Category Archives: Small Business

Accounting Firm, Copyright Infringement, Intellectual Property, Network Security, Risk Management, Small Business, Social Media

CHIP Away Risk and Grow Your Business

While many business owners recognize the importance of maintaining their Cybersecurity Hygiene and protecting their Intellectual Property (“IP”), they are often too pressed for time and money to implement any serious plans of action.  There are ways to improve your cybersecurity and IP postures without breaking the bank or ignoring revenue goals.

Be proactive and not take for granted good cybersecurity hygiene exists in your company.  To start this exercise, every business owner should at least have someone review the readily available free resources on the subject. For example, the U.S. Small Business Administration (“SBA”) has online resources dedicated to informing small businesses on how to bolster their cybersecurity. And, the National Institute of Standards and Technology (“NIST”) helps companies who admittedly have modest or no cybersecurity plans in place by offering to “kick-start their cybersecurity risk management strategy” with the NIST Cybersecurity Framework (CSF) 2.0.

Tip #1:  Choose WordPress for your website.   After reviewing free resources, business owners can determine which direction to turn when it comes to preparing for the worst.  For example, you may want to start out by looking at one of your main sources of credibility in the marketplace – your website.  A secure site will always score higher on SEO than an insecure site – which makes it crucial for business to focus on reputational integrity and protection of customer data.  The WordPress platform is extremely popular with small business owners given its content management system allows owners to easily upload and modify content – without the need for a developer charging for every edit. 

Given that a large portion of the Internet is using WordPress, Corporate websites built using WordPress allow for secure custom shops and can securely mesh with your own separate e-commerce shop built using tools such as Shopify. 

Some WordPress tips include keeping WordPress on auto-update to ensure all security updates are in place as soon as possible; choosing a mature template with many thousands of downloads that has been security tested over a long period and routinely updated; limiting the use of Plugins to those essential for WordPress security, including WordFence (or a similar firewall/scanning plugin) and WPS Hide Login (or similar plugin that hides the default login URL frequented by hackers) because many incidents are directly tied to insecure plugins – those that may have not been updated in years yet are still active on your site; and making sure you install an SSL (Secure Sockets Layer) Certificate allowing for encrypted HTTPS communications between site and browser.

The last tip is especially important given Google’s Chrome browser and Brave’s browser have long warned users when a website does not use this HTTPS protocol – a warning that likely causes potential visitors to not even visit the site.  The Really Simple SSL plugin can help ensure that this is easily done.  Many hosting companies provide a free SSL certificate so getting the plugin will make this an easy fix if needed.

Tip #2:  Practice good security hygiene by using passwords that include upper case letters, numbers, lower case numbers, and symbols that total no less than 10 characters. Keep the password in a safe place if you cannot memorize it and only use it for your website.  As well, deploy two-factor authentication to make it that much more difficult to get in the website using the front door – Authenticator is an excellent app for 2FA purposes but there many to choose from.  When it comes to passwords, the strongest chain of defense can only be as strong as its weakest link.

Tip #3:  Remind all employees never to click on links in emails – even if they seem legitimately from companies you do business with, including lawyers and accountants.  As for the most basic of “basic training”:  Don’t open or click on anything that looks suspicious. Again, it is much more difficult for hackers to launch an exploit without walking in the front door and they can’t come in if you don’t open the door. In other words, never click on a link, file or image from an untested source or unknown URL. The extra seconds it takes to confirm the actual sender of an email message or owner of a website is well worth the time.

Tip #4:  Safeguard against Ransomware attacks.  Given credit card data and account information has long been dirt-cheap to buy on the dark web, hackers now combine social engineering, e.g., well-crafted targeted emails using publicly available information, including emails of licensed professionals, with botnets usually tasked with promulgating spam and searching for vulnerabilities.  The result is a ransomware attack that can cripple a business unless Bitcoin is transferred to a specific account. 

The FBI has long suggested firms focus on a variety of basic prevention efforts – in terms of awareness training for employees and technical prevention controls, as well as the creation of a solid business continuity plan in the event of a ransomware attack.  And, after a ransomware attack is suspected, victims should immediately contact the local FBI field office and report the incident to the Bureau’s Internet Crime Complaint Center.   

If a firm wants to immediately enact a more proactive approach, however, there are certainly additional very basic policies and procedures that can be put in place right now to help avoid a ransomware exploit:  (i) block executable files (such as “.exe” files) and compressed archives (such as zip files) containing executable files before they reach a user’s inbox; (ii) block the use of thumb drives; (iii) mitigate against social engineering exploits by providing employee online training that is continuous and targeted with services such as KnowBe4; (iv) make sure whoever is providing you with IT support has a software patch management plan in place; (v) regularly back up data with media not connected to the Internet.

Tip #5:  Apply for Cyber Insurance.   Given the recent massive spike in small business insureds being specifically targeted, price hardening and onerous underwriting requirements have been the norm for cyber insurers.  While it is way too soon to turn in the towel on small business cyber insurance, some of those allocated insurance premium dollars might also be spent on bolstering security as well as lower cost/higher deductible coverage. 

One key attribute of any cyber insurance should be the technical vendors and legal counsel associated with these carriers.  Cyber insurance will also always serve a vital role in helping small business owners deal with ransomware attacks by offering the benefit of an underwriting process so that businesses can better understand their vulnerabilities and potential strengths – all without the need of hiring a consultant or paying any fees.   Indeed, an insurer acting as a trusted partner may even assist a potential client obtain compliance with an insurer’s cybersecurity standards before the insurance is even purchased

Protecting your most valuable assets – your intellectual capital, is well worth the effort.   Whether it’s how your employees conduct business, which clients you do the most business with, how you service those clients, or how you communicate with clients and employees, intellectual property is wrapped around all of it. 

Tip #1: Your know how needs confidential treatment.  Your client list and how your clients are serviced constitute your “know how” or more commonly “trade secrets” that must be kept confidential – once they become public any protections you may have had will evaporate.  The use of non-disclosure agreements with third parties is essential – as well as ensuring your employees understand this fundamental concept. Using well-written contracts with clients will also help ensure your know how is protected.

Tip #2: Your brand, sales and marketing brochures, and training materials are trademark and copyright protected.  Even a small company with no employees can have a robust brand built over many years – and found predominantly on the company’s sales and marketing materials.  All that is necessary for local common law protection is that it be in use to identify specific services or products.  To obtain nationwide protection and added damages for infringement, the mark should seek federal registration using the USPTO.Gov website.  Similarly, the product brochures created from scratch are copyright protected as soon as they were created but have enhanced protection when registered at Copyright.Gov.  

As you review the content and systems powering your business — everything from the company names to the use of training materials — you will quickly appreciate how much value goes unguarded. Consulting a legal expert or learning how to protect your trademarks and copyrights may not be quick or glamorous, but it will give you something longstanding: ownership of an intangible asset, leverage, and peace of mind.

Tip #3: Plan for the sale of your business by incorporating these best practices.  According to the SBA, more than half of the nation’s small-business owners are over the age of 50, and approximately 21% of the US population were born before 1964. And, according to one study, baby boomers owned about 51% of the privately held businesses in the United States, which is about 3 million businesses valued at $10 trillion dollars.  Unfortunately, founders typically defer addressing the fact that they will one day be too old and tired to manage a successful business. 

When no one in the family wants to take over your business there are only two options, close shop or sell to a willing buyer.  One metric used in valuing businesses is tied to the company’s ability to scale based on its protected intellectual property assets.  In other words, sustainable growth is not always about making more — it’s also about being able to protect what you’ve already built. After deploying the right practices, support system, and mindset, a successful entrepreneur can go from vulnerable to vigilant — and nurture a business that’s built for selling.

Financial Reporting, FinCEN BOI Reporting, Middle Market Business, Risk Management, Small Business

The Need to Comply With the CTA comes Into Focus

October 8, 2024 was a bellwether date for those waiting on a court to clarify whether the statutory requirement for filing BOI Reports sits on solid ground.  It was on October 8, 2024 when the oral argument in the pending Eleventh Circuit appeal from Small Bus. United d/b/a Nat’l Small Bus. Ass’n v. Janet Yellen, Case No. 5:22-cv-01448, Dkt. No. 52 (N.D. Ala. Mar. 1, 2024) was released to the public.   

Given the tempo and questions raised during this September 27, 2024 hearing, reporting companies can now reasonably assume there is likely no longer any reason to delay filing their BOIR Report based on any perceived lack of judicial clarity.  Before the end of the year – the deadline for over 30 million reporting companies, subject companies should likely file their BOI Report because there is no Judge that will likely remove that obligation. 

While it is never easy to predict which way the judicial winds blow, it seems likely the Eleventh Circuit will at least remand the Alabama decision for further review of the Fourth Amendment argument raised during that hearing – something not touched upon by the court below, if not just rule outright for reversal.  The appellee raised the Fourth Amendment argument because federal, state, local and foreign law enforcement can access BOIR data without the need for a Court Order.  Overall, the Judges – especially the Honorable Andrew L. Brasher who was appointed in 2020, seemed skeptical of this and all other arguments suggesting that Congress passed in 2021 the Corporate Transparency Act (“CTA”) without proper Constitutional footing.

The Eleventh Circuit hearing is on the heels of a District Court Judge in Oregon denying requested injunctive relief, in part, by ruling the CTA was likely constitutional.  See Michael Firestone, et al. v. Janet Yellen, Case No. 3.24-cv-1034, Dkt. No. 18 (D. Or. Sept. 20, 2024).  Indeed, in the second of two supplemental filings with the Eleventh Circuit, the appellee tried to distinguish the Oregon case as well as a recent Supreme Court case that may have shifted the burden in this case slightly in favor of the government – a case the Eleventh Circuit requested supplemental briefing on in its August 14, 2024 Order.  Not surprisingly, the government filed a contrary reply with the Court. 

As it stands, the Eleventh Circuit and the Court of Appeals of the Ninth Circuit – by way of the likely appeal from the Firestone decision, will squarely rule upon the constitutionality of the CTA – setting up the exact sort of case the Supreme Court likes to hear, namely an appeal where more than one Circuit Court rules on the constitutionality of a far-reaching federal statute. 

Indeed, there are other Courts of Appeal that could also likely chime in on this issue given pending District Court cases, including the First Circuit (William Boyle v. Janet Yellen, Case No. 2:24-cv-00081 (D. Me. filed Mar. 15, 2024) and Black Econ. Council of Mass., Inc. v. Janet Yellen, Case No. 1:24-cv-11411 (D. Mass. filed May 29, 2024)); the Fifth Circuit (Texas Top Cop Shop, Inc. v. Merrick Garland, Case No. 4:24-cv-00478 (E.D. Tex. filed May 28, 2024)), the Sixth Circuit (Small Bus. Ass’n of Mich. v. Janet Yellen, Case No. 1:24-cv-00314 (W.D. Mich. filed Mar. 26, 2024) and Robert J. Gargasz Co. LPA v. Janet Yellen, Case No. 1:23-cv-02468 (N.D. Ohio filed Dec. 29, 2023)); and the Tenth Circuit (Taylor v. Janet Yellen, Case No. 2:24-cv-00527 (D. Utah filed July 29, 2024)).

This mosaic of potentially conflicting upper court decisions leaves little doubt that in the short term FinCEN holds the upper hand and might use such built-up judicial equity to aggressively enforce its BOIR regulations in 2025.  One thing is for sure – the only way this fast-approaching BOIR Train gets derailed is by either the Supreme Court – which is unlikely given the very case the Eleventh Circuit sought briefing on, or by Congress – which is even less likely given the treasure trove of information derived from the CTA may be useful for tracking individuals with large cryptocurrency holdings and eventually bringing in more money into federal coffers as well as potential crime prevention.

Accounting Firm, Financial Reporting, FinCEN BOI Reporting, Middle Market Business, Risk Management, Small Business

Practical Steps for Advising on BOIR Compliance

When advising clients on filing FinCEN’s Beneficial Ownership Information (BOI) reporting obligations, professionals should offer clear, practical guidance to ensure compliance and mitigate potential risks. 

It is obviously helpful to start out by educating small business clients on the fundamentals of BOIR filing:

   – Who needs to file: Explain that most small corporations, LLCs, and similar entities must comply unless specifically exempt.

   – What needs to be reported: Discuss the required information, such as names, dates of birth, addresses, and ID numbers of beneficial owners (anyone with 25% or more ownership or substantial control).

   – Filing deadlines: Highlight the deadlines—new businesses must file upon formation, and existing businesses have until the start of 2025.

Small business ownership structures can be complex.   Professionals should emphasize that beneficial ownership extends to anyone with substantial control, even if their equity stake is less than 25%.  For example, CPAs should direct their clients to experts who can help them identify all individuals who qualify as beneficial owners, ensuring no key person is missed.  Discuss how trusts are to be handled.

The importance of accurate and up-to-date documentation should be stressed:

   – Maintain records: Recommend that clients keep detailed records of beneficial owners and any changes over time. Establishing a system for periodic updates will help ensure compliance in the future.

   – Secure documentation: Encourage clients to securely store identifying information, such as government-issued ID numbers, to ensure data privacy and protection.

Professionals should inform clients of the risks of non-compliance:

   – Fines and penalties: Non-compliance can result in daily fines of $591 per day, potentially leading to substantial financial liability.

   – Business risks: Emphasize that failing to comply could lead to regulatory investigations or civil penalties, which can be costly and damaging to the business’s reputation.

For businesses that may find the filing process challenging, you should either:

   – Assist with filing: Offer to help prepare and file the BOIR on behalf of the client or coordinate with professionals focused on such filings.

   – Refer to a Compliance specialist: CPAs can also recommend working with a compliance expert or other professional specializing in corporate governance and regulatory filings.

Clients should be told to approach BOI filings proactively:

   – Plan for future updates: Encourage clients to set up procedures for regularly reviewing and updating beneficial ownership information to avoid missing future reporting obligations.

   – Consult early: Suggest addressing BOIR filing well in advance of deadlines to prevent rushed submissions that could lead to errors. Professionals who are diligent and invest the time can easily help their clients navigate FinCEN’s BOI reporting obligations effectively, minimizing risk and ensuring ongoing compliance.

Accounting Firm, Financial Reporting, FinCEN BOI Reporting, Middle Market Business, Risk Management, Small Business

Risks of Non-Compliance with FinCEN’s BOI Reporting Rule

Non-compliance with FinCEN’s Beneficial Ownership Information (BOI) reporting requirement could expose your business to significant financial and legal risks. Here’s what you need to know about the potential consequences of failing to comply with this critical regulation.

FinCEN has the authority to impose hefty fines on businesses failing to meet the BOI reporting requirement. Penalties for non-compliance is $591 per day, with no maximum cap. This means even small delays in filing could result in substantial financial costs if FinCEN targets your company.

Non-compliance with BOIR can be seen as an attempt to obscure ownership information, which could trigger further investigation into potential financial crimes.

Businesses found to be in non-compliance with the BOI reporting requirements may also suffer reputational damage. Investors, clients, and partners expect transparency in ownership structures, and failure to comply could result in a loss of trust and business opportunities.

Non-compliant businesses may find it harder to secure loans, attract investors, or engage in mergers and acquisitions. Transparency in beneficial ownership is becoming a key factor in financial and business transactions, and non-compliance could hinder growth opportunities.

As of today, there are no reported instances of fines being assessed against a company for violation of the BOI reporting rule.  Nevertheless, the risks of non-compliance with FinCEN’s BOIR requirement far outweigh the effort of filing. Businesses that take proactive steps to meet the reporting deadlines and maintain accurate information will avoid fines, legal action, and reputational harm. Make compliance a priority to safeguard your business.

Accounting Firm, Financial Reporting, FinCEN BOI Reporting, Middle Market Business, Risk Management, Small Business

Five Common Mistakes to Avoid Before Filing Your BOI Report

Business owners preparing to file their Beneficial Ownership Information (BOI) reports should be aware of common pitfalls that might lead to civil penalties or worse.

The most common mistake is identifying one owner but not identifying every individual qualifying as a beneficial owner. Even if someone owns less than 25% of the business, that person may still be considered a beneficial owner if they hold significant decision-making authority evidencing “substantial control” over the reporting company.

For example, an indirect way to exercise substantial control over a reporting company is by controlling one or more intermediary entities that separately or collectively exercises substantial control over a reporting company. The best way to avoid this mistake is to review your company’s structure carefully and consult an expert if you’re unsure about who is a potential beneficial owner.

Another likely common mistake is submitting incorrect or incomplete details for beneficial owners. Mistakes in names, dates of birth, or identification numbers can lead to rejected filings or regulatory scrutiny – and possibly even fines and jail time if done deliberately. This mistake can easily be avoided by double-checking all information before submission and ensuring you’ve provided accurate and up-to-date details.

A third common mistake is failing to timely file. Businesses underestimate how long the process can take, leading to missed deadlines. For new businesses, filing is required 90 days after formation or registration, while companies formed or registered prior to 2024 have until January 2025 to comply. Companies can avoid this potential problem by marking important dates on your calendar and preparing your filing early to avoid a last-minute rush and a possible $591 a day fine for an untimely filing.

A fourth mistake would be the failure to update information as it changes. As set forth in the applicable regulations, the failure to update beneficial ownership information as changes occur can result in non-compliance. Any changes in ownership or control must be reported within thirty days of the change. This can be avoided by Implementing an internal system to track changes in ownership and file updated reports with FinCEN when necessary.

The fifth common mistake is simply assuming the existence of an exemption without really confirming it applies. Certain businesses, like larger companies already subject to similar rules, are exempt from the BOI reporting requirement. Assuming you are covered by an exemption without having proper confirmation could lead to fines. This can be avoided by double checking your exemption status by consulting the list of exempt entities or seeking expert advice. For example, even if your company has filed for dissolution, that would not automatically exempt you as an inactive company if that dissolution took place in 2024.

Avoiding these five common mistakes will help ensure a smooth BOI reporting process. By simply taking the time to understand key requirements and double-checking your information, you can protect your business from most of these unnecessary risks.

Accounting Firm, Financial Reporting, FinCEN BOI Reporting, Middle Market Business, Risk Management, Small Business

Preparing Your Business for FinCEN’s BOI Reporting Rule

With the Beneficial Ownership Information (BOI) reporting requirement now in effect, many businesses are wondering how to comply with this new rule issued by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). Preparing early will help you avoid fines and penalties, ensuring a smooth filing process.

The first step is determining who qualifies as a beneficial owner. This includes anyone who exerts substantial control or has ownership of 25% or more in your business. It’s crucial to assess both direct and indirect control, so be sure to evaluate individuals who might have critical influence over decision-making even if they don’t own a large percentage of equity.

You will need the following details for each beneficial owner:

  • Full name
  • Date of birth
  • Residential or business address
  • A government-issued identification number (such as from a driver’s license or passport)

Having this information on hand before filing will streamline the process and ensure accuracy.

If filing for an entity formed in 2024, you will also need to provide similar details for “applicants”, namely those persons who filed formation or registration documents with the state of formation or registration.

New businesses must file their BOI reporting information upon formation. For existing businesses, FinCEN has provided a one-year grace period to comply, meaning the deadline for companies formed or registered prior to 2024 is January 1, 2025. Don’t wait until the last minute — start preparing now.

Develop internal procedures to ensure ongoing compliance. This could involve creating a system for regularly updating beneficial ownership information when ownership or critical management changes over time.

Consider seeking advice from compliance experts to ensure whether you meet all the requirements. While the BOIR filing might seem straightforward, nuances in ownership or control structures could complicate the process. Ensuring your business is prepared for BOI reporting compliance long before the applicable deadline is the exact sort of proactive approach that will save you time, reduce stress, and help avoid costly penalties.

Accounting Firm, Financial Reporting, FinCEN BOI Reporting, Middle Market Business, Risk Management, Small Business

What Every Business Owner Needs to Know About FinCEN’s BOIR Requirement

The Beneficial Ownership Information (BOI) reporting requirement, introduced by FinCEN (the Treasury Department’s Financial Crimes Enforcement Network) increases transparency in business ownership with the stated goal of reducing financial crimes such as money laundering and tax evasion. As a business owner, it’s essential to understand what this regulation means for you and your company.

The BOIR rule mandates that certain companies report information about their beneficial owners to FinCEN. A “beneficial owner” is any individual who directly or indirectly exercises substantial control over the company or owns 25% or more of its equity

Corporations, limited liability companies (LLCs), and similar entities created or registered by a state to do business in the United States are required to file their BOI Report. Larger companies, regulated financial institutions, and inactive companies, are exempt because they largely already have to conduct this disclosure.

Businesses must report identifying information about each beneficial owner, including:

  • Full legal name
  • Date of birth
  • Current residential or business address
  • A unique identification number from a government-issued document (such as a driver’s license or passport)

The BOIR requirement officially went into effect in January 2024, and new companies must file within 90 days after their formation. Existing companies have until the end of 2024 to comply, so it’s essential to immediately start gathering the necessary information. Compliance with FinCEN’s BOIR requirement is a crucial regulatory obligation so take the time to understand these requirements and prepare your business for the upcoming changes.

Accounting Firm, Financial Reporting, FinCEN BOI Reporting, Law Firm, Middle Market Business, Risk Management, Small Business

Constitutionality of FinCEN’s BOIR Requirement

Found in the nearly 1,500-page National Defense Authorization Act of 2021, is the 21-page Corporate Transparency Act (“CTA”), 31 U.S.C. § 5336.  The CTA currently requires most entities incorporated or doing business under State law to disclose personal stakeholder information to the Treasury Department’s criminal enforcement arm, Financial Crimes Enforcement Network (“FinCEN”), including Tax ID numbers, date of birth, government identification number and copies of government identification documents of all beneficial owners and company state formation applicants (collectively a Beneficial Ownership Information Report or “BOI Report”).

According to Congress, this law is intended to prevent financial crimes such as money laundering and tax evasion committed using shell corporations.  The relevant Constitutional question recently put before an Alabama federal court was whether Congress’ broad powers to regulate commerce, oversee foreign affairs and national security, and impose taxes and related regulations were enough to power such a massive information grab. 

In a 53-page opinion, Judge Liles C. Burke of the Northern District of Alabama answered this question in the negative and struck down the CTA as unconstitutional.  See Mem. Op. at 3 (“Because the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals, the Plaintiffs are entitled to judgment as a matter of law.”).   As recognized by Judge Burke, there was no comparable State or federal law to the CTA.  Mem. Op. at 35.

As a result of Judge Burke’s March 1, 2024 ruling – which began its appellate journey on March 11, 2024, all the plaintiffs in that case are for the time being exempt from filing a BOI Report – including the over 65,000 businesses and entrepreneurs located in all 50 states who are members of Plaintiff National Small Business Association (“NSBA”).  As for everyone else who may be a Reporting Company, the CTA very much still applies.

By way of background, FinCEN issued a final rule implementing the CTA on September 29, 2022 and made that rule effective as of January 1, 2024.  87 Fed. Reg. 59498.  Because only the plaintiffs in the Alabama action are safe from the CTA’s reporting reach all other businesses operating in the United States who are considered Reporting Companies will have to comply with the Rule. 

More specifically, the CTA requires disclosures from “reporting company[ies],” defined as “corporation[s], limited liability company[ies], or other similar entit[ies]” that are either “(i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe, or (ii) formed under the law of a foreign country and registered to do business in the United States.” 31 U.S.C. § 5336(a)(11)(A). The CTA exempts twenty-three kinds of entities from its reporting requirements, including banks, insurance companies, and entities with more than twenty employees, five million dollars in gross revenue, and a physical office in the United States. 31 U.S.C. § 5336(a)(11)(B).  In other words, this statute not only targets shell companies involved in criminal conduct or fraud, it expressly hits most small business owners in the country as well.

“FinCEN estimates that there will be approximately 32.6 million reporting companies in Year 1, and 5 million additional reporting companies each year in Years 2–10.”   87 Fed. Reg. at 59549. The CTA requires these millions of entities to disclose the identity and information of any “beneficial owner.” 31 U.S.C. § 5336(b)(1)(A). A beneficial owner is defined as “an individual who . . . (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity,” with some exceptions for children, creditors, and a few others. 31 U.S.C. § 5336(a)(3).

For new entities formed or operating in the United States after January 1, 2024, the CTA requires them to disclose the identity and information of both Beneficial Owners and “Applicants,” defined as “any individual who files an application to form a corporation, LLC, or other similar entity under the laws of a State or Indian Tribe; or registers [a foreign entity] to do business in the United States.” 31 U.S.C. § 5336(a)(2).  Such filings must be made within 90 days of the relevant state filings and those companies formed or operating in the United States prior to January 1, 2024 have until year end.

Reporting entities must give FinCEN a Beneficial Owner or Applicant’s full legal name, date of birth, current address, and identification number from a driver’s license, ID card, or passport. 31 U.S.C. § 5336(a)(1), (b)(2)(A).   Under the final rule, reporting entities are also required to submit an image of the identifying document. 31 C.F.R. § 1010.380(b)(1)(ii)(E). If any of that information changes, the reporting company must update FinCEN, 31 U.S.C. § 5336(b)(1)(D), and FinCEN retains Applicant and Beneficial Owner information on an ongoing basis for at least five years after the reporting company terminates. 31 U.S.C. § 5336(c)(1).  Determining whether someone is a Beneficial Owner can be somewhat difficult given it requires a determination of who “has substantial influence over important decisions made by the reporting company” among other potentially vague criteria.  31 C.F.R. § 1010.38 (d)(1)(i)(C).

A willful provision of false or fraudulent beneficial ownership information or failure to report “complete or updated beneficial ownership information to FinCEN” by “any person” is punishable by a $500 per day civil penalty and up to $10,000 in fines and 2 years in federal prison, 31 U.S.C. § 5336(h)(1), (3)(A); a knowing and unauthorized disclosure or use of beneficial ownership information by “any person” is punishable by a $500 per day civil penalty, along with a $250,000 fine and 5 years in federal prison, 31 U.S.C. § 5336(h)(2), (3)(B); and a knowing and unauthorized use or disclosure while violating another federal law “or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period” by “any person” is punishable with a $500,000 fine and 10 years in federal prison, 31 U.S.C. § 5336(h)(3)(B)(ii)(II). Over time, this daily penalty increased to $591 per day.

As recognized by Judge Burke, “[t]he ultimate result of this statutory scheme is that tens of millions of Americans must either disclose their personal information to FinCEN through State-registered entities, or risk years of prison time and thousands of dollars in civil and criminal fines.”  Mem. Op. at 8.  Given the importance of this information, FinCEN already compels banks and other financial institutions to obtain nearly identical information from State entity customers and provide it to FinCEN.  

More specifically, FinCEN’s 2016 Customer Due Diligence rule requires “covered financial institutions” to “identify and verify beneficial owners of legal entity customers.” 31 C.F.R. § 1010.230(a).   As with the CTA, this rule defines a “legal entity customer” as “a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account,” unless the entity fits into one of sixteen exemptions – seven less than the CTA exemptions. 31 C.F.R. § 1010.230(e)(1)-(2).

The CDD rule also defines beneficial owners in the same manner: “Each individual . . . who owns, directly or indirectly, 25 percent or more” of the entity; has “significant responsibility to control, manage, or direct a legal entity,” including “a Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Managing Member, General Partner, President, Vice President, or Treasurer)” and “[a]ny  other  individual  who  regularly  performs  similar  functions.”  31 C.F.R. § 1010.230(d)(1)-(2).

In other words, FinCEN’s CDD rule and the CTA provide FinCEN with nearly identical information.  The CTA itself acknowledges the similarity. See 31 U.S.C. § 5336(b)(1)(F) (requiring the Secretary of the Treasury to promulgate regulations that “collect [beneficial owner and applicant] information . . . in a form and manner that ensures the information is highly useful in . . . confirming beneficial ownership information provided to financial institutions.” (emphasis added).  See also Pub. L. 116-283 § 6402 (6)(B) (134 STAT. at 4604 – 4605) (“It is the sense of Congress that . . . [collection of] beneficial ownership information . . . [will] confirm beneficial ownership information [already] provided to financial institutions.”).

According to FinCEN’s compliance with the Paperwork Reduction Act of 1995: “The estimated average burden associated with this collection of information from Reporting Companies is 90 to 650 minutes per respondent for reporting companies with simple or complex beneficial ownership structures, respectively. The estimated average burden associated with Reporting Companies updating information previously provided is 40 to 170 minutes per respondent for reporting companies with simple or complex beneficial ownership structures, respectively.”

Given the appellate route will likely take well over a year to resolve and the NSBA plaintiffs no longer have any injury to adjudicate – which might have expedited an appeal if they had, it is incumbent on business owners to take the CTA at its face value and comply with the implemented regulations of FinCEN.

Digital Assets, Network Security, Privacy, Risk Management, Small Business

Exchanges May Crack Down on Ransomware OFAC Risk

On April 22, 2021, Chainalysis published its findings on the OFAC sanctions violation risk tied to ransomware payments.  According to Chainalysis, 15% of ransomware payments paid in 2020 were at risk of OFAC sanctions.  Even though lower than the measured risk from 2016 – 2018, last year’s numbers remain an uptick from 2019.  

Chainalysis discovered ransomware victims paid out in 2020 more than $50 million worth of cryptocurrency to addresses that carried sanctions – with mainstream exchanges receiving “more than $32 million from ransomware strains associated with sanctions risks.”  Given the public market embrace of crypto exchanges, it is very likely those exchanges seeking greater regulatory scrutiny will eventually implement curbs to address the OFAC October 2020 advisory – eventually making it more difficult for smaller businesses to satisfy ransomware demands.

Behavioral Advertising, Middle Market Business, Network Security, Privacy, Risk Management, Small Business, Technology Law

Our Current Cyber Pandemic Will Also Subside

On April 17, 2020, it was reported that researchers at Finland’s Arctic Security found “the number of networks experiencing malicious activity was more than double in March in the United States and many European countries compared with January, soon after the virus was first reported in China. ”

Lari Huttunen at Arctic Security astutely pointed out why previously safe networks were now exposed: “In many cases, corporate firewalls and security policies had protected machines that had been infected by viruses or targeted malware . . . . Outside of the office, that protection can fall off sharply, allowing the infected machines to communicate again with the original hackers. “

Tom Kellerman – a cybersecurity thought leader, distills it this way: “There is a digitally historic event occurring in the background of this pandemic, and that is there is a cybercrime pandemic that is occurring.”

While there are certain internal ways of addressing cybersecurity threats arising from a viral pandemic, the exposures now faced by corporations become doubly damaging when the outside resources absolutely necessary to combat active threats are considered off-budget or not a critical enough priority. Smart companies generally survive stressful times by prioritizing with some foresight. Network security during a Cyber Pandemic should be a top priority no matter what size business.

During our Cyber Pandemic, companies recognizing and properly addressing the potential damage caused by threat actors will not only survive minor short-term hits to their bottom line caused by paying outside resources, they will likely be the ones coming on top after both Pandemics subside. There is definitely a light at the end of the tunnel for those willing to take the ride – just continue using trusted vehicles to get you there.