CHICAGO — In an effort to combat money laundering and other financial crimes, the federal government recently passed legislation that will require most small- to mid-sized companies to document who has a hand in their operations.
This requirement, which affects almost all drycleaning company owners, is part of the Corporate Transparency Act (CTA), which went into effect on January 1. It requires most companies to file what is called a Beneficial Ownership Information, or BOI, report with a federal agency called the Financial Crimes Enforcement Network (FinCEN).
The CTA was the topic of a recent webinar, “Beneficial Ownership Reporting is Here: What Small Business Owners Need to Know about the New Reporting Requirements,” hosted by the National Federation of Independent Business (NFIB). In the webinar, Sandra Feldman, attorney and beneficial ownership information reporting expert with Wolters Kluwer CT Corporation, offered information about the new requirement, along with information about filing and penalties in the event of violations.
“Millions of corporations, LLCs and other similar entities are formed in the United States each year,” Feldman says, “but the states where they’re formed don’t require information about the beneficial owners.”
Beneficial owners, in this sense, are the individuals who ultimately own or control those business entities.
This lack of oversight, Feldman explains, allows who Congress refers to as “malign actors” to conceal their ownership of these entities and use them to launder money, finance terrorism, commit tax fraud and other illicit activities.
“Federal legislation providing for the collection of information that can be used to identify beneficial owners is needed, according to Congress, to protect vital national security interests, and better enable law enforcement efforts to counter money laundering and other illicit activity,” Feldman says.
“FinCEN is a name you will become very familiar with the more involved you become over time with BOI reporting,” Feldman says.
The Financial Crimes Enforcement Network is a bureau in the U.S. Department of Treasury. In the CTA, Congress provided a basic framework of what needed to be done to comply.
“It’s FinCEN that wrote the rule that provides all the material details about your reporting,” Feldman says, “such as who has to file reports, what information has to be reported and when reports have to be filed.”
All reports are filed with FinCEN, Feldman says. “That’s who is maintaining the registry that contains all the report and information, and only FinCEN is authorized to provide access to that information to anyone requesting it.”
When it comes to disclosing information contained in the BOI filings, there are limit as to who can access this data.
“The public will not have access,” Feldman says. “FinCEN can only disclose beneficial ownership information to five general categories of recipients and only for certain authorized activities.”
Those recipients, Feldman says, are:
- Federal, state, local and tribal officials who can obtain BOI for activities related to national security, intelligence and law enforcement
- Foreign law enforcement officials who have to make their request through a United States federal agency
- Financial institutions, but only with the company’s consent, and only so the financial institution can comply with its customer due diligence requirements
- Regulatory agencies that supervise financial institutions
- The U.S. Department of Treasury itself
So, who has to file with FinCEN on this matter? Almost every small- to mid-sized business, Feldman says.
Businesses having to file include:
- Every corporation
- Every LLC
- Every other entity that is created by the filing of a document with the Secretary of State or similar office
There are 23 exceptions for certain corporations, LLCs, or other entities, but active drycleaning businesses created as a corporation or LLC do not qualify for these. These exceptions are:
- Securities reporting issuers
- Governmental authority
- Credit unions
- Depository institution holding companies
- Money services businesses
- Securities brokers/dealers
- Securities exchange or clearing agencies
- Other Exchange Act registered entities
- Investment company/advisers
- Venture capital fund advisers
- Insurance companies
- State licensed insurance producers
- Commodity Exchange Act registered entitles
- Public accounting firms
- Public utilities
- Tax exempt entities
- Financial market utilities
- Pooled investment vehicle
- Tax-exempt entities
- Entity assisting tax-exempt entities
- Large operating companies
- Subsidiary of certain exempt entities
- Inactive entities
“That’s a lot of exemptions,” Feldman says, “but chances are your small LLC, corporation or other entity will not qualify for any of them. That’s because most of the exemptions are for entities that are already highly regulated by the government, particularly those that already have to provide some information about their beneficial owners.”
There are still questions in many owners’ minds, however, if they still must file.
“We know for sure that corporations and LLCs that are not exempt are reporting companies, because it says so right in the CTA and FinCEN reporting rule,” Feldman says. “But what about other kinds of entities that people use — for example, limited partnerships, limited liability partnerships, trusts, sole proprietorships and general partnerships that aren’t mentioned in either the CTA or FinCEN reporting rule?”
It depends upon whether a formation document had to be filed with the state filing office in order for that entity to exist, she says. “If a filing was required to create the entity, and it’s not exempt, it is a reporting company and has to file a BOI report. If a filing was not required to create the entity, it is not a reporting company, and it does not have to file a BOI report.”
“Large Operating Companies” are also entities that don’t have to file a BOI report. These companies are classified at those with more than 20 full-time employees in the U.S., have more than $5 million in gross receipts or sales, and have an operating presence at a physical office in the U.S. All three of these requirements are necessary to be considered a Large Operating Company.
Come back Tuesday for Part 2 of this series, where we’ll examine who qualifies as a “beneficial owner” and what information goes into a BOI.
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