Under the FinCEN Beneficial Ownership Information (BOI) Reporting Rule, which took effect in 2024, many small and mid-size businesses must now report any beneficial owners to the federal government.

Not reporting beneficial ownership information (BOI) can result in civil and criminal penalties.

This rule follows the Corporate Transparency Act (CTA), a relatively new law whose enforcement is still evolving.

Failing to report beneficial owners can subject you to criminal penalties under Title 31 U.S.C. § 5336(h), which includes fines and up to two years in federal prison.

In essence, Section 5336(h) specifies penalties for intentionally violating the Beneficial Ownership Information (BOI) reporting requirements under the Corporate Transparency Act (CTA).

This includes failure to report, submission of false information, or failure to update BOI records. Penalties include substantial daily civil fines and criminal sanctions, including hefty fines and up to 2 years' imprisonment.

These penalties apply to companies, officers, and individuals responsible for non-compliance.

The best way to avoid or minimize these penalties if you're accused of violating the law is to hire a federal criminal defense attorney with experience in financial criminal defense.

Key Takeaways

• This section was introduced by the Corporate Transparency Act (CTA) as part of the Anti-Money Laundering Act of 2020, requiring many U.S. entities to report BOI to FinCEN.
• This section reinforces adherence to the CTA's updated beneficial ownership disclosure regulations by imposing substantial financial penalties and possible jail time for deliberate violations, as highlighted in the Federal Register.
• Reporting violations include intentionally not reporting BOI, deliberately submitting false BOI, and intentionally failing to update BOI.
• Liability can extend to the reporting company, its senior officers, and anyone responsible for the company's non-compliance, including beneficial owners who fail to provide necessary information.
• Civil penalties can amount to up to $500 daily for each day the violation continues.
• Criminal penalties include fines up to $10,000 and may involve imprisonment for up to 2 years, or both.
• "Willfully" refers to a deliberate, voluntary breach of a known legal obligation, as outlined in relevant FinCEN guidance.

What Is a Beneficial Owner?

Under federal law, a beneficial owner is an individual who, directly or indirectly, either exercises substantial control over a company or owns or controls at least 25% of its ownership interests.

The law is designed to look past the formal titles on company documents and identify the real people who benefit from or direct a company's actions. A person is generally considered a beneficial owner if they meet one of two criteria:

1. Substantial Control: This includes senior officers (like a CEO or CFO), individuals with the authority to appoint or remove senior officers, and anyone who directs or has significant influence over important decisions of the company. A person can have substantial control even without a formal title.
2. Ownership Interest: This applies to individuals who own or control 25% or more of the company's equity, stock, or voting rights.

Why Does the Government Require This Information?

The federal government's goal with the CTA is to increase transparency and combat illegal activities. For years, anonymous shell companies were used to hide illicit funds, launder money, finance terrorism, evade taxes, and commit fraud.

By requiring companies to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), the government aims to expose these hidden structures.

The information is stored in a secure federal database, accessible to law enforcement and certain financial institutions for investigations. This transparency is seen as a crucial tool for protecting national security and the integrity of the U.S. financial system.

Elements of the Crime: What a Prosecutor Must Prove

To secure a conviction under 31 U.S.C. § 5336(h), a federal prosecutor must prove that a defendant acted willfully. This is a high standard and a key element of the offense.

Willfulness means you knew of your legal duty to report and intentionally chose to disregard it. A simple mistake or oversight is generally not enough to trigger criminal liability. The statute outlines three primary ways a person can commit this crime:

1. Willfully Failing to File: Intentionally not submitting a required Beneficial Ownership Information (BOI) report to FinCEN by the deadline.
2. Willfully Providing False Information: Knowingly submitting a BOI report containing false or fraudulent information about a beneficial owner.
3. Willfully Failing to Update Information: Knowingly failing to correct or update a previously filed report that has become inaccurate.

Penalties for Non-Compliance

The consequences for a willful violation of the reporting requirements may include both civil and criminal penalties.

• Civil Penalties: The law authorizes fines of up to $500 for each day that a violation continues.
• Criminal Penalties: A criminal conviction can result in fines of up to $10,000 and imprisonment for up to two years.

These penalties are reserved for willful conduct. Accidental errors or a good-faith misunderstanding of the rules should not, in theory, lead to these harsh outcomes.

What Are the Related Federal Statutes?

31 U.S. Code Chapter 53, Monetary Transactions, Subchapter II, Records and Reports on Monetary Instruments Transactions, has several related federal statutes, including the following:

• 31 U.S.C. 5311 - Declaration of purpose
• 31 U.S.C. 5312 - Definitions and application
• 31 U.S.C. 5313 - Reports on domestic coins and currency transactions
• 31 U.S.C. 5314 - Records and reports on foreign financial agencies
• 31 U.S.C. 5315 - Reports on foreign currency transactions
• 31 U.S.C. 5316 - Exporting and importing monetary instruments
• 31 U.S.C. 5317 - Search and forfeiture of monetary instruments
• 31 U.S.C. 5318 - Compliance, exemptions, and summons authority
• 31 U.S.C. 5318A - Special measures for jurisdictions, financial institutions, international transactions, or types of accounts of primary money laundering concern
• 31 U.S.C. 5319 - Availability of reports
• 31 U.S.C. 5320 - Injunctions
• 31 U.S.C. 5321 - Civil penalties
• 31 U.S.C. 5322 - Criminal penalties
• 31 U.S.C. 5323 - Whistleblower incentives and protections
• 31 U.S.C. 5324 - Structuring transactions to evade reporting requirements prohibited
• 31 U.S.C. 5325 - Identification required to purchase certain monetary instruments
• 31 U.S.C. 5326 - Records of certain domestic transactions
• 31 U.S.C. 5329 - Staff commentaries
• 31 U.S.C. 5330 - Registration of money-transmitting businesses
• 31 U.S.C. 5331 - Reports relating to coins and currency received in nonfinancial trade or business
• 31 U.S.C. 5332 - Bulk cash smuggling into or out of the United States
• 31 U.S.C. 5333 - Safe harbor with respect to keeping open directives
• 31 U.S.C. 5334 - Training regarding anti-money laundering and countering the financing of terrorism
• 31 U.S.C. 5335 - Prohibition on concealment of the source of assets in monetary transactions
• 31 U.S.C. 5336 - Beneficial ownership information reporting requirements

The Corporate Transparency Act (CTA) requires certain companies to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) to prevent money laundering, fraud, tax evasion, and other financial crimes.

Common Defenses a Federal Attorney May Use

If you are accused of failure to report a beneficial owner, a federal criminal defense attorney can build a strategy tailored to the facts of your case. Common defenses include:

• Lack of Willfulness: This is the most common defense. An attorney can argue that your failure to file or any inaccuracies in your report were not intentional. Perhaps you were unaware of the new law, misunderstood its complex requirements, or relied on incorrect advice from a professional. If the failure was a mistake, negligence, or an accident, it does not meet the legal standard of "willful."
• Good-Faith Effort to Comply: Evidence showing you made a genuine attempt to understand and follow the law can be powerful. This might include records of communication with lawyers or accountants about your reporting obligations. Demonstrating that you took steps to comply, even if you ultimately made an error, undermines the claim of a willful violation.
• Constitutional Challenges: Because the CTA is a new and far-reaching law, defense attorneys may raise constitutional challenges. These arguments could question whether the CTA exceeds Congress's authority, is unconstitutionally vague, or violates other protections. The success of such challenges is uncertain, but they can be an important part of a comprehensive defense strategy in certain cases.

For additional information or a case evaluation, contact our federal criminal defense law firm at Eisner Gorin LLP.

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