The Financial Crimes Enforcement Network (FinCEN) Beneficial Ownership Information Reporting Rule (the “Reporting Rule”), which becomes effective on January 1, 2024, creates new reporting requirements for most small business borrowers. While lenders are already familiar with FinCEN, many small business borrowers likely are not.
Beginning January 1, the Reporting Rule requires a reporting company to identify itself and report four pieces of information about each of its beneficial owners:
- Name;
- Birthdate;
- Address; and
- A unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document).
While certain types of businesses (such as banks) are exempt from reporting, the Reporting Rule applies to most small business borrowers.
Additionally, the Reporting Rule requires reporting companies created after January 1, 2024, to provide the four pieces of information and document image for “company applicants.”
Reporting companies are required to identify all individuals who own or control at least 25 percent ownership interest and all individuals who exercise “substantial control” over the company. Thus, small business borrowers need to understand: 1) Who is a beneficial owner; 2) Who is a company applicant; and 3) When reports are required.
Who is a beneficial owner?
The term “beneficial owner” is defined in 31 U.S.C. 5336(a)(3) and means “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- (i) exercises substantial control over the entity; or
- (ii) owns or controls not less than 25 percent of the ownership interests of the entity”
“Substantial control” is defined in 31 C.F.R. § 1010.380(d)(1). The definition includes, among others: senior officers of the company; individuals with authority to appoint or remove certain officers or a majority of directors of the reporting company; important decision-makers (such those who determine the nature, scope, and attributes of the business); and “any other form of substantial control over the reporting company.”
An individual might be a beneficial owner through substantial control, ownership interests, or both. There is no maximum number of beneficial owners who must be reported, but FinCEN expects every reporting company will be able to identify and report at least one beneficial owner to FinCEN.
Who is a company applicant?
Each reporting company will have to identify and report to FinCEN at least one company applicant. All company applicants must be individuals (not the company itself or a legal entity). There are two categories of company applicants: the “direct filer” and the individual who “directs or controls the filing action.”
A direct filer must be identified by all reporting companies. The second category (directs or controls the filing action) may not be applicable to all reporting companies and is only required to be reported when more than one individual is involved in the filing of the document that created or first registered the company. If more than one individual is involved in the filing, then two company applicants must be reported. No reporting company will have more than two company applicants.
When are Reports Required?
There are two circumstances when companies must file a BOI Report with FinCEN: 1) when the company is created or registered; and 2) when previously filed information changes. While there is no annual reporting requirement, companies that were created or registered before the Reporting Rule goes into effect (companies created or registered prior to January 1, 2024) will need to file a BOI report within the next year. FinCEN’s electronic filing system is currently under development and will not be available until January 1, 2024. FinCEN will publish instructions and other technical guidance on how to complete the BOI report form here: www.fincen.gov/boi.
- Companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial reports.
- Companies created after January 1, 2024, and before January 1, 2025, will have 90 calendar days after receiving actual or public notice that the company’s creation or registration is effective to file its initial BOI report.
- Companies created after January 1, 2025, will have 30 calendar days from actual or public notice that the company’s creation or registration is effective to file its initial BOI report.
- Reporting companies have 30 days to report any change to the information in their previously filed report, such as:
- Any change to the information reported for the company, such as registering a new DBA;
- A change in beneficial owners (based on substantial control), such as a new Chief Executive Officer; or
- A change in beneficial owners (based on ownership interest), such as a change in ownership that changes who meets the ownership interest threshold of 25 percent.
Because willful failure to report complete or updated beneficial ownership information to FinCEN potentially carries significant penalties (up to $500 per day that the violation continues), lenders should consider adding to their loan documents affirmative covenants that require entity customers—including borrowers and corporate guarantors—to provide to the lender proof of all required reporting to FinCEN, including initial reporting, as well as any changes, as applicable.
Helpful Links
FinCEN Small Entity Compliance Guide: https://www.fincen.gov/boi/small-entity-compliance-guide
Reference Materials: https://www.fincen.gov/boi/Reference-materials