FinCEN Considers Validation of BOI Data

Acting Director of FinCEN, Himamauli Das, testified last week before the House Financial Services Committee on the agency's progress towards the implementation of the Corporate Transparency Act.

FinCEN is charged to implement the Corporate Transparency Act and has adopted regulations that will require U.S. companies to begin reporting beneficial ownership information ("BOI") on January 1, 2024. 

Congress has been watching FinCEN's progress carefully and has raised concerns that FinCEN's approach does not go far enough.

In particular, the Corporate Transparency Act required FinCEN adopt regulations that would not only collect BOI data but would also be "highly useful . . . . [in] confirming" the beneficial ownership information reported by banks and financial institution's under FinCEN's already-implemented Customer Due Diligence ("CDD") rules.  31 U.S.C. 5336(b)(F)(iv)(II). 

Members of the House Financial Services Committee, such as Blaine Luetkemeyer (R-Mo.) have questioned whether FinCEN's approach goes far enough in making BOI data "highly useful."  

In his testimony before Congress last week, Acting FinCEN Director Das said "We heard loud and clear the importance of validation and we agree with the importance of validation.  There are legal considerations, cost considerations, and then a number of questions with respect to how to implement validation as well." 

Changing FinCEN's approach with only eight months remaining before the CTA takes effect will prove difficult.  The Acting Director's testimony did not make clear how FinCEN would seek to validate BOI data submitted by reporting companies.

As required by the regulations now in effect, a reporting company must file a BOI Report that identifies each of its beneficial owners and provides, for each of them, the beneficial owner's full legal name, date of birth, home residential address, a unique identifying number (such as a drivers license or passport) and an image of the document that contains the unique identifying number.

FinCEN could, in theory, validate these data points in several ways.   A reporting company's BOI Report is already submitted by a senior officer of the reporting company under penalty of perjury.  So, in a meaningful sense, the reporting officer is validating the accuracy of the data through the very act of filing the report.

It might be theoretically possible for FinCEN to cross-check certain data points by other means.  For example, the name and residential address of a beneficial owner might be cross-checked against the tax returns available in IRS records for the beneficial owner.  But, there is no regulatory pathway for that kind of cross-checking currently and the data collected in the BOI Report does not include a beneficial owner's SSN.  If FinCEN had intended to cross-check with tax records, it should have required SSN numbers in its BOI Report rule.

Perhaps FinCEN will delay its attempt to validate BOI data until after the first year of BOI reporting is completed by January 1, 2025.  At that point, with one year of data collection complete, FinCEN would have a better grasp on the level of compliance and a better ability to forecast how a system of validation might work. 

Bi-partisan Congressional interest in this subject ensures that it will not fade away, so U.S. companies should begin implementing procedures to collect BOI data from their investors to make the compliance process easier.  U.S. companies should adopt amendments to their shareholder agreements and LLC operating agreements that require investors to make their BOI data available for reporting purposes. U.S. companies should also engage with counsel to make sure they are able to identify the beneficial ownership who will need to be covered by their reports after the January 1, 2024 implementation date.