The deadline for Corporate Transparency Act (CTA) compliance is fast approaching. Companies formed or registered to do business in the United States prior to January 1, 2024 must file initial beneficial ownership reports with the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) by January 1, 2025, unless exempt. With only months left before the deadline, companies should act now to ensure compliance with the CTA’s reporting requirements.
This LawFlash provides a high-level Q&A overview of the CTA and its beneficial ownership reporting requirements.
WHAT IS THE CTA?
On January 1, 2021, the US Congress enacted the CTA to establish a reporting regime to make beneficial ownership information (BOI) of certain entities available to law enforcement and, in some circumstances, financial institutions for use in combating money laundering. The CTA applies to both domestic and foreign entities that are formed or registered to do business in the United States.
WHO IS REQUIRED TO REPORT BOI?
Under the CTA, a “reporting company” must report certain BOI to FinCEN. A “reporting company” is defined as any corporation, limited liability company, or similar entity that is (1) created by filing a formation document with the US Secretary of State or a similar office under the laws of a US state or American Indian tribe, or (2) is formed under the law of a foreign country and has registered to conduct business in the United States by filing a document with the Secretary of State or a similar office under the laws of a US state or American Indian tribe.
While the definition of “reporting company” is broad, there are 23 exemptions to the definition. The exemptions include, but are not limited to, the following:
- Public companies
- Certain highly regulated financial institutions, such as banks, credit unions, brokers, dealers, and exchanges and clearing agencies
- Investment companies and investment advisers
- Insurance companies operating within the United States
- Public utility companies
- Accounting firms
- Pooled investment vehicles
- Tax-exempt entities
- Entities that (1) employ more than 20 employees, (2) filed a federal tax return demonstrating more than $5 million in gross receipts or sales for the previous year, and (3) have an operating presence within the United States
- Wholly owned subsidiaries of certain exempt entities
All potential reporting companies should carefully review the exemptions to determine whether any may be available to them.
WHAT IS REQUIRED TO BE REPORTED AND WHEN?
Reporting companies must file a report with FinCEN containing the following information with respect to the entity:
- Full legal name
- Any trade names or “doing business as” (DBA) names
- Complete current address of principal place of business in the United States (if a domestic reporting company) or primary location in the United States where the company conducts business (if a foreign reporting company)
- Jurisdiction of formation
- The state or tribal jurisdiction where the company first registers (if a foreign reporting company)
- Taxpayer ID
Additionally, reporting companies must report the following information for each beneficial owner:
- Full legal name
- Date of birth
- Current residential or business street address
- An image of one of the following (including the unique identifying number and issuing jurisdiction):
- US passport
- State driver’s license
- Identification document issued by a state, local government, or tribe
- A foreign passport
The CTA defines a “beneficial owner” as an individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls not less than 25% of the ownership interests of the entity. The deadline for compliance with the CTA depends on the date a reporting company was formed: (1) reporting companies formed prior to January 1, 2024 must file initial BOI reports by January 1, 2025; (2) reporting companies formed after January 1, 2024 must file initial BOI reports within 90 days of the date of formation; and (3) reporting companies formed on or after January 1, 2025 must file initial BOI reports within 30 days of the date of formation. If any information in the reports filed with FinCEN changes, an updated report must be filed within 30 days.
Failure to comply with the CTA’s reporting requirements can result in both criminal and civil penalties, including fines of $500 per day (not to exceed $10,000) and up to two years in prison.
WHO ARE THE KEY PARTIES WITH ACCESS TO BOI?
BOI reported to FinCEN will be stored in a secure, nonpublic database using rigorous information security methods and controls typically used by the federal government to protect non-classified yet sensitive information systems at the highest security level.
FinCEN will permit federal, state, local, and tribal officials, as well as certain foreign officials who submit a request through a US federal government agency, to obtain BOI for authorized activities related to national security, intelligence, and law enforcement. Financial institutions can access BOI in certain circumstances, with the consent of the reporting company. Their regulators will also have access to BOI when supervising the financial institutions.
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