Hailey Johnson
The Financial Crimes Enforcement Network (FinCEN) has outlined 23 types of entities that are exempt from beneficial ownership reporting requirements under the Corporate Transparency Act (CTA). These exemptions are designed to reduce the reporting burden on entities that are already subject to significant regulatory scrutiny or pose a lower risk of being used for illicit financial activities. Banks are included in this list of exempt entities, however, they are still required to establish and maintain written procedures to identify and verify the beneficial owners of legal entity customers and include these procedures in their anti-money laundering compliance programs. This information can provide law enforcement with key details about suspected criminals who use legal entities to conceal their illicit activities and assets.
| Characteristics | Values |
|---|---|
| Definition of a beneficial owner | Any person involved in a company who either directly or indirectly exercises substantial control over the reporting company, or owns or controls at least 25% of the ownership interests of the reporting company |
| Definition of a reporting company | Domestic companies such as limited liability companies and any other business entities created by filing a document with a secretary of state or any similar office in the United States; Foreign reporting companies, which are entities formed in a foreign country that are registered to do business in the US |
| Types of companies exempt from beneficial ownership reporting | Securities Reporting Issuer, Governmental Authority, Banks, Credit Unions, Insurance Companies, Public Utilities, and Inactive Companies, Large Operating Companies, Subsidiaries of Certain Exempt Entities, Tax-Exempt Entities, Entities Assisting a Tax-Exempt Entity |
| Regulatory requirements | Identifying suspicious activity, determining Office of Foreign Assets Control (OFAC) sanctioned parties |
| Requirements for banks | Banks must establish and maintain written procedures that are reasonably designed to identify and verify beneficial owners of legal entity customers and to include such procedures in its anti-money laundering compliance program |
| Requirements for legal entity customers | Legal entity customers seeking access to banks are required to disclose identifying information, such as name, date of birth, and Social Security number |
| Requirements for non-exempt reporting companies | Non-exempt reporting companies must file their Beneficial Ownership Information report |
| Requirements for companies created or registered before January 1, 2024 | The deadline to file the initial report is January 1, 2025 |
| Requirements for companies created or registered on or after January 1, 2024 | The deadline to file the initial report is 30 days from the date the company receives actual or public notice that its creation or registration is effective |
| Penalties for non-compliance | Criminal or civil penalties, including fines of up to $10,000 and up to two years in prison |
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What You'll Learn
Banks are exempt from identifying owners of certain accounts
Banks are exempt from identifying the owners of certain accounts. This is due to specific exemptions outlined by the Financial Crimes Enforcement Network (FinCEN) under the Corporate Transparency Act (CTA). FinCEN has outlined 23 types of business entities that are exempt from beneficial ownership reporting requirements, including banks, credit unions, insurance companies, and public utilities.
The Beneficial Ownership Rule requires banks and other financial institutions to collect specific information about the beneficial owners of an entity when opening an account. A beneficial owner is defined as any individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. While banks are generally required to comply with this rule, there are certain exemptions.
One exemption is that banks are not required to identify and verify the identity of the beneficial owner(s) of a legal entity customer when the customer opens certain types of accounts. This exemption is subject to certain limitations and does not alter or supersede other existing requirements related to anti-money laundering (AML) and Office of Foreign Assets Control (OFAC) sanctions. The collection of beneficial ownership information by banks can provide law enforcement with key details about suspected criminals who use legal entity structures to conceal their illicit activities and assets.
Additionally, under the CTA, all entities created in the United States and their beneficial owners are exempt from reporting beneficial ownership information to FinCEN. This exemption includes previously defined "domestic reporting companies," which are now only considered entities formed under foreign law and registered to do business in the US. Furthermore, if a beneficial owner owns or controls their interests in a reporting company exclusively through multiple exempt entities, the names of those exempt entities may be reported instead of the individual owner's information.
It is important to note that these exemptions are designed to reduce the reporting burden on entities already subject to significant regulatory scrutiny or those posing a lower risk of being used for illicit financial activities. However, understanding these exemptions is crucial for companies to determine their compliance obligations under the CTA.
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Banks must verify owners of legal entities
Banks are required to verify the identities of the beneficial owners of legal entity customers. This is to assist the government and law enforcement in combating money laundering, tax evasion, corruption, fraud, and other financial crimes, including terrorist financing.
The Beneficial Ownership Rule, which came into effect on May 11, 2018, requires financial institutions to gather additional information from legal entity customers. Banks must establish and maintain written procedures to identify and verify the beneficial owners of legal entity customers and include these procedures in their anti-money laundering compliance programs. This information is crucial for law enforcement to identify suspected criminals who use legal entities to conceal their illicit activities and assets.
While banks are generally expected to verify the identities of beneficial owners, there are certain exemptions. For instance, banks are not required to identify and verify the beneficial owner(s) when the customer opens certain types of accounts, and there are specific exclusions for certain legal entities. Additionally, banks are not mandated to conduct retroactive reviews to obtain beneficial ownership information for customers prior to May 11, 2018.
The definition of a beneficial owner is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns at least 25% of the ownership interests. In cases where no individual owns 25% or more, there may not be a beneficial owner listed. It is important to note that banks are not responsible for establishing the accuracy of every element of identifying information, but they must verify enough information to reasonably believe they know the true identity of the beneficial owner(s).
The information requested by banks includes the name, address, date of birth, and Social Security Number or Individual Tax Identification Number of the beneficial owner. This information must be provided within 30 days of opening an account to prevent it from being closed.
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FinCEN defines beneficial ownership
FinCEN's definition of beneficial ownership is a crucial aspect of the Corporate Transparency Act (CTA), which aims to combat financial crimes, including money laundering, terrorism financing, and corruption. The CTA requires "reporting companies" to disclose beneficial ownership information to FinCEN, the Financial Crimes Enforcement Network.
A beneficial owner, as defined by FinCEN, includes any individual who, directly or indirectly, exercises substantial control over a reporting company or owns/controls at least 25% of the ownership interests. This definition of "substantial control" is further elaborated with a list of activities that could constitute such control. FinCEN's rules also outline how reporting companies should handle situations where ownership interests are held in trust.
There are two categories of reporting companies: domestic and foreign. Domestic reporting companies include corporations, LLCs, and entities created by filing with a Secretary of State or similar office. Foreign reporting companies are those formed under foreign law and registered to do business in the US or a tribal jurisdiction.
It's important to note that there are exemptions to the reporting requirements. For instance, US persons are exempt from providing beneficial ownership information to FinCEN. Additionally, certain trusts are excluded from the definition of legal entity customers. FinCEN also allows for special reporting rules, where a reporting company may report the name(s) of an exempt entity instead of an individual beneficial owner under specific conditions.
While FinCEN's rules provide standards for identifying beneficial owners, the complexity of the definitions and exemptions often necessitates legal guidance for companies to determine their beneficial owners accurately, especially for organizations with complex structures.
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Reporting companies must disclose ownership
The Corporate Transparency Act, which came into effect on January 1, 2021, requires certain companies to disclose their beneficial owners to the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN). This includes corporations, limited liability companies, and limited partnerships registered in the U.S., as well as foreign legal entities registered to do business in the U.S.
The definition of a "beneficial owner" includes not only equity holders but also senior management who might not hold any equity in the company. Specifically, a beneficial owner is each individual who, directly or indirectly, owns 25% or more of the equity interests of the reporting entity, as well as each person with significant responsibility to control, manage, or direct a reporting company.
FinCEN has prepared frequently asked questions (FAQs) to provide guidance to reporting companies. For example, if a beneficial owner owns or controls their ownership interests in a reporting company through multiple exempt entities, the names of those exempt entities may be reported instead of the individual's information. Additionally, any changes in the reported information, such as changes in ownership or address, must be updated within a year.
It is important to note that the new law imposes on the U.S. Department of Treasury the obligation to maintain the confidentiality of the disclosed information. FinCEN will only disclose the information under specific circumstances, such as upon request from law enforcement agencies or financial institutions with the consent of the reporting company.
While the Corporate Transparency Act requires most companies to disclose beneficial ownership information, there are some exemptions. Banks, for example, are exempt from certain requirements under the Beneficial Ownership Rule. They are not required to identify and verify the identity of the beneficial owner(s) of a legal entity customer when the customer opens certain types of accounts. However, banks must establish and maintain written procedures to identify and verify beneficial owners of legal entity customers and include these procedures in their anti-money laundering compliance programs.
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Exempt companies and reporting rules
Banks are required to establish and maintain written procedures that are reasonably designed to identify and verify beneficial owners of legal entity customers and include such procedures in their anti-money laundering compliance programs. However, there are certain exemptions to this rule.
According to FinCEN, all entities created in the United States, including those previously known as "domestic reporting companies", and their beneficial owners are exempt from reporting beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act (CTA). This exemption was announced on March 26, 2025, and applies to entities registered to do business in the United States on or after this date, giving them 30 calendar days to file an initial BOI report.
FinCEN's Small Entity Compliance Guide outlines special reporting rules, including the ability for a reporting company to report the name(s) of an exempt entity or entities instead of an individual beneficial owner if they own or control ownership interests in the reporting company entirely through ownership interests in the exempt entity or entities. Additionally, if the beneficial owners of the reporting company and an intermediate company are the same individuals, the reporting company may report the FinCEN identifier and full legal name of the intermediate company.
It's important to note that these exemptions do not apply when an individual owns or controls ownership interests in a reporting company through both exempt and non-exempt entities. In such cases, the reporting company must report the individual as a beneficial owner, but the exempt companies do not need to be listed.
While banks have certain exemptions from identifying beneficial owners, they still play a crucial role in collecting beneficial ownership information, which can provide law enforcement with key details about suspected criminals who use legal entity structures to conceal their illicit activities and assets.
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Frequently asked questions
The Beneficial Ownership Rule requires banks to establish and maintain written procedures to identify and verify the beneficial owners of legal entity customers.
A beneficial owner is any individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.
Banks are not exempt from the Beneficial Ownership Rule. However, they are exempt from reporting their beneficial ownership information. Additionally, banks are not required to identify and verify the identity of the beneficial owner(s) of a legal entity customer when the customer opens certain types of accounts.
Other exempt entities include credit unions, insurance companies, public utilities, and inactive companies.
Examples of exempt entities include governmental authorities, securities reporting issuers, and large operating companies.
