners to a reporting company.   As of January 1, 2024, covered entities must submit detailed information, including names, addresses, and social security numbers or passport details of individuals meeting this threshold. This shift is expected to fortify the government’s ability to trace and prevent illicit financial activities, and to strengthen anti-money laundering (“AML”) measures. By ensuring a comprehensive understanding of who ultimately owns and controls legal entities, authorities can better assess and mitigate risks associated with financial transactions. This move aligns with international efforts to create a more transparent and accountable financial system.

However, these changes also raise concerns about privacy and data security. Critics argue that the extensive disclosure requirements may expose individuals to potential risks, especially in cases where personal information falls into the wrong hands. Striking the right balance between transparency and privacy remains a challenge, necessitating ongoing dialogue and adjustments to ensure that the regulations achieve their intended goals without unduly compromising individual rights.

Who has to comply with the new ownership changes?

The new changes apply to certain covered entities, specifically those defined as “reporting companies.” Reporting companies include corporations, limited liability companies (“LLC’s”), and similar legal entities formed under the laws of the United States, plus certain foreign entities registered to do business in the U.S. However, there are many exemptions to the “covered entity” definition. Whether an entity is exempt from the requirements should be evaluated each year.

To whom must “covered entities” report?

Covered entities are required to report this information directly to FinCEN, which is a bureau of the United States Department of the Treasury. This is in addition to any filings required by the Secretary of State or other jurisdiction governing the formation or active status of the entity. Covered entities in existence prior to January 1, 2024 have until January 1, 2025 to report to FinCen. New companies formed after January 1, 2024 but before January 1, 2025 have 90 calendar days after receiving notice that their registration is effective to file their initial BOI report.  Companies created after January 1, 2025 will have 30 days from the date of registration to file their initial BOI report.

Effect of Failure to Report Accurate Information

Failure to report and maintain accurate beneficial ownership information to FinCEN, may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000. Senior officers of an entity that fails to file a required BOI report may be held accountable for that failure.

What part do lenders play in the new reporting regime?

Previously, as part of anti-money laundering compliance, lenders were required to collect and verify certain information from their customers as part of their Know Your Customer (“KYC”) procedures. While traditional KYC processes focused on verifying the identity of the customer opening the account, the new regulations extend the scope to include a deeper understanding of the ownership structure. Financial institutions are now required to identify and directly report to FinCEN the beneficial owners who own 25% or more of the equity interests in covered legal entities.

How will financial institutions report to FinCEN?

Lenders are likely to use FinCEN’s existing systems or designated platforms for filing these reports. The specific details of the reporting process, including the format and channels for submission, are typically provided by FinCEN through official guidance and documentation.

In December 2023, FinCEN issued a Final Rule on the Beneficial Ownership Information Access and Safeguards. The Final Rule becomes effective on February 20, 2024. In this Rule, FinCEN plans a phased implementation of access to the BOI database, including obtaining authorization of lending institution customers to the disclosure or sharing of their personal information.  Financial institutions are last on the access list, because, according to FinCEN, the timing of their access will coincide with the upcoming revision of FinCEN’s 2016 CDD (Customer Due Diligence) Rule, part of the Bank Secrecy Act. FinCEN anticipates providing additional information on the timing and details regarding this phased implementation approach in early 2024. It remains to be seen how the reporting obligations will affect financial institutions.

For any questions about how to incorporate BOI compliance into your SBA lending practice, please contact Starfield & Smith, P.C. at info@starfieldsmith.com.