Corporate Transparency Act
By Katherine David and Scott Dondershine
Congress enacted the Corporate Transparency Act (“CTA”) on January 1, 2021. The CTA requires certain companies to report “beneficial ownership” and “company applicant” information with the Financial Crimes Enforcement Network (“FinCEN”). See 31 U.S.C.A. §5336. The purpose of the CTA is “to help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity”. Any willful failure to comply with the CTA’s reporting requirements can result in civil and criminal penalties, including a maximum civil penalty of $500 for each day the violation continues (there does not appear to be a cap) and a fine of up to $10,000 and imprisonment for up to two years for any criminal violations. 31 U.S.C.A §5336(h).
FinCEN has published proposed rules at 31 CFR §1010 (published at 86 Fed. Reg. 69920-69974 (Dec. 8, 2021)) and final regulations should be finalized soon. There are a myriad of questions pertaining to the requirements discussed below which hopefully will be clarified once the final regulations are adopted.
Who is required to file report with FinCEN?
Reporting companies are required to report with FinCEN, and the term “reporting companies” is broadly defined, including both domestic reporting companies and foreign reporting companies. A domestic reporting company is “any entity that is created by the filing of a document with a secretary of state or similar office of a jurisdiction within the United States.” A foreign reporting company is “any entity formed under the law of a foreign jurisdiction that is registered to do business in the United States.”
Who is not required to file a report with FinCEN?
While it appears that essentially every company must file a report based on the definition of “reporting companies”, the CTA provides for 23 types of companies that are exempt from the reporting requirements. Many of the exemptions apply to companies that are already regulated by other state or federal regulations including, public utilities, certain public accounting firms, SEC reporting companies, investment advisors, insurance companies and banks. There is also an exemption for “large operating companies” which is defined as a company that: (1) employs more than 20 full time employees in the United States, (2) filed in the previous year a federal income tax return demonstrating more than $5 million in revenue (excluding revenue sourced outside of the U.S.), and (3) has an operating presence at a physical office within the United States. In addition, companies that are subsidiaries of an exempt company are also excluded.
What information must be reported?
A reporting company must file basic information about the company itself including the company’s full name, trade name or DBA, business street address, jurisdiction of formation, and taxpayer ID number. In addition, companies must disclose information about each “beneficial owner” including, (1) full legal name; (2) date of birth; (3) current residential or business street address; and (4) a unique identifying number from an acceptable identification document, such as a passport, personal identification card, driver’s license (and the image of the document) or a FinCEN unique ID.
For “company applicants”, reporting companies must submit each company applicant’s legal name, date of birth and unique identifying number from an acceptable identification document. If the company applicant is filing information documents as part of its job, the address submitted for the company applicant should be its business address.
The proposed regulations discuss an alternative way of complying with the above requirements. See 31 CFR 1010.380(b)(5). Under the proposed regulations, an individual may obtain a FinCEN identifier to use in lieu of the above-described information. FinCEN should provide, hopefully with the final regulations, additional guidance about how to apply for an acceptable identifier.
Who is a beneficial owner or company applicant?
A beneficial owner is anyone who either (1) exercises substantial control over the reporting company or (2) owns or controls at least 25% of the entity’s ownership interests. Exercising substantial control includes (a) serving as a senior officer, (b) having authority over the appointment or removal of any senior officer or a majority (or dominant minority) of the board of directors (or similar body) of a reporting company, or (c) directing, determining or substantially influencing important company matters. Exercising substantial control can also include forms other than the three specific indicators listed above. For instance, the proposed regulations discuss joint ownership, control of an interest owned by another person, and holding an interest as a settlor, trustee, or beneficiary of a trust or similar arrangement. See 31 CFR 1010.380(d)(3)(ii).
The proposed regulations also describe who is a company applicant. See 31 CFR 1010.380(e). In the case of a domestic reporting company, a company applicant is the individual who files the document that forms the entity, including anyone who directs or controls the filing of the document by another person. In the case of a foreign reporting company, a company applicant is the individual who files the document that first registers the entity to do business in the United States.
When does a company have to report?
Reporting companies must file their initial report within 14 calendar days of formation. For pre-existing entities, their initial report is due not later than one year after the proposed regulations are finalized. For entities that were once exempt from having to report but are no longer exempt, the initial report is due within 30 calendar days of the date that the exemption criteria are no longer met. A reporting company is also responsible for updating its information when (1) there is any change to information previously reported and, must do so within 30 days of said change, (2) when the reporting company becomes an exempt company or (3) within 30 days of settlement of the estate of a deceased beneficial owner.
What does this mean for my company?
The CTA does not go into effect until final regulations are adopted which is expected to be by the end of 2022. There is a lot of ambiguity in the CTA that hopefully will become clearer once the final regulations are adopted.
In the meantime, companies should assess whether they qualify as reporting companies, gather the information they will be required to report to FinCEN, and consider internal procedures they will need to adopt to ensure that their reported information remains compliant and up to date.
Please let us know if you have any questions about the new rules after they are finalized or in the meantime.
This Client Alert is intended as an introduction only to the topics addressed – it is not a full discussion of the issues presented. Let us know if you want to discuss the issues in this Client Alert in greater detail or if you have other questions.
DISCLAIMER. This Client Alert does not provide legal advice. We are providing it for general informational purposes only.