Several years ago, Congress passed the Anti-Money Laundering Act of 2020, which became effective law on January 1, 2021 (the “Act”). Included in the Anti-Money Laundering legislation was the Corporate Transparency Act (“CTA”). Congress’s intent for passing the CTA is to assist in the prevention of money laundering and terrorist financing through anonymous shell companies by creating new reporting requirements. Effective as of January 1, 2024, the CTA requires certain legal entities (corporations, limited liability companies, partnerships and trusts formed or registered to do business in the U.S.) to file information concerning their beneficial owners with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury.[1] Below is a brief overview of (a) entities that need to comply with the CTA; and (b) the information required for a submission.
Reporting Companies
The CTA creates reporting requirements for certain domestic and foreign legal entities. These entities, known as “Reporting Companies” under the CTA, include:
- Domestic corporations, limited liability companies, or any entities created by the filing of a document with the secretary of state or similar office under the law of a state or Indian Tribe.
- Foreign corporation, limited liability companies, or any entities formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or similar office.[2]
Exempt from the definition of Reporting Companies are twenty-three (23) entities, including without limitation, “large operating companies,” banks, money services businesses, securities exchange or clearing agencies, and investment companies.[3] An entity that qualifies for an exemption is not required to submit a “Beneficial Ownership Interest” (“BOI”) report to FinCEN. For example, under the large operating company exemption, companies that employ (i) more than twenty (20) full-time employees in the U.S., (ii) have a physical office within the U.S., and (iii) have filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales domestically, are not Reporting Companies. [4]
Beneficial Owners and Company Applicant
The Reporting Companies must report information about their Beneficial Owners (defined herein) to FinCEN. Under the CTA, a “Beneficial Owner” is an individual who directly or indirectly either:
(1) exercises substantial control over a Reporting Company, or
(2) owns or controls at least 25 percent of the ownership interests of a Reporting Company.[5]
Under the CTA, an individual has substantial control over a Reporting Company if the individual is (a) a senior officer; (b) has the authority to appoint or remove certain officers or a majority of directors of the reporting company; (c) is an important decision maker for the company regarding the business, finance or structure; or (d) has any other form of substantial control.[6] The last requirement, “has any other form of substantial control,” is a catch-all that accounts for different corporate structures that may have different indicators for control other than the criteria listed under the CTA.
If an individual is found to be a Beneficial Owner, a BOI report must be filed. Included in the BOI report is information on the Reporting Company, its Beneficial Owners, and its Company Applicants. As to each Beneficial Owner, the report must include: (a) the individual’s name; (b) date of birth; (c) residential address; (d) a unique identifying number from an acceptable form of identification (e.g., passport or U.S. driver’s license); and (e) an image of the document containing the unique identifying number.[7]
In addition to the Beneficial Owner, information regarding the “Company Applicant” must be included in the BOI report. The Company Applicant is the person who “directly files the document” that created (or registered) the Reporting Company (in the case of a domestic entity) and if there is more than one individual involved, the individual who is “primarily responsible for directing or controlling such filing.”[8] The Company Applicant must be an individual and can be the Beneficial Owner or the attorney that completed the filing. However, companies created or registered prior to January 1, 2024 do not need to report information on their company applicants, but should nevertheless consider reporting the information.[9]
FinCEN Filing Deadlines
Reporting Companies must file BOI reports electronically through FinCEN online. For Reporting Companies formed prior to January 1, 2024, the BOI report must be filed on or before January 1, 2025. Reporting Companies formed after January 1, 2024 will have ninety (90) calendar days after receiving actual or public notice that the company’s creation or registration is effective. Lastly, if the Reporting Company was created or registered on or after January 1, 2025, it will have thirty (30) calendar days from actual or public notice that the creation or registration is effective.[10]
Failure to Report
Failure to report complete, updated or accurate BOI reports to FinCEN may result in civil or criminal penalties. Civil penalties include up to $500 for each day the violation continues or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.[11] To comply with these requirements, companies may also need to revise operating, shareholder, or joint venture agreements to assign responsibility for tracking and reporting beneficial owner information.
Conclusion
With the implementation of the CTA, it is important that both newly formed and previously formed entities understand the applicability of the CTA reporting requirements. Entities that fail to adhere to the CTA filing requirements may be subject to civil and criminal penalties. Entities should become familiar with the CTA and may want to consult an attorney to assist with these filings and understanding these new requirements.
[1] Robert Wilson Downes, Scott E. Ludwig, Thomas Rutledge and Lorraine A. Smiley, The Corporate Transparency Act – Preparing for the Federal Database of Beneficial Ownership Information, AMERICAN BAR ASSOCIATION (Aprile 16, 2021) https://www.americanbar.org/groups/business_law/resources/business-law-today/2021-may/the-corporate-transparency-act/.
[2] 31 USC § 5336(a)(3).
[3] 31 USC § 5336(a)(11)(B).
[4] 31 USC § 5336(a)(11)(B)(xxi).
[5] 31 USC § 5336(a)(3).
[6] Small Entity Compliance Guide, FINANCIAL CRIMES ENFORCEMENT NETWORK (December 2023).
[7] Jonathan B. Wilson, Corporate Transparency Act: A Must-Do List for the Looming Deadline, THE AMERICAN LAW INSTITUTE: Continuing Legal Education (Nov. 21, 2023).
[8] Jonathan B. Wilson, Corporate Transparency Act: A Must-Do List for the Looming Deadline, THE AMERICAN LAW INSTITUTE: Continuing Legal Education (Nov. 21, 2023).
[9] Beneficial Ownership Information Reporting, Frequently Asked Questions, FINANCIAL CRIMES ENFORCEMENT NETWORK (Jan. 4, 2024) https://www.fincen.gov/boi-faqs.
[10] Beneficial Ownership Information Reporting, Frequently Asked Questions, FINANCIAL CRIMES ENFORCEMENT NETWORK (Jan. 4, 2024) https://www.fincen.gov/boi-faqs.
[11] Beneficial Ownership Information Reporting, Frequently Asked Questions, FINANCIAL CRIMES ENFORCEMENT NETWORK (Jan. 4, 2024) https://www.fincen.gov/boi-faqs.
