Your Guide to the Latest FinCEN FAQs: Reviewing CTA Compliance Updates with Confidence
We understand how important it is to stay informed of FinCEN FAQ updates. Especially when it comes to filing Beneficial Ownership Reports! In this article, I’ll guide you through what these new updated questions are and how they could impact your daily compliance strategies.
Let’s look at what these updates mean for us and how we can adapt to these new requirements.
Everything New in FinCEN FAQ
Exploring S-Corporations and BOI Reporting
In the FinCEN FAQ updates, a common question that comes up is “Do the BOI reporting requirements apply to S-Corporations?” So, let me break this down simply.
Yes, S-Corporations do need to comply with these requirements. Firstly, S-Corps typically treat profits and losses differently for tax purposes—passing them directly to shareholders’ personal tax returns. However, they still must report their beneficial owners. Moreover, this is because their tax status doesn’t exempt them from these rules.
Therefore, if your S-Corp registers with the state (and doesn’t fall under any special exemptions) you must follow these reporting guidelines. In conclusion, this update emphasizes that ownership reporting remains applicable regardless of how taxes are handled.
Clarifying Reporting Requirements for Unconventionally Formed Companies
Here’s a practical question: “Does a domestic corporation or limited liability company that isn’t created by filing a document with a secretary of state or similar office become a reporting company?”
No, it is not considered a reporting company. Here’s a straightforward way to understand it. Typically, domestic corporations and LLCs officially form by submitting documents to a state office like the secretary of state. This is how they usually recognize themselves as legal entities.
If a corporation or LLC is established without formal paperwork—possibly through an alternative process—it’s exempt from FinCEN’s reporting requirements. Essentially, this means that only entities formed through standard state filings must report under these rules.
HOAs and Reporting Requirements
Another common question tin the update is “Are homeowners associations reporting companies?“
It depends. Here’s a breakdown:
Firstly, homeowners associations (HOAs) can exist in various corporate forms. If an HOA is not formed via official filings, then it isn’t a reporting company.
If incorporated, such as through filing, an HOA may still be exempt from reporting requirements. For example, HOAs registered as 501(c)(4) social welfare organizations often qualify for a beneficial ownership exemption due to their tax-exempt status.
On the other hand, an incorporated HOA that isn’t a 501(c)(4) needs to adhere to FinCEN’s reporting rules. This means they must report beneficial ownership information (BOI).
FinCEN FAQ: Understanding Beneficial Ownership
Defining Beneficial Owners of Reporting Companies
Another common question in the FinCEN FAQ is “Who is a beneficial owner of a reporting company?“
Simply put, a beneficial owner is someone who has significant control over a reporting company, either directly or indirectly. For instance, they might directly manage important decisions or own or control at least 25 percent of the company’s ownership interests. It’s important to note that beneficial owners must be individuals—they can’t be trusts, corporations, or other legal entities.
However, in certain cases, information about an entity might be reported instead of details about a beneficial owner.
Understanding Beneficial Ownership in Homeowners Associations
Here’s a good question about beneficial ownership information in HOA’s: “Who is the beneficial owner of a homeowners association?“
Basically, if an HOA meets the definition of a reporting company. It doesn’t usually qualify for any exemptions, and has to report its beneficial owner(s). This means any individual who has significant control over the HOA. This can be either directly or indirectly, or who owns or controls at least 25 percent of its ownership interests.
Sometimes, there might not be individuals who own or control 25 percent of the HOA’s ownership interests. However, FinCEN still expects that at least one person exercises substantial control over the HOA.
For example, this could be someone who’s a senior officer. This person has the authority to appoint or remove certain officers or a majority of directors, makes important decisions, or has other forms of substantial control. Even if there’s no single large owner, someone is in charge needs to be reported under FinCEN’s rules.
Trusts and Beneficial Ownership
There are also several questions relating to Trusts. Let’s take a look at those. The first one we will cover is “Can beneficial owners own or control reporting companies through trusts?“
Absolutely, beneficial owners can indeed own or control a reporting company through trusts. For instance, they might have significant control over a reporting company through a trust arrangement. Following this, they may own or control the ownership interests of a reporting company held in a trust. Even with ownership held in a trust, it still falls under the reporting requirements outlined by FinCEN.
Reporting Companies and Trusts: Understanding Ownership
The next one is “Who are a reporting company’s beneficial owners when individuals own or control the company through a trust?“
Basically, a beneficial owner is any individual who has significant control over a reporting company or who owns or controls at least 25 percent of its ownership interests. This control can be direct or indirect, meaning it might be through contracts, arrangements, relationships, or other means.
Now, when it comes to trusts, things can get a bit more complex. It all depends on the specific details of the trust. For example, the trustee of a trust might be considered a beneficial owner if they have significant control over the reporting company. Additionally, they could own or control at least 25 percent of its ownership interests through the trust.
Similarly, certain beneficiaries, grantors, or settlors of the trust might also be considered beneficial owners if they have certain rights or powers over the trust assets.
Some common scenarios that indicate an individual owns or controls ownership interests in a reporting company through a trust include:
- In instances where a trustee (or another individual) can manage trust assets.
- If a beneficiary is the only one who can receive income and principal from the trust or can demand a significant portion of the trust assets.
- Should a grantor or settlor can revoke the trust or withdraw its assets.
It’s important to note that this list might not cover every possible situation, as trust arrangements can vary widely.
Corporate Trustees and Reporting Companies
The last new question about trusts in the FinCEN FAQ is “How does a reporting company report a corporate trustee as a beneficial owner?“
So, here’s how it works. If a reporting company’s ownership interests are held through a trust with a corporate trustee—meaning a legal entity acting as a trustee—there’s a process to figure out if any individual owners of that corporate trustee indirectly own or control at least 25 percent of the reporting company’s ownership interests through their ownership in the trustee.
For instance, let’s say an individual owns 60 percent of the corporate trustee of a trust, and that trust holds 50 percent of a reporting company’s ownership interests. In this case, the individual effectively owns or controls 30 percent of the reporting company’s ownership interests (60 percent of 50 percent). So, they’re considered a beneficial owner of the reporting company.
Conditions for Reporting a Corporate Trustee
However, if that same trust only holds 30 percent of the reporting company’s ownership interests, then the individual owner of the corporate trustee only controls 18 percent of the reporting company (60 percent of 30 percent). So, they wouldn’t be considered a beneficial owner in this scenario.
Now, the reporting company has a choice. It can report the name of the corporate trustee instead of providing details about an individual beneficial owner. This only works if three conditions are met:
- Exemption of Corporate Trustee: The corporate trustee is exempt from reporting requirements.
- Ownership Percentage: The individual beneficial owner owns or controls at least 25 percent of the reporting company’s ownership interests solely through their ownership in the corporate trustee.
- Control Considerations: The individual beneficial owner doesn’t exercise significant control over the reporting company.
It’s also important to consider whether any owners or individuals connected with the corporate trustee exercise substantial control over the reporting company. This is because the factors for determining substantial control by an individual connected with a corporate trustee are the same as for any other beneficial owner.
FinCEN FAQ Guidance on Address Reporting for Companies without a U.S. Presence
Another updated FinCEN FAQ question is about reporting addresses for companies without a principal place of business in the United States: What address should a reporting company report if it lacks a principal place of business in the United States?“
Here’s how it breaks down. If a reporting company doesn’t have a main office in the U.S., it needs to report to FinCEN the primary location where it does business in the country.
For example, if a reporting company operates at more than one location in the U.S., it can report any of those addresses where it receives important mail or correspondence as its primary location.
Now, if a reporting company doesn’t have any business locations in the U.S., then it should report the address of the person or entity designated to accept legal documents on its behalf. This person, often called the registered agent, is the one authorized to accept legal papers like lawsuits. In some places, this address is called the registered office.
So, whether a company operates in the U.S. or not, there’s a process in place to ensure that FinCEN has the appropriate address on file.
Timing of BOI Reports for Companies Losing Exempt Status
There is also a new FinCEN FAQ question about the timing of filing BOI reports for companies losing exempt status: “How long does the reporting company have to file its initial BOI report if it loses its exempt status?“
Here’s the deal. Usually, a company losing its exempt status has 30 days to file a BOI report with FinCEN after it no longer qualifies for any exemptions. But, if the company was created or registered before January 1, 2024, and loses its exempt status between January 1, 2024, and January 1, 2025, it gets until January 1, 2025, to file its initial BOI report.
Now, here’s the catch: FinCEN has decided that companies losing their exempt status in 2024 will get the benefit of whichever time frame is longer. That means they’ll have either:
- The remaining days left in the one-year filing period for existing companies, or
- The standard 30-day period for companies losing their exempt status.
For example, if a company loses its exempt status on February 1, 2024, it’ll have until January 1, 2025, to file its BOI report. Similarly, if it loses exempt status on December 15, 2024, it’ll have until January 14, 2025, to submit its initial BOI report. This way, companies have enough time to adjust to the change and meet their reporting obligations to FinCEN.
FinCEN FAQ: Penalties for Violating BOI Reporting Requirements
Now, let’s go over an update to penalties in the FinCEN FAQ: “What penalties do individuals face for violating BOI reporting requirements?“
Here’s the reality: If someone intentionally breaks the BOI reporting rules, they could face both civil and criminal penalties. Firstly, civil penalties could be as high as $500 per day for each day the violation continues. However, this amount changes yearly to keep up with inflation. Currently, it stands at $591.
Additionally, those who knowingly violate the BOI reporting rules could also face criminal penalties. This could mean up to two years in prison and fines of up to $10,000. Examples of violations include not filing a BOI report when required, submitting false information, or neglecting to update previously reported information.
So, it’s really important to follow the BOI reporting requirements to avoid facing these hefty penalties outlined by the Corporate Transparency Act.
Fluctuating Company Sizes and BOI Reporting Guidelines per FinCEN FAQ
In the FinCEN FAQs, there is also a question about fluctuating company sizes and BOI reporting: “If the size of a reporting company fluctuates above and below one of the thresholds for the large operating company exemption, does the reporting company need to file a BOI report?”
If a company is a reporting company and doesn’t qualify for exemptions, it must file a BOI report. Should it becomes exempt later, it must submit a “newly exempt entity” report. If it loses the exemption, it needs to update the report within 30 days.
Now, to qualify for the large operating company exemption, a company must meet specific criteria: It must have over 20 full-time employees in the U.S., have filed a federal income tax return showing over $5,000,000 in gross receipts or sales in the previous year, and have a physical office in the U.S. This exemption is designed to relieve larger companies from certain reporting requirements.
FinCEN FAQ: Authorized Recipients for BOI Information
Access to Beneficial Ownership Information for Authorized Recipients
In the FinCEN FAQs, there’s a few questions about access to beneficial ownership information, let’s go over the first one: “When will authorized recipients have access to beneficial ownership information?“
Here’s the breakdown: FinCEN plans to roll out access to this information in phases.
Firstly, a pilot program for a few Federal agency users is expected to start in the spring of 2024.
In summer 2024, access extends to Treasury and other agencies. This is followed by an expansion to more agencies and law enforcement partners in fall 2024.
After that, in the winter of 2024, access will extend to intermediary Federal agencies for foreign government requests.
Finally, in the spring of 2025, financial institutions subject to customer due diligence requirements under the law and their supervisors will gain access.
It’s important to note that FinCEN isn’t currently accepting requests for access. They’ll provide further guidance on how to request access in the future.
Requesting Beneficial Ownership Information for Federal Agencies
The next question is “I work at a Federal agency. How can I request beneficial ownership information from FinCEN?“
Here’s what you need to know: FinCEN can share beneficial ownership info with Federal agencies involved in national security, intelligence, or law enforcement, as well as those supervising financial institutions for compliance.
To request this info, your agency must first sign a memorandum of understanding with FinCEN. This document outlines how your agency will keep the information secure and confidential.
More details will be provided when your agency becomes eligible for access. Meanwhile, review the Beneficial Ownership Information Access and Safeguards Rule to understand the access requirements.
Accessing Beneficial Ownership Information for State Agencies
Another related question is “Which state agencies can request beneficial ownership information from FinCEN?“
State, local, and Tribal law enforcement agencies may request this info from FinCEN in specific situations.
However, they can only do so if a court gives them permission as part of a criminal or civil investigation. And, they need to meet certain access requirements, like signing a memorandum of understanding (MOU) with FinCEN to keep the info secure.
Furthermore, state regulatory agencies overseeing financial institutions for compliance can also request this info from FinCEN for supervision purposes. Like other domestic government agencies, they’ll need to sign an MOU with FinCEN to ensure info security and confidentiality.
International Partners and Beneficial Ownership Information
The next related question in the FinCEN FAQ: “Can foreign governments access beneficial ownership information?“
Foreign governments can’t directly access FinCEN’s system for beneficial ownership info. However, they can request this info through intermediary Federal agencies.
Now, law enforcement investigations, prosecutions, or national security activities authorized under the foreign country’s laws can make these requests. And, there are two ways foreign governments can make these requests:
- Through an international treaty, agreement, or convention.
- Without such agreements, by their law enforcement or judicial authorities, if deemed trustworthy by FinCEN, with the agreement of the Secretary of State and consultation with the Attorney General or other relevant agencies.
But, it’s important to note that FinCEN isn’t currently processing these requests from foreign governments.
FinCEN FAQ: Preparing to Handle Beneficial Ownership Information
Next, there is a question about handling BOI information: “How should authorized recipients prepare to receive, store, and use beneficial ownership information?“
The preparations needed to handle this info will differ based on the type of authorized recipient.
Firstly, those interested in accessing this info should check out the Beneficial Ownership Information Access and Safeguards Rule (and the related regulations at 31 CFR 1010.955).
Depending on the recipient, requirements may include:
- Setting up standards and procedures to protect the info’s security and confidentiality.
- Providing reports to FinCEN regularly about these standards and procedures.
- Having a secure system for storing the info.
- Keeping records of all requests for this info and their reasons.
- Conducting internal audits annually to ensure the info is used properly.
- Cooperating with FinCEN’s audits to ensure compliance.
So, each recipient needs to make sure they’re following the rules to handle this info responsibly and securely.
Supervisory Expectations for Financial Institutions Accessing Beneficial Ownership Information
And finally, this question about Financial Institutions accessing BOI: “Although financial institutions subject to customer due diligence requirements are not currently required to access the beneficial ownership IT (BO IT) system, what are the current supervisory expectations if they choose to access beneficial ownership information from the BO IT system, when access becomes available to them?“
Here’s the deal: FinCEN plans to let these financial institutions access the BO IT system along with their supervisors by spring 2025. However, if any institutions decide to access the system earlier, FinCEN will provide more guidance on what’s expected from them.
Navigating Compliance: Key Takeaways from FinCEN FAQ
As compliance professionals, staying informed about these updates is key to keeping our institutions compliant and effective in fighting financial crimes. With each FinCEN FAQ update, we gain insights that shape our compliance strategies, making BOI filing easier with our leading Corporate Transparency Act Reporting Software. Curious to see it in action? Schedule a demo today.
