On January 1, 2024, the reporting requirements under the Corporate Transparency Act (“CTA”) will take effect, requiring most US private companies to file and update information about the individuals who own and control them.
The CTA, enacted in 2021, requires most companies that are formed in the United States or are registered to do business in the United States to report to the Financial Crimes Enforcement Network of the Department of the Treasury (“FinCEN”) information about the entity’s beneficial owners and, in the case of entities formed on or after January 1, 2024, the company applicant. Information must be submitted electronically through an online portal being developed by FinCEN.
Purpose of the CTA.
The purpose of the CTA is to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other unlawful activity which is believed to occur when illicit actors use corporate structures to conceal their identities and move money through the United States financial system. FinCEN will collect, store, secure and maintain information furnished under the CTA and will manage the appropriate disclosure of this information to authorized entities.
Who Must File Reports Under the CTA.
All domestic and foreign Reporting Companies must report and regularly amend information about their beneficial owners to FinCEN. A “Reporting Company” is an entity that is:
- created by the filing of a document with a state’s or indian tribe’s secretary of state or similar office, or
- formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a State’s or Indian Tribe’s Secretary of State or similar office.
Under this broad definition, reporting requirements will apply to entities such as corporations, limited liability companies, limited partnerships, limited liability partnerships, professional corporations, professional limited liability companies and business trusts.
Exemptions to Reporting Requirements Under the CTA.
There are 23 exemptions that render a Reporting Company exempt from the CTA’s reporting requirements. Many of the exemptions apply to businesses that operate in highly regulated fields (such as banks, governmental entities, charitable organizations, investment advisors and investment companies). For businesses that do not operate in such regulated fields, the most broadly applicable exemptions are:
- Publicly traded companies.
- Inactive entities that meet certain requirements (such as in existence for over a year, inactive, not owned by a foreign person, no change in ownership or sending/receipt of funds greater than $1,000 in the past 12-months and holds no assets).
- Large operating companies that (1) employ more than 20 full-time employees in the United States, (2) filed, in the previous year, a Federal income tax return showing more than $5 million in gross receipts or sales, and (3) have an operating presence at a physical office within the United States.
- Subsidiaries controlled or wholly owned by a Reporting Company that is exempt under certain provisions (such as a wholly owned subsidiary of a corporation that qualifies as a large operating company).
Timeline to File Reports.
There are strict deadlines for Reporting Companies to file their initial reports and to file updates to their reports. Reporting Companies created or registered on or before December 31, 2023 must file an initial report on or before December 31, 2024. Reporting Companies created on or after January 1, 2024 must file an initial report within 30 days of the earlier of the receipt of actual notice that its creation or registration has become effective or the date on which a Secretary of State provides public notice that the Reporting Company has been created or registered. A Reporting Company that ceases to qualify for an exemption must file an initial report within 30 days of the date it no longer qualifies.
All non-exempt Reporting Companies must file updated reports within 30 days of any change of reporting information. Such updates include
- Changes in information about greater than 25% owners (including by death or an owner reaching the age of majority),
- Changes in information about individuals who exercise substantial control over the Reporting Company,
- A Reporting Company qualifying for an exemption, or
- Any changes to a previously submitted identifying document (such as a change in name, address, or identifying number).
A Reporting Company must submit to FinCEN a report containing information on each of its Beneficial Owners. A “Beneficial Owner” is an individual who, directly or indirectly, exercises substantial control over an entity or owns or controls at least 25% of the ownership interest of the entity. The CTA provides specific examples of what constitutes exercising substantial control over a Reporting Company, such as serving as or having the authority to appoint or remove a senior officer, or directing, determining or influencing certain important decisions. Ownership interest is defined broadly to include stock, equity, capital or profit interests, and any other instrument, contract, arrangement or understanding used to establish ownership.
In addition, a Reporting Company formed on or after January 1, 2024 must also report information on each Company Applicant. A “Company Applicant” is an individual who directly files the formation documents for a Reporting Company, and, if different, the individual who is primarily responsible for directing or controlling the filing of the formation documents.
Note that the CTA requires the identification of people, not other entities, as Beneficial Owners and Company Applicants. The specific information to be submitted to FinCEN consists of:
- Full legal name,
- Date of birth,
- Current residential or business street address,
- Unique identifying number and its jurisdiction, and
- A copy of the document with the unique identifying number.
As there are only a few circumstances in which a Reporting Entity can elect not to report a Beneficial Owner (such as a minor child if the parent or guardian is reported), FinCEN expects that a Reporting Company will always identify at least one Beneficial Owner and may report multiple Beneficial Owners.
Penalties for Violating the CTA.
Each violation of the CTA can result in a civil penalty of up to $500 per day, a fine of up to $10,000 and up to 2 years of imprisonment. There is, however, an exemption from civil and criminal liability if an individual voluntarily and promptly corrects an inaccurate report no later than 90 days after submission of an inaccurate report. For the exemption to apply, such person must not have intentionally submitted an inaccurate report to evade reporting requirements and must not have had actual knowledge that the reported information was inaccurate.
Who Can Access the Reported Information?
Given the sensitivity of the reportable information, the CTA imposes strict confidentiality, security, and access restrictions on the data FinCEN collects. FinCEN is authorized to disclose reported Beneficial Owner information in limited circumstances to a statutorily defined group of governmental authorities and financial institutions. Federal agencies, for example, may only obtain access to such information when it will be used in furtherance of a national security, intelligence, or law enforcement activity. For state, local, and Tribal law enforcement agencies, a court of competent jurisdiction must authorize the agency to obtain such information as part of a criminal or civil investigation. Foreign government access is limited. Finally, a financial institution’s regulator can obtain information that has been provided to a financial institution it regulates for the purpose of performing regulatory oversight that is specific to that financial institution. With the consent of the Reporting Company, FinCEN may also disclose Beneficial Owner information to financial institutions to help them comply with customer due diligence requirements under applicable law.
With the CTA’s effective date quickly approaching, it is essential that all companies created or registered in the United States determine whether an exemption to the reporting requirement applies, and, if not, begin determining the reportable information for its Beneficial Owners and, if applicable, its Company Applicants.