In January 2021, Congress enacted the Corporate Transparency Act (“CTA”), which is intended to bring the U.S. into compliance with international anti-money laundering standards. It will primarily achieve this by requiring certain entities to register with the Financial Crimes Enforcement Network (“FinCEN”) and requiring beneficial owners of those entities to identify themselves as such and provide FinCEN with certain limited personal information.
Effective Dates of the CTA
The CTA goes into effect in two phases:
- January 1, 2024 for companies formed or registered from January 1, 2024 onward; and
- January 1, 2025 for companies already formed or registered before January 1, 2024.
Entities Required to Report and Exempt Entities
Entities that will come under the purview of the CTA include limited liability companies, corporations, and any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Native American tribe, including statutory trusts (but not common law trusts) (“Reporting Companies”). Although broadly inclusive, there are thirty-three (33) entities that are exempt from reporting altogether. Some notable exempt entities include:
- entities with over twenty (20) full-time U.S. employees, $5 million in gross revenue, and a physical U.S. office;
- financial services institutions that are already regulated by the Securities and Exchange Commission, Federal Deposit Insurance Corporation, or Comptroller of the Currency;
- subsidiaries 100% owned by exempt entities; and
- churches, charities, 501(c) nonprofit entities, and charitable trusts.
Entities Subject to Reporting Under the CTA
Reporting Companies must report certain limited information on the Company itself, a “Company Applicant,” and a “Beneficial Owner.”
A Company Applicant is one who files, or directs or controls the filing of, an application to form the entity or enable it to do business in the U.S. (which could be the outside lawyer or paralegal that causes the filing of an application for a new entity).
A Beneficial Owner is each individual who exercises “Substantial Control” over an entity or owns or controls twenty-five percent (25%) or more of the ownership interest in an entity.
Among those who exercise Substantial Control are:
- senior officers of the reporting company;
- individuals who can appoint or remove senior officers or a majority of the board of directors of the reporting company;
- individuals who direct, determine, or have substantial influence over important matters of the reporting company; and
- individuals who have any other form of substantial control over the reporting company.
The definition of Beneficial Owner is intentionally broad, but does contain a few exemptions from individuals having to provide their personal information in respect of a Reporting Company, including for:
- individuals acting as nominees, agents, intermediaries, or custodians on behalf of another individual;
- individuals acting as employees (excluding senior officers);
- individuals whose interest in the reporting entities are through rights of inheritance; and
A Reporting Company must report the following information about itself:
- its full legal name and any d/b/a names;
- the street address of its principal place of business;
- for a foreign Reporting Company, the street address of the primary location in the U.S where it conducts business;
- for a domestic Reporting Company, the State or Tribal jurisdiction where it was formed;
- for a foreign Reporting Company, the State or Tribal jurisdiction where it was first registered to do business; and
- the Tax Identification Number (TIN) of a domestic Reporting Company or a foreign TIN for a foreign Reporting Company without a U.S. TIN.
Besides reporting information about itself, Reporting Entities must also report the following information about each Beneficial Owner and Company Applicant:
- full legal name;
- dates of birth;
- current residential or (for Company Applicants only) business street address;
- unique identifying numbers from an acceptable identification document, such as passports and drivers’ licenses; and
- a copy of the identification document.
All reporting will be done electronically through a website being developed by FinCEN.
Reporting Entities have a continuing obligation to update information about themselves and their Beneficial Owners, but not about the Company Applicants. Changes to Beneficial Ownership and exemption status must be reported within thirty (30) days of such changes.
Penalties for Non-Compliance
Willfully providing false information, or willfully failing to update information, to FinCEN can result in civil penalties of up to $500 per day and criminal penalties of up to two (2) years of imprisonment and fines of up to $10,000. However, reporting entities have a ninety (90) day window to correct inaccurate information after submitting such information in good faith without actual knowledge that the information was incorrect.
Confidentiality of Information
FinCEN, and those with access to personal information submitted to FinCEN, have an obligation under the statute to keep such information confidential. FinCEN may only disclose such personal information in very limited circumstances to a statutorily defined group of domestic and international governmental authorities and financial institutions. Further, knowingly disclosing or using such personal information without authorization can result in civil fines of up to $500 per day and criminal penalties of up to ten (10) years of imprisonment and fines of up to $500,000.