Starting January 1, 2024, certain U.S. and foreign entities must identify and report to the U.S. Treasury Department's Financial Crimes Enforcement Network (FinCEN) detailed information about the individuals that beneficially own or substantially control them.
The Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act for Fiscal Year 2021, imposes these reporting requirements on Reporting Companies.
The CTA authorizes FinCEN to maintain this information in a national database and to disclose it to law enforcement, national security agencies, and others to combat crimes including money laundering, terrorism and human trafficking.
Why is this Important?
This impending reporting requirement is generally applicable to all entities that qualify as Reporting Companies.
Per the final regulations for implementing the CTA issued by the U.S. Department of Treasury, “Reporting Companies” are broadly defined to include U.S. corporations, limited liabilities companies and “other similar entities” that are created by a filing with a secretary of state’s office or foreign entities that register to do business in the U.S.
The phrase “other similar entities” likely includes limited partnerships (including limited liability partnerships and limited liability limited partnerships) and business trusts that all require a state filing for their formation as Reporting Companies.
The CTA outlines a number of exceptions to the Reporting Companies definition, including publicly traded corporations, certain tax exempt organizations, banks and “large operating companies”.
To be excepted, large operating companies must employ more than 20 full-time employees in the U.S., have received $5 million in gross receipts or sales generated in the U.S. for the previous year (as reflected on a filed federal income tax return) and have an operating presence at a physical office in the U.S. The Regulations include further details about these large operating company requirements.
Who is a Beneficial Owner?
Under the CTA, a “Beneficial Owner” is any individual that directly or indirectly (i) “substantially controls” the Reporting Company; or (ii) owns or controls not less than 25% of the ownership interests in the Reporting Company.
These control/ownership tests are triggered by direct or indirect control over or ownership interests in the Reporting Company. Indirect control or ownership can be by “contract, arrangement, understanding, relationship” or other scenario that satisfies the CTA’s control/ownership requirements.
Both the CTA and the Regulations describe five exceptions to the definition of Beneficial Owner, including minor children, nominees, employees (that are not senior officers and only receive compensation as employees), a person with rights to a future inheritance, and creditors.
What is Substantial Control?
Pursuant to the Regulations, an individual exercises “substantial control” over a Reporting Company if the individual is a senior officer or has authority or substantial influence over any significant Reporting Company matter (such as the appointment or removal of senior officers) or major decisions (i.e., mergers, major investments, ventures, significant contracts).
Senior officers include any individual holding the position or exercising the authority of a president, CFO, general counsel, CEO, COO or any other officer who performs similar functions. Additionally, an individual that has “any other form of substantial control” over the Reporting Company must be reported.
Take Note: From a practical standpoint, this catch-all provision requires the Reporting Company to disclose all individuals with any significant influence or authority over the Reporting Company’s activities or decisions.
How is Ownership Defined?
The Regulations contain a broad and detailed definition of “ownership interests” including, among others, any equity, stock, joint venture interests, any capital or profit interests, instruments convertible into equity or other interests, and the catch-all “any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership”.
In computing whether an individual owns not less than 25% of the Reporting Company, the Regulations include detailed calculation provisions and require all ownership interests owned or controlled by that individual to be considered on an aggregate basis.
Who is the Company Applicant?
For a U.S. Reporting Company, the Company Applicant includes (a) the person who directly files the document that creates the Reporting Company; and (b) the person who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.
For companies that handle their own entity formations, this would likely include the individual supervising the transaction for which the Reporting Company is being formed and the individual actually filing the instrument creating the Reporting Company with the relevant state office (which may be one and the same).
Take Note: If the Reporting Company was formed or registered (if foreign) before January 1, 2024, information about the Company Applicant is not required to be reported.
What Information is to be Reported?
The Regulations require the following specific information to be reported to FinCEN:
- For a Reporting Company: (·) Full legal name, (·) Any trade or “doing business as” name, (·) Address of principal place of business, (·) Jurisdiction of formation, and (·) Unique identification number (UIN) (i.e., IRS Taxpayer Identification Number, including Employer Identification Number).
- For each qualifying Beneficial Owner: (·) Full legal name, (·) Date of Birth, (·) Residential street address, (·) UIN from a non-expired U.S. passport, a non-expired U.S. driver's license or other permitted document, together with an image of the UIN document that includes the UIN and a photograph of the individual Beneficial Owner.
- For each Company Applicant: (·) Full legal name, (·) Date of Birth, (·) Residential or business street address (depending on the person’s role), (·) Unique Identification Number, together with an image of the UIN document that includes the UIN and a photograph of the individual Company Applicant.
Phased In Reporting Deadlines:
All U.S. Reporting Companies formed after January 1, 2024, the initial report must be submitted within 30 days after the date of formation (as confirmed by the applicable state).
For U.S. Reporting Companies formed before January 1, 2024, the report must be submitted not later than January 1, 2025.
Reporting Companies must also report changes to or inaccuracies in the information in their initial reports within 30 days. This includes entities that were previously exempt and who must file a report within 30 days after the entity no longer satisfy the exception requirements.
How to file:
FinCEN is developing its online platform for an electronic CTA filing system. It is not clear when this system will be operational. Paper filings will likely be required in the interim.
Civil and Criminal Penalties for CTA Violations:
For reporting violations, including willfully providing false information or failing to file complete and accurate reports (or updated reports), the CTA provides for civil penalties of up to $10,000 (i.e., $500 per day for each day the violation continues) and/or imprisonment for up to 2 years.
For the unauthorized disclosure of beneficial ownership information, the CTA provides for civil penalties of $500 per day for each day the violation continues and a fine of not more than $250,000 and/or imprisonment for up to 5 years. In addition, if the unauthorized disclosure or use of beneficial ownership information collected under the CTA occurs in conjunction with the violation of another domestic law as part of a pattern of illegal activity involving more than $100,000 during a 12-month period, the disclosing party may be fined up to $500,000 and/or may be imprisoned for up to 10 years.
The CTA imposes a massive burden on companies and their investors many of which will constitute Reporting Companies. Identifying entities and gathering all of the information and needed documentation for Reporting Companies will take a lot of time and resources. Activate now to prepare for the CTA’s looming reporting deadlines.