Practical Issues for Entity Management
The Corporate Transparency Act (CTA) is new legislation passed by Congress as part of the Anti-Money Laundering Act of 2020. This legislation sets forth uniform beneficial ownership information (BOI) regarding reporting requirements for corporations, limited liability companies, and other related entities created in or registered to do business in the United States.
The CTA is designed to protect the U.S. financial system from illicit financial activity and national security threats. The CTA empowers the Financial Crimes Enforcement Network (FinCEN)
On September 30, 2022, FinCEN published a Final Rule (Rule) which, in effect, means institutions must be prepared to either identify an exemption or disclose certain BOI information on behalf of U.S. and non-U.S. entities. (See 31 CFR 1010.380.) FinCEN expects the Rule will help efforts to set a clear federal standard for incorporation practices and protect against vital U.S. national security interests and interstate and foreign commerce.
Who Must File a Report?
Any entity that meets the threshold of a “reporting company” must file a Beneficial Ownership Information Report (BOI report).
The Rule defines a domestic reporting company to mean a “corporation, limited liability company, or 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 Indian tribe.”
A foreign reporting company is defined as a “corporation, limited liability company, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.”
Based on the foregoing, FinCEN expects limited liability partnerships, limited liability limited partnerships, business trusts and most limited partnerships to submit BOI reports. Certain entities are excluded from the definition of a "reporting company" to the extent that they are not created by a filing with a secretary of state or similar office. Domestic and foreign groups that have U.S. subsidiaries will need to evaluate their own circumstances to determine whether they qualify for an exception.
Deadlines
Regulations for new formations will take effect beginning on January 1, 2024. Existing reporting companies will have an additional year from the effective date; therefore, an initial BOI report must be filed with FinCEN no later than January 1, 2025. Reporting entities created on or after January 1, 2024, will have 30 calendar days to file their initial BOI report.
Failure to Comply
Failure to comply with CTA reporting requirements can have significant adverse consequences, including civil penalties of up to $500 per day and criminal fines of up to $10,000 and imprisonment for up to two years.
Takeaways
The CTA is a step toward protecting the U.S. financial system from illicit use and fraudulent actors from abusing legal entities. In turn, initial reports will help making the BOI reporting process a natural part of formation and registration process for companies and ensure they are properly organized. The Rule also acts as a safeguard for those entities involved in mergers and acquisitions, consequently becoming an important risk consideration when conducting due diligence.
FinCEN is in the process of creating forms by which reporting companies will report beneficial ownership information. While the new law does not take effect until January 1, 2024, beneficial owners should review these new measures with legal counsel to determine whether they fall within an exemption under the Rule; or otherwise review their entity and evaluate their reporting obligations.
We will continue monitoring developments with the CTA and other information from FinCEN.
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