Corporate Transparency Act
U.S. CORPORATE TRANSPARENCY ACT
An important new U.S. federal law that imposes significant reporting obligations on certain privately owned businesses comes into effect on January 1, 2024. The Corporate Transparency Act (“CTA”) requires certain businesses to report the names of its owners to the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”). Before the enactment of the CTA, business owners of most privately held companies had no such obligations. The CTA seeks to eliminate the use of shell companies for money laundering, terrorist financing, sanctions evasion and other crimes by creating a data base of their owners. Failure to comply with this new law comes with very steep consequences, including criminal penalties. This article covers the scope of the CTA, who must report, and the risks of failing to file the necessary report timely.
Overview of the CTA
Before enactment of the CTA, business owners of most privately held companies had no obligation to report their ownership interests to the U.S. government or law enforcement. Critics have said that this lack of transparency, unique among most developed nations, resulted in the United States becoming a “safe haven” for those seeking anonymity of ownership for nefarious purposes such as money laundering and financing criminal operations.
The CTA establishes a database of beneficial owners of corporations, LLCs, and other corporate entities, which will be available to law enforcement agencies -- but not to the public. Business owners now have an affirmative obligation to identify and report their beneficial ownership to FinCEN. The CTA requires, with very limited exceptions as listed below, that all U.S. registered corporations, LLCs, or similar entities to report beneficial ownership information to FinCEN.
The new registry will collect the names, dates of birth, addresses, and identification documents of individuals who own at least a 25% equity stake in the entity, or exercise substantial control over the entity, which will more directly tie the responsibility of the entity’s conduct to specific individuals.
The CTA’s requirements are clear. If an entity qualifies as a “reporting company,” it must submit a report to FinCEN containing the identifying information of the entity’s beneficial owners.
The information provided is to be maintained in a confidential and secure database and only released upon: (i) a request from certain federal or state agencies engaged in national security, intelligence or law enforcement activity; (ii) certain types of requests from a federal agency on behalf of foreign authorities; (iii) a request by a financial institution “subject to customer due diligence requirements”; or (iv) a request by a federal regulator.
1. Who Must Report
Definition of “Reporting Company”
The CTA requires that every “reporting company” as defined in the CTA must disclose its ownership. The definition of “reporting company” is broad, and includes any corporation, limited liability company, or other similar entity created under the laws of any U.S. state or territory. The CTA excludes from the definition “reporting company” entities that are already subject to complex and comprehensive reporting requirements, as follows:
Exemption No. Exemption Short Title
1 Securities reporting issuer (for example, a public company)
2 Governmental authority
3 Bank
4 Credit union
5 Depository institution holding company
6 Money services business
7 Broker or dealer in securities
8 Securities exchange or clearing agency
9 Other Exchange Act registered entity
10 Investment company or investment adviser
11 Venture capital fund adviser
12 Insurance company
13 State-licensed insurance producer
14 Commodity Exchange Act registered entity
15 Accounting firm
16 Public utility
17 Financial market utility
18 Pooled investment vehicle
19 Tax-exempt entity
20 Entity assisting a tax-exempt entity
21 Large operating company
22 Subsidiary of certain exempt entities
23 Inactive entity
An important exception to the reporting obligations is for any company that qualifies as a “large operating company” (no. 21 above). The term “large operating company” means any entity that (i) employs more than 20 employees on a full-time basis in the United States, (ii) had at least $5 million in gross receipts or aggregate sales in the previous year, as demonstrated on its tax returns, and (iii) has an operating presence at a physical office within the United States.
By excluding large operating companies from the reporting requirements, the primary burden of compliance with the CTA falls on small and medium-sized businesses that do not meet these thresholds as well as single purpose entities used to hold title to real estate or other specific assets such as intellectual property.
2. Timeline for Reporting
Reporting companies already in existence as of the Effective Date must submit their initial beneficial ownership reports to FinCEN by January 1, 2025 (within one year of the Effective Date).
Reporting companies that are formed or registered to do business on or after January 1, 2024 must submit their initial beneficial ownership reports within 30 days of such formation or registration. Any changes to previously submitted reports (including with respect to beneficial ownership or exemption status) must also be reported on an amended filing within 30 days.
FinCEN is currently developing an online portal known as the Beneficial Ownership Secure System (“BOSS”) that will receive, store and maintain beneficial ownership information submitted by reporting companies. Reporting companies will be required to submit the required information via a standardized form, expected to be available on FinCEN’s website by the Effective Date.
3. Who Must Report
Each reporting company must file a report that discloses each beneficial owner’s name, date of birth, residential or business street address, and unique identifying number from an identification document.
Who Qualifies as a Beneficial Owner?
A beneficial owner is any individual who, directly or indirectly, owns or controls 25% or more of the ownership interest in the entity or exercises “substantial control” over the entity.
An individual may be deemed to have direct or indirect ownership of a reporting company through any contract, arrangement, understanding, relationship, or otherwise, including through:
joint ownership with one or more other persons such as a spouse;
another individual acting as a nominee, intermediary, custodian, or agent on behalf of such individual;
with regard to a trust, its status (i) as a trustee with the authority to dispose of trust assets, (2) as a beneficiary who is the sole permissible recipient of income and principal or has a right to demand a distribution of or withdraw substantially all of the assets from the trust, or (3) as a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust; or
ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of any such entities, that separately or collectively own or control ownership interests of the reporting company.
Substantial Control
The Final Rule adopts a broad definition of “substantial control”, thereby significantly expanding the scope of the beneficial ownership concept. An individual will be deemed to have substantial control if the individual:
serves as a senior officer of the reporting company, defined as “any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function”;
has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);
directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding: (1) the nature, scope, and attributes of the business (2) the reorganization, dissolution, or merger of the reporting company; (3) major expenditures or investments, issuances of any equity, or incurrence of significant debt; (4) the selection or termination of business lines or ventures, (5) compensation schemes and incentive programs for senior officers; (6) the entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; or (7) amendments to any governance documents; or
has any other form of substantial control over the reporting company.
4. Penalties for Non-Compliance
The CTA establishes civil and criminal penalties for individuals who “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information” or who “willfully fail to report complete or updated beneficial ownership information”. Willful failures to report complete or updated beneficial ownership information are punishable by civil penalties of up to $500 per day that each violation continues, and in certain cases criminal penalties of up to $10,000, two years’ imprisonment, or both. These penalties are severe.
Contact me to discuss whether any company with whom you are involved may be subject to the CTA and any action that may be required to avoid penalties.
