Effective January 1, 2024, corporate entities formed or operating in the United States will be subject to new rules requiring the submission of reports to the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) regarding their beneficial ownership. These requirements, which will affect businesses across the country, are part of the Corporate Transparency Act (“CTA”), which has been clarified in FinCEN’s Final Rule for Beneficial Ownership Reporting (the “Rule”) issued on September 29, 2022.
Why Was the CTA Enacted?
The CTA was enacted on January 1, 2021. Congress drafted the CTA in order to strengthen national security and the integrity of the U.S. financial system by deterring crimes committed using shell entities, including human trafficking, drug trafficking, hiding or laundering money, tax evasion, and financial fraud. The CTA requires domestic and foreign reporting companies to disclose information regarding their beneficial owners and others involved in their formation.
When is Filing Required?
The CTA’s reporting requirements take effect on January 1, 2024. Companies formed on and after January 1, 2024, are required to comply within 30 days of formation, whereas companies formed before January 1, 2024, will have until January 1, 2025, to comply.
Updates to filed reports are required within 30 calendar days of any changes in the information provided by the related reporting company or of the reporting company becoming aware of mistakes or inaccuracies in such a report. Changes that may require an amended report include:
- Changes in the beneficial ownership of the reporting company;
- Transfers resulting from a minor child reaching the age of majority;
- A reporting company qualifying for an exemption under the CTA; or
- Changes to an identifying document previously submitted.
Who is Required to File?
The Rule applies to domestic and foreign reporting companies, which includes:
- Any domestic corporation, limited liability company or similar entity that is created by filing a document with a secretary of state or similar office of a state or Indian tribe; or
- Any foreign entity formed under the laws of a foreign country registered to do business in the U.S. by the filing of a document with a secretary of state or similar office of a state or Indian tribe.
The CTA and the Rule include several exemptions to the definition of a reporting company (exempt companies will not have to file beneficial ownership reports), including:
- Issuers of securities registered with the U.S. Securities and Exchange Commission;
- Financial entities that are required to disclose beneficial ownership interests publicly or to federal regulators;
- Registered entities;
- Public accounting firms;
- State-licensed insurance producers;
- 501(c) tax exempt entities;
- Tax exempt political organizations;
- Certain trusts; and
- Large operating companies employing more than 20 full time employees in the U.S. which have more than $5,000,000 in gross receipts or sales and have an operating presence at a physical office in the U.S.
What Information is Required in the Report?
Reporting companies must report the following information for any individual who is a beneficial owner or a company applicant of the company:
- Full legal name;
- Any trade name or “doing business as” (d/b/a) name;
- Date of birth;
- Complete current address (this must be the residential address for beneficial owners and the street address of the business for company applicants);
- An identifying number consisting of a Federal Taxpayer ID number, a unique ID number issued by FinCEN, or a number from a US or foreign passport, or an identification document from the U.S., state, local, or tribal government; and
- An image of the document with the unique identifying number.
Who is a Beneficial Owner?
A beneficial owner is any individual who:
- Directly or indirectly exercises substantial control over such reporting company; or
- Owns or controls at least 25% of the ownership interests of the reporting company.
An individual exercises “substantial control” over a company if the individual (i) serves as a senior officer of the company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board; (iii) directs, determines, or has substantial influence over important decisions made by the reporting company; or (iv) has any other form of substantial control over the reporting company.
Control may be exercised either directly or indirectly, including through board representation, ownership, financing arrangements, or control over intermediary entities. Indirect ownership or control of a company or its ownership interests may include the following:
- Joint ownership with one or more other persons;
- Through another individual acting as a nominee, intermediary, custodian, or agent;
- As trustee, grantor, settlor, or beneficiary of a trust; or
- Through ownership or control of one or more intermediary entities that separately or collectively own or control ownership interests of the reporting company.
The following are not considered beneficial owners of a reporting company:
- Minor children;
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual who is a beneficial owner;
- An employee of the reporting company, acting solely as a non-officer employee, whose substantial control over or economic benefits from the entity are derived solely from the employment status;
- An individual whose only interest in a reporting company is a future interest through a right of inheritance; or
- A creditor of the reporting company.
Who is a Company Applicant?
A company applicant is an individual who:
- Directly files a document to form a U.S. entity (including the individual who is primarily responsible for directing or controlling the filing if more than one individual is involved in the filing of the document); or
- Registers a foreign entity to do business in the U.S.
Third parties such as attorneys and paralegals who file formation documents on behalf of clients may also be considered company applicants. Reporting companies in existence prior to January 1, 2024, are not required to include information on company applicants.
What are the Penalties For Failure to Comply?
Failure to file the required information can result in civil and criminal penalties, including a $500 per day penalty, a $10,000 fine, or up to two years imprisonment.
Where Will Filings be Made?
FinCEN is still developing the infrastructure to implement and administer the Rule, including the Beneficial Ownership Secure System, which is the information technology system which will receive and store beneficial ownership information.
What Happens to the Information Following Submission?
Reports filed with FinCEN will not be accessible to the public and are exempt from requests under the Freedom of Information Act. However, FinCEN reports are accessible to the following authorities:
- Federal agencies engaged in national security, intelligence, and law enforcement;
- The Department of the Treasury;
- State and local law enforcement agencies; and
- Financial institutions in connection with anti-money laundering compliance, upon the consent of the reporting company.
This article is for general information purposes and is not intended to be and should not be taken as legal advice. If legal advice is needed, contact your Moye White attorney.