Beneficial Ownership Reporting: Questions Over Meaning of “Substantial Control”


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Eye on Enforcement

We are less than one year out from the effective date (January 1, 2024) of the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) beneficial ownership information (BOI) reporting rule, and key details about the rule remain unclear. The rule requires most domestic and foreign companies to report their beneficial owners to FinCEN, but the lack of promised guidance from the agency may leave entities unsure of which individuals fit that category.

What is the BOI reporting rule?

On September 29, 2022, FinCEN issued a rule implementing the BOI reporting requirements of the Corporate Transparency Act (CTA). The rule requires “reporting companies” to disclose certain information about their ownership in a BOI report filed with FinCEN.

According to FinCEN, the purpose of the rule is to “enhance the ability of FinCEN and other agencies to protect U.S. national security and the U.S. financial system from illicit use and provide essential information to national security, intelligence, and law enforcement agencies; state, local, and Tribal officials; and financial institutions to help prevent drug traffickers, fraudsters, corrupt actors such as oligarchs, and proliferators from laundering or hiding money and other assets in the United States.” 

Who is required to file a BOI report and what must they include?

The rule describes who is required to file a BOI report, what information must be reported, and when a report is due. Under the rule, both domestic and foreign companies are considered “reporting companies” and are required to report. However, 23 types of entities are explicitly exempted from reporting.

Reporting companies must file reports with FinCEN identifying both 1) the beneficial owners of the entity, and 2) the company applicants of the entity. Companies must provide the name, birthdate, address, and a unique identifying number for each of its beneficial owners, and companies created after January 1, 2024, must also provide that information for company applicants. 

Broad definition of “substantial control” could cause confusion for reporting companies

A beneficial owner is any individual who either exercises “substantial control” over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.

One question that many reporting companies may have leading up to the effective date is what constitutes “substantial control” over a company to qualify as a beneficial owner for reporting purposes. According to the rule, an individual exercises substantial control if the individual:

  1. Serves as a senior officer of the reporting company;
  2. Has authority over the appointment or removal of any senior officer or a majority of the board of directors;
  3. Directs, determines, or has substantial influence over important decisions made by the reporting company; or
  4. Has any other form of substantial control over the reporting company.

In addition, the rule explains that an individual may directly or indirectly exercise substantial control over a reporting company through positions such as board representation, control of a majority of the voting power, or pursuant to certain contracts, arrangements, understandings, or relationships with the reporting company.

FinCEN admitted that many commenters raised issue with the definition of “substantial control” in the proposed rule, labeling it as too broad, overinclusive, and vague. Although FinCEN made slight modifications to the proposed rule for clarification purposes, the final definition largely adopts the proposed rule, despite the concerns over the breadth of the definition.

As it stands, the definition leaves a lot of uncertainty over who qualifies as having “substantial control.” FinCEN believes that the definition “strikes the appropriate overall balance,” as it is based on established legal principles and usage of the term “substantial control,” while also being broad enough to account for the variety of ways that individuals may exercise control over an entity. According to FinCEN, the definition “supports the basic goal of requiring a reporting company to identify the key individuals who stand behind the reporting company and direct its actions.”

While FinCEN claimed at the time the rule was promulgated that it would develop guidance documents to assist reporting companies in complying with the rule, no such materials have been issued at this time. However, FinCEN has continued its effort to implement the CTA, issuing a Notice of Proposed Rulemaking on December 15, 2022, to establish regulations on who will have access to the information that will be reported to FinCEN pursuant to the BOI Reporting Rule. Since FinCEN remains focused on BOI, it is possible that guidance clarifying the “substantial control” prong of the BOI Reporting Rule will be issued prior to the effective date.

When do reporting companies need to file their initial BOI reports?

While compiling the information for a BOI report may be an onerous task for some reporting companies, there is still plenty of time. 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 BOI reports, while companies created or registered after January 1, 2024, will have 30 days after receiving their creation or registration to file their reports.