NEWS: The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) recently issued a final rule that will require tens of millions of corporations and limited liability companies registered to do business in the U.S. to report their beneficial ownership information (BOI) directly to FinCEN.
Under the new rule, required by the federal Corporate Transparency Act (CTA), a “beneficial owner” is 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.
Credit unions and banks are among categories of companies that are exempt from the reporting requirements. And for now, this will not change existing Customer Due Diligence (CDD) requirements that credit unions gather BOI information from companies at account opening. So, why are we writing about this new rule, then? Because FinCEN’s future rulemaking plans are likely to expand on credit unions’ CDD responsibilities.
Current BOI rules for credit unions
As we explain in The League’s ii Release No. 0159, existing CDD rules (in place since 2016) require credit unions to gather information about a company’s beneficial owners at account opening.
The CDD rules have a two-pronged definition of “beneficial owner,” with an ownership prong and a control prong. Under this approach, the credit union must identify:
- Each individual (if any) who, directly or indirectly, owns 25% or more of the equity interests in the “legal entity customer” (although credit unions are permitted to set a lower percentage threshold if they wish, and they are encouraged to do so if the entity is considered higher risk); and
- A single person who has significant responsibility to control the legal entity (including an executive officer or senior manager, such as a CEO, CFO, COO, managing member, general partner, president, vice president or treasurer) or any other person who regularly performs similar functions.
Changes may be in store for credit unions
There is a key difference between the existing CDD rules applicable to banks and credit unions vs. the new FinCEN rule. The existing CDD rules require financial institutions to gather information about just one person with control over a company. The new FinCEN rule requires companies to report information on anyone who exercises substantial control over a company.
FinCEN indicated that it is working on additional rulemakings under the CTA. One of them will revise those existing CDD information gathering rules (applicable to financial institutions) to bring them in line with the requirements of the new FinCEN reporting rule. Such new rules for financial institutions have not been proposed yet. Still, we can expect that in time, FinCEN will require financial institutions to change their systems and gather information about all persons exercising substantial control of a company that opens an account, rather than just one person.
More on FinCEN’s new rule
The final rule is effective January 1, 2024. Reporting companies created or registered before that date will have one year (until January 1, 2025) to file their initial reports, while reporting companies created or registered on or after that date will have 30 calendar days after their creation or registration to file their initial reports.
FinCEN expects that the reports will be submitted electronically through an online interface – the Beneficial Ownership Secure System, or “BOSS” – which has not been made public.
FinCEN’s press release on its new rule is here; the full text of the final rule is here; and a summary “fact sheet” on the rule is here.