What this is: The Corporate Transparency Act is a law aimed at preventing criminals from using business entities to commit crimes. The goal of the CTA, along with its enforcement guidelines, is to supply vital data to law enforcement, national security organisations and other parties in order to thwart criminals, terrorists, weapons proliferators and unscrupulous oligarchs from concealing illegal funds or assets within the United States.
What this means: There are many nuances to the law. Let’s answer some of the basic questions many of you have about what this is, what it does and what it means to you and your business.
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1. What Is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) was passed into law on January 1, 2021, after 13 years in the making. The CTA creates beneficial ownership disclosure requirements aimed to prevent criminals from using anonymously owned companies for illicit activities such as money laundering, tax evasion and terrorism financing. The CTA requires all “reporting companies” to disclose to the Financial Crimes Enforcement Network (FinCEN), personal identifying information for each of the “reporting company’s” “beneficial owners” and “company applicants.” FinCEN will store the information in a secure confidential database, not available to the public.
On September 29, 2022, FinCEN issued Final Rules on beneficial ownership information reporting (Final BOI Rules). FinCEN has indicated that the Final BOI Rules are the first of three sets of regulations that FinCEN is creating related to the CTA. In December 2022, FinCEN issued a Notice of Proposed Rulemaking (NPRM) for the second set of rules, which implements protocols for access to and disclosure of the beneficial ownership information (e.g., law enforcement, government agencies and financial institutions with permission from the reporting company). The period for public comment on this “Access” NPRM closed on March 20, 2023. FinCEN has one year from the CTA’s effective date to issue its third set of rulemaking, which will address amendments to the Customer Due Diligence section of the Bank Secrecy Act.
2. When Will It Take Effect?
Per the Final BOI Rules, the CTA’s effective date is January 1, 2024.
3. What Are Some Key Terms Found in the CTA?
A “reporting company” is defined in the CTA as “a corporation, LLC or other similar entity that is created by the filing of a document with the Secretary of State or a similar office under the law of a state or Indian Tribe; or formed under the law of a foreign country and registered to do business in the US by the filing of a document with such a filing office.” The CTA does not further define “other similar entity” and neither does FinCEN in its Final BOI Rules. But FinCEN does emphasise that “the core consideration for the purposes of the CTA’s statutory text and the final rule is whether an ‘entity’ is ‘created’ by the filing of the document with the relevant authority.”
A “beneficial owner” is defined in the CTA as an “individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, exercises substantial control over the entity, or owns or controls 25 percent or more of the ownership interests of the entity or receives substantial economic benefits from the assets of the entity.” The definition excludes minors and certain others. The Final BOI Rules define “substantial control” in more detail.
An “applicant” (referred to as a “company applicant” in the Final BOI Rules) is defined in the CTA as “any individual who files an application to form a corporation, limited liability company or other similar entity under the laws of a state or Indian Tribe; or registers or files an application to register a corporation, limited liability company or other similar entity formed under the laws of a foreign country to do business in the US.” The Final BOI Rules specify that the term “company applicant” means “the individual who directly files the document to create or register the reporting company, and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.”
4. What Do Reporting Companies Need to Report to FinCEN?
All reporting companies will be required to disclose to FinCEN the full legal name, date of birth, address and unique identifying number (e.g., unexpired state identification card number, unexpired driver’s license number or an unexpired passport number) of each of its beneficial owners and applicants and provide a scanned copy of the identifying document.
5. Are There Any Exemptions to the Reporting Requirements?
The CTA provides 23 exemptions to the reporting company definition, including any entity that: Employs more than 20 full-time employees in the US, in the previous year filed federal income tax returns in the US demonstrating more than $5 million in gross receipts or sales in the aggregate and has an operating presence at a physical office within the US. The exemptions in the CTA also include many industries that are already heavily regulated, such as banks and insurance providers, as well as publicly traded companies subject to SEC reporting.
6. When Does a Reporting Company That Is Formed on or After the January 1, 2024 Effective Date Need to File Its BOI Report?
For reporting companies that are newly formed or registered on or after the January 1, 2024 effective date, must file initial BOI reports within 30 days from the earlier of: “The date on which the reporting company receives actual notice that its creation (or registration) has become effective; or a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the reporting company has been created (or registered).” The initial BOI report must include the required information/documentation about the reporting company, its beneficial owners and its company applicants.
7. What About Existing Reporting Companies? When Do They Need to File BOI Reports?
Reporting companies that are in existence prior to the January 1, 2024 effective date must file their initial BOI reports within a year of the effective date. The initial BOI report must include the required information/documentation about the reporting company and its beneficial owners. Importantly, the Final Rules do not require these existing reporting companies to include company applicant information in their BOI reports. In its commentary to the Final BOI Rules, FinCEN noted the potential burden on existing reporting companies in having to locate company applicants and indicated that, for reasons explained in the commentary, the burden outweighs the potential usefulness of this information.
8. What if Inaccuracies Are Discovered in the Initial BOI Report After It's Filed, or if the Information That Is in the Initial BOI Report Changes?
The Final BOI Rules require reporting companies to correct any inaccurate information in the initial BOI report within 30 days from when the inaccuracy is discovered. For information that has changed since the initial BOI report filing, the reporting company has 30 days from the date of the change to file an updated report.
9. What Happens if a Reporting Company Fails to File a Report?
The CTA includes substantial civil and criminal penalties for wilful failure to report, wilfully providing false or fraudulent information and for unauthorised disclosure or use of the reporting information. Penalties for reporting violations can be as high as $10,000 or 2 years in prison, or both, and penalties for unauthorised disclosure or use violations can be up to $250,000 or 5 years in prison, or both (or higher if part of violating another law).
10. Where Can I Learn More?
We have resources to help you understand the history and impact of the CTA. Start with Key Points on the CTA and Beneficial Ownership Requirements, which is a brief video introduction to the CTA, created far in advance of recent developments.
And just in case you missed our first three webinars in this series, why not watch them On Demand as well? You’ll get a good sense of where this act started, what it means and where it’s going.