January 22, 2024 - On January 17th, the LSTA hosted a webinar, “Corporate Transparency Act is Here: What You Need to Know” presented by Dan Stipano, Partner of Davis Polk. Mr. Stipano presented to LSTA members on this topic about six months ago and returned to provide an update now that the effective date of January 1, 2024, of the beneficial ownership information reporting rule (“BOI Rule”) has passed.
The BOI Rule is issued by the Financial Crimes Enforcement Network (“FinCEN”), a bureau within the U.S. Treasury Department. The Rule implements the provisions of the Anti-Money Laundering Act 2020 (“AMLA”) and establishes the requirements for covered companies (i.e., reporting companies) to submit their beneficial ownership and company applicant information to FinCEN. The Rule is intended to provide law enforcement and financial institutions with the information necessary to better identify and prevent money laundering through corporate structures.
A reporting company is required within BOI reports 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. Under the BOI 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.
The BOI Rule identifies two types of reporting companies: domestic and foreign, both of which are defined. There are estimated to be 30-40 million entities that are reporting companies. There are, however, 23 types of entities that are exempted from the “reporting company” definition, including large operating companies, banks, credit unions, depository institution holding companies, broker-dealers, clearing agencies, investment companies, investment advisers, and other Exchange Act registered entities, and pooled investment vehicles. The exemptions tend to include larger and more complex entities, which is not surprising because the BOI Rule focuses on smaller companies and shell companies. Thus, companies need to determine if they are a reporting company and then determine if they are subject to an exemption.
As noted above, the effective date for the rule is January 1, 2024. Reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports. Reporting companies created or registered in 2024 will have 90 days after receiving notice of their creation or registration to file their initial reports. (This filing period will revert to 30 days after January 1, 2025.)
FinCEN is authorized to impose penalties on individuals, reporting companies, and other entities for willfully providing, or attempting to provide, false or fraudulent beneficial ownership information (including false identifying documentation); or willfully failing to report complete or updated beneficial ownership information. If an entity makes a good faith effort to comply then it is unlikely to be penalized. This area is unlikely to be a high enforcement priority for FinCEN.
The BOI Rule differs from FinCEN’s existing Customer Due Diligence Rule (“CDD Rule”) in significant ways. The definition of “beneficial owner” in the BOI Rule (see above) is significantly broader than the definition under the CDD Rule, as it does not limit the substantial control prong to a single individual and adopts broader definitions of what constitutes “substantial control” and an “ownership interest.” There are more exemptions from the definition of “reporting company” in the BOI Rule than there are exclusions from the definition of “legal entity customer” in the CDD Rule. At least until the CDD Rule is amended, banks and other covered financial institutions will be collecting BOI from entities that will not be required to report such information to FinCEN under the BOI Rule. Financial institutions should, of course, continue to comply with the beneficial ownership requirements of the CDD rule.
On December 22, 2023, FinCEN issued a final rule governing access to the BOI registry and safeguards (“Access Rule”). Unlike other jurisdictions, in the U.S. the registry is not a public database. Under the Access Rule, which becomes effective on February 20, 2024, FinCEN will only permit certain government entities and financial institutions to access BOI. This includes federal agencies for use in furtherance of national security, intelligence, or law enforcement activity; state, local, and tribal law enforcement agencies for use in criminal or civil investigations; foreign law enforcement agencies, prosecutors, judges, foreign central authorities, or foreign competent authorities for use in furtherance of foreign national security, intelligence, or law enforcement activity; financial institutions subject to CDD requirements and federal functional regulators to facilitate compliance with customer due diligence requirements; and officers or employees of the Department of the Treasury whose official duties the Secretary determines require inspection or disclosure, or for tax administration. The Access Rule provides a detailed framework for ensuring that BOI is subject to cyber security controls, confidentiality protections, and oversight measures.
FinCEN changed the Access Rule because of numerous comments that were submitted, and now financial institutions can access the registry for broader customer due diligence purposes, not just compliance with the CDD Rule. Upon receipt of a request from a financial institution, FinCEN may disclose the information to the financial institution, (1) provided that the financial institution is subject to a legal requirement or prohibition designed to counter money laundering or the financing of terrorism, or to safeguard the national security of the U.S.; (2) to comply with such requirement, it is reasonably necessary for a financial institution to obtain or verify beneficial ownership information of a legal entity; and (3) the reporting company that reported the information to FinCEN consents to such disclosure. If those three standards are met FinCEN will grant the request. The financial institution, however, shall not make information obtained from FinCEN available to, amongst others, persons in China, Russia, or a jurisdiction that is a state sponsor of terrorism.
We encourage our members, especially those in compliance, to listen to Mr. Stipano’s excellent webinar. The LSTA will continue to monitor the BOI Rule and advise our members if any changes to credit agreements are being adopted by the market. Click here for the slides and replay.