Wednesday, August 2, 2023

What You Need to Know About the Corporate Transparency Act

On September 29, 2022, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule (see 31 C.F.R. § 1010.380) to implement the beneficial ownership information reporting rules of the Corporate Transparency Act of 2021 (CTA). The Rule will take effect on January 1, 2024. The relatively new legislation is aimed at preventing and combating money laundering, terrorist financing, corruption, tax fraud, and other illicit activity.

When the rule was first announced, there were many questions and concerns regarding how broad its impact might be and what changes it would bring to the disclosures of entities and their beneficial owners, as well as a number of privacy issues. For entrepreneurs, when you are faced with existing and/or potential investors/owners who are worried or confused about how the rule will impact them, you will want to give them a high-level introduction, and the abstracts below could be a helpful quick guide for you!

WHO Must Report under the Rule?

Not every company will be required to report under the new rule, so the first question is who must report? Under the rule, any U.S. entity created by the filing of a document with a secretary of state or similar office of any state or other governmental agency must report information on itself, its beneficial owners, and its company applicants. The same reporting is required for any foreign entity (an entity formed under the laws of a foreign country) that is registered to do business in the U.S. by the filing of a document with a secretary of state or similar office.

The rule seems broad at first glance, because it covers almost all kinds of legal entities other than sole proprietorships and general partnerships. However, the rule also carves out 23 exemptions:
  • Companies involved in highly regulated industries, e.g., insurance, banking, utilities, accounting, and more.
  • “Large operating companies” those companies with more than 20 full time employees in the U.S. or its territories, with an operating presence at a physical office in the U.S., and more than $5 million in gross receipts or sales.
  • Any entity which is owned or controlled by one or more exempt entities is also exempt from the reporting requirements.

WHAT Information Must Be Reported under the Rule?

What needs to be reported under the rule could be roughly classified into three categories with a variety of information, including:

  • The reporting company itself
    • Full legal name;
    • Any trade name or “doing business as” name;
    • Current address of its principal place of business or primary location in the US;
    • Jurisdiction of formation or registration;
    • Taxpayer identification number (TIN).
  • The “Beneficial Owners” (see below) of the Reporting Company
    • Full legal name;
    • Date of birth;
    • Complete current address;
    • A unique identifying number and issuing jurisdiction (e.g., a passport or social security card);
    • An image of the document containing the unique identifying number.
  • The Company Applicant for the Reporting Company (similar reporting requirements as to the beneficial owners of the reporting company)
Notably, the Beneficial Owner and Company Applicant are defined broadly. In general, a Beneficial Owner is any individual (1) who directly or indirectly exercises “substantial control” over the reporting company; or (2) who directly or indirectly owns or controls 25 percent or more of the “ownership interests” of the reporting company. Additionally, there can be up to two individuals who qualify as Company Applicants: (1) the individual who directly files the document that creates, or first registers, the reporting company; and (2) the individual that is primarily responsible for directing or controlling the filing of the relevant document.

WHEN Must Reports Be Made?

The rule is effective as of January 1, 2024. Any reporting company created or registered prior to that date will have one year—until January 1, 2025—to file their initial reports, including an $85 filing fee. For reporting companies created or registered after January 1, 2024, the reporting company must file the required report within 30 days of receiving notice of company creation or registration.

Additionally, reporting companies have an ongoing obligation to maintain the accuracy of their reports. If any of the information filed in the initial report changes or the company becomes aware of inaccurate information, the company must report those changes or correct the inaccurate information within 30 days of becoming aware of the change or the inaccuracy.

What If You Don’t Comply?

The rule contains civil penalties of $500 per day for being late and also potential criminal penalties of up to $10,000 and two years in jail for willful violations—so this is serious stuff!

What Should You Do Now?

It may be a good time to determine who is considered a Beneficial Owner (or Company Applicant) and to start work to collect the necessary information from these individuals well in advance of the deadlines described above so there isn’t a mad dash to meet the obligation. Also, it could take some explaining to Beneficial Owners as to why you suddenly need a copy of their passport or social security card.

WHO Will Have Access to Beneficial Ownership Information?

Investors and owners might worry about the Beneficial Ownership information being easily accessed by the public, but FinCEN has addressed this concern, and allows only certain authorized recipients access to such information for limited purposes as allowed under the CTA:

  • Federal, state, local and tribal government agencies;
  • Foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities, provided their requests come through an intermediary federal agency and meet additional criteria;
  • Financial institutions using such information to facilitate compliance with customer due diligence requirements;
  • Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing financial institutions;
  • U.S. Department of the Treasury.
Notably, even within the five categories, the CTA expressly restricts access to such information to only those authorized users (1) who are directly engaged in an authorized investigation or activity; (2) whose duties or responsibilities require access to such information; (3) who have undergone appropriate training or use staff to access the system who have undergone appropriate training; (4) who use appropriate identity verification to obtain access to the information; and (5) who are authorized by agreement with the Secretary of the Treasury to access such information.

Additional Useful Resources:

1 comment :

  1. Interesting Post Lu! Seems like we should make sure the entrepreneurs we are working with start thinking about compliance!