The marketing campaigns say it all: If you don’t make your Beneficial Ownership Information (BOI) report to FINCEN and also get it absolutely correct, then you are going to get fined hundreds of dollars per day and probably end up in jail too. These statements are being bombed out to LLC owners by dubious outfits that are often charging around $100 to do something those owners can do themselves without too much trouble for absolutely free. I’ve received several “warnings” and “notices” spammed out by these companies and directed at LLCs that I am involved with (how they got my e-mail address is another curiosity).
While there is a kernel of truth in what these marketers say, the reality of BOI fines and prosecutions is very different. That is what we will explore today.
There are indeed civil fines and criminal penalties that can be meted out under the the Corporate Transparency Act (CTA). These are found at 31 U.S.C. § 5336(h)(1) and (3) which provide the following penalties for failing to make the BOI report:
(1) Reporting violations. ― It shall be unlawful for any person to ―
(A) willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with subsection (b); or
(B) willfully fail to report complete or updated beneficial ownership information to FinCEN . . ..
***
(3) Criminal and civil penalties. ―
(A) Reporting violations. ― Any person that violates subparagraph (A) or (B) of paragraph (1) ―
(i) shall be liable to the United States for a civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and
(ii) may be fined not more than $10,000, imprisoned for not more than 2 years, or both.
[Emphasis added.]
The key word is willfully. One can only be fined for not making a BOI report when one is required, or making a false BOI report, if they have acted willfully. If they have not acted willfully, then there can be neither civil penalties nor criminal prosecution no matter how badly they have messed the process up. So what does willfully mean in this context?
Because the CTA is so new, and also because of the various court challenges, nobody has yet been charged with violating the BOI reporting requirements and of course there is no case law on the criminal implication of this statute. However, we can look to the very similar statute 31 U.S.C. § 5322 which provides the criminal penalties for certain financial crimes, such as currency structuring, to see what willfully usually means in this context. Since § 5322 has been around since 1982, there are literally hundreds of court opinions which have examined this statute, and it is highly likely that a court reviewing the CTA’s penalty provisions will look to § 5322 by analogy.
In Ratzlaf v. U.S., 510 U.S. 135 (1994), the U.S. Supreme Court considered willfully in the context of a person convicted of currency structuring under § 5322. There, a gambler by the name of Ratzlaf lost $160,000 playing blackjack at a Reno casino. The casino gave Ratzlaf one week to pay. At the end of the week, Ratzlaf showed up with $100,000 in cash with which to pay down his debt. At that point, the casino told Ratzlaf that if he paid that amount in cash they would have to file a report with the state and federal authorities. But, the casino graciously added, they could either take a cashier’s check for the $100,000 but that would then trigger reporting requirements by the issuing bank.
Ever helpful, the casino provided Ratzlaf with a limousine to take him around to a number of different banks in the area to use his cash to obtain a number of cashier’s checks for just less than $10,000 each, which was just under the reporting requirement. Ratzlaf then returned to the casino to pay them the $100,000 with a number of cashier’s checks obtained during his limo ride. For this ride, or more accurately for Ratzaf’s structuring of these cash transactions to evade the $10,000 reporting requirement, Ratzlaf was prosecuted, tried, convicted, fined and eventually sent to prison. Ratzlaf appealed on the basis that his conduct was not conducted willfully because he did not understand that such currency structuring was unlawful.
Ratzlaf’s appeal percolated all the way up to the U.S. Supreme Court, which then had to decide what willfully means in this context. In reversing Ratzlaf’s conviction, the majority opinion noted that:
” ‘Willful,’ this Court has recognized, is a word of many meanings, and its construction is often … influenced by its context. [] Accordingly, we view §§ 5322(a) and 5324(3) mindful of the complex of provisions in which they are embedded. In this light, we count it significant that § 5322(a)’s omnibus ‘willfulness’ requirement, when applied to other provisions in the same subchapter, consistently has been read by the Courts of Appeals to require both knowledge of the reporting requirement and a specific intent to commit the crime, i.e., a purpose to disobey the law.” [Internal quotations and citation omitted, and emphasis in original.]
While “knowledge of the reporting requirement” is an element that has been substantially eroded since the Ratzlaf opinion, what still is good law is that the defendant must have “a specific intent to commit the crime, i.e., a purpose to disobey the law.”
In another case, U.S. v. Bank of New England, 821 F.2d 844 (1st Cir., 1987), a bank was convicted of 31 counts of violations of § 5322 by failing to make currency transactions reports by assisting one of its customers in structuring currency transactions. In affirming the conviction, the First Circuit opinion commented that:
“Nor do we find any defects in the trial court’s instructions on specific intent. The court told the jury that the concept of willfulness entails a voluntary, intentional, and bad purpose to disobey the law. Her instructions on this element, when viewed as a whole, directed the jury not to convict for accidental, mistaken or inadvertent acts or omissions. It is urged that the court erroneously charged that willfulness could be found via flagrant indifference by the Bank toward its reporting obligations. With respect to federal regulatory statutes, the Supreme Court has endorsed defining willfulness, in both civil and criminal contexts, as ‘a disregard for the governing statute and an indifference to its requirements.’ “
What these and similar opinions say about willfully in the context of these currency structuring transaction reports is that it means that one acted with the intent of violating the statute. By contrast, if inaccurate reports were made by accident or mistake ― or even just mere negligence ― that does not rise to the level of willfully.
In other words, one cannot be fined or prosecuted just because the BOI report was messed up, or even that you did not timely file a report, unless they had the intention to file an inaccurate BOI report or not make a BOI report when they knew one was required.
Other commentators have noted that there can be a lot of complexities in filing BOI reports, such as knowing when somebody has an ownership interest that requires that they be included. This complexity acts to negate the willfully requirement in the absence of clear guidance by FINCEN on the particular subject. But even where there is clear guidance, if one still messes up that part of the report as part of a good faith effort to file, then they have not acted willfully either.
Note that there is also “safe harbor” provision for BOI reporting that is found in § 5336(h)(3)(C) which basically provides that if an incorrect report has been filed, but not for the purpose of evading the reporting requirements, then the person filing the report may not face consequences if a corrected report is filed within 90 days of the original report.
On the other hand, the willfully requirement does not mean that somebody can just totally blow off the BOI reporting requirement or be grossly negligent in filling out the report. Things like gross negligence, recklessness, or apathy can satisfy the willfully element. Recall that the Bank of New England as mentioned above was ultimately convicted on what amounted to a reckless indifference standard.
But as long as one submits their BOI reports in good faith, they will not face fines even if some of the information is inaccurate or possibly even if they miss the filing of a required report for a particular reporting entity (let’s say a real estate developer has 100 LLCs but in good faith overlooks one and only files the BOI reporting form for the other 99.
The realities of BOI reporting and the imposition of civil fines and penalties must be considered as well. The use of willfully in the CTA means that it is not a strict liability violation, but rather requires a testing of one’s intent. This requires a trial, which requires a court case and litigation leading to the trial. It also means that the Treasury Department cannot simply send out thousands of letters imposing fines on non-filers or incorrect-filers.
Instead, for each alleged violation of the CTA, the U.S. Department of Justice would have to file a new lawsuit. To obtain a criminal conviction, the DOJ would have to prove the violation of the CTA by the usual criminal standard of proof, which is beyond a reasonable doubt. United States v. St. Michael’s Credit Union, 880 F.2d 579, 584 (1st Cir. 1989).
Be assured that the DOJ, considering all of its other broad responsibilities, simply does not have the resources to start bringing such lawsuits en masse. Rather, CTA violations are very likely to be pursued only if the CTA violations are blatant or are a part of larger investigations of wrongdoers, such as for money laundering or other financial crimes.
Again, this doesn’t mean that one can simply blow off their BOI reporting requirements, intentionally submit false information, or be reckless or grossly negligence in filing out the BOI form. But it does mean that so long is one is attempting to comply in good faith, it is highly unlikely that they will ever have to worry about the fines or criminal penalties.
That is not something that the marketers of BOI reporting services are likely to tell you.
As an aside, if somebody were worried about their BOI reporting and wanted somebody to do it for them, then they should have their attorney make the filing. Assuming that the information given to the filing attorney was not intentionally false, a person could rely on the “advice of counsel” as a defense to a CTA violation. But only a licensed attorney can provide that advice of counsel. Indeed, the websites, e-mails, and agreements of the BOI filing services almost always disclaim that they are a law firm or are giving legal advice. Which means that you can’t rely upon their representations in filing (or not filing) a BOI report and the information given therein.
As noted above, probably most of the time that will not be a problem anyway, but if it does become a problem, then it would be nice if you could rely upon advice of counsel as a defense ― which means using an attorney if there are any sticky issues involved in a particular filing (and, no, I do not offer any services to make these filings so please don’t call me).
Fortunately, we don’t have to worry about any of this just yet as FINCEN still has BOI reporting on hold as of the writing of this article, but it may become relevant pretty quickly.