Beneficial Ownership

After September 11. 2001, the federal government passed the Patriot Act with the intention of deterring and punishing terrorist acts in the United States and around the world, enhancing law enforcement investigatory tools, and other purposes, some of which include:

●    To strengthen U.S. measures to prevent, detect and prosecute international money laundering and financing of terrorism;
●    To subject to special scrutiny foreign jurisdictions, foreign financial institutions, and classes of international transactions or types of accounts that are susceptible to criminal abuse;
●    To require all appropriate elements of the financial services industry to report potential money laundering;
●    To strengthen measures to prevent use of the U.S. financial system for personal gain by corrupt foreign officials and facilitate repatriation of stolen assets to the citizens of countries to whom such assets belong.

As you have likely noticed since the Act was passed, you are now required to provide very detailed information to banks when you open accounts so that they can monitor your activity and report anything "suspicious" to the government.  One of the things you are required to provide to the bank is information regarding the "beneficial owners" of any entity such as a corporation or a trust.

Building on the Patriot Act, the Corporate Transparency Act was passed in 2022 (the "CTA").  To help enforce the CTA, the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) issued a final rule requiring most corporations, limited liability companies, and other entities registered to do business in the United States to report information about their beneficial owners.  The rule was originally intended to go into effect on January 1, 2023, but was extended until January 1, 2024.

Simply put, the rule requires most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners – the persons who ultimately own or control the company, to FinCEN.

Under the rule, a beneficial owner includes any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25% of the ownership interests of a reporting company.  Both of these standards are defined in the rule.

Companies that must report under the final rule must provide information relating to the company, including the full legal name of the company; the corporate address; the location of the company’s initial registration; and its Internal Revenue Service Taxpayer Identification Number. For the company's beneficial owners, information that must be reported includes the owner's full name; date of birth; address; a unique identifying number and issuing jurisdiction from a current photo identification document issued by the U.S. government or a non-expired foreign passport; and an image of the same identification document.

Failure to comply with these reporting requirements can result in penalties ranging from $25,000 to approximately $250,000 and also criminal liability.

In addition to beneficial owners, "applicants" of reporting companies formed after January 1, 2024, must be reported.  An example of an "applicant" is the "Organizer" named on the articles of organization for an Illinois corporation or limited liability company.  It is possible that for convenience your attorney or another party filed for your articles of organization as the Organizer.  Under the final rule, for newly formed entities, you will now be required to provide that person's information to FinCen as well.

Updated and corrected reports to report any change to information previously reported concerning a reporting company or its beneficial owners must be filed within 30 days of when the change occurred.  Therefore, if your attorney was your Organizer and changes his or her information, you will be required to file an updated report within 30 days.  Therefore, it may be advantageous to have an owner named as the Organizer.

Reporting companies will have one year (or until January 1, 2025) in which to file their initial reports once the rule becomes effective. Any reporting companies created or registered after January 1, 2024 will have 30 days to file their initial reports.

FinCen estimates that 32,556,929 entities will have to file reports in the initial year and that 4,998,468 entities will have to file reports every year after the first year.  The total estimated costs for filing reports is estimated to be $21.7 billion in the initial year and $3.3 billion in each subsequent year.

This article is for informational and educational purposes only and does not constitute legal advice.