On September 30, 2022, the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) finalized regulations to implement the Corporate Transparency Act (CTA), originally passed under the 2021 National Defense Authorization Act. The CTA establishes uniform reporting requirements for certain business entities created in or registered to do business in the United States and authorizes FinCEN to collect and disclose information to authorized government authorities and financial institutions in order to assist law enforcement to combat corruption, money laundering, terrorist financing, tax fraud, and other illicit activity. The regulations will be effective starting January 1, 2024.
Who Must Report?
The rule identifies two types of reporting companies: domestic and foreign.
- A domestic reporting company is a corporation, limited liability company (LLC), 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 a corporation, LLC, 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.
The CTA exempts from the definition of “reporting company” 23 specific types of entities. Many of these exempt entities are already subject to substantial federal and/or state regulation or already have to provide their beneficial ownership information to a governmental authority. For example, specific exemptions are provided for:
- “Large operating companies,” defined as entities that (a) employ more than 20 employees on a full-time basis in the United States, (b) filed in the previous tax year a federal income tax return demonstrating more than $5 million in gross receipts or sales of other entities owned by the entity, and (c) have an operating presence at a physical office in the United States.
- Entities that are subject to other regulatory reporting (e.g., SEC reporting entities, tax-exempt entities, banks, insurance companies, public utilities, investment companies, etc.).
- Entities that are owned entirely by one or more exempt entities.
What Information Must Be Reported?
While the FinCEN forms and instructions are not yet available, the regulations require that the report must include information concerning the company, the “beneficial owners” of the company and, for entities formed after January 1, 2024, the “company applicant.”
Reporting Company Information
The company information required to be reported includes: (a) the company’s full legal name and any d/b/a names, (b) street address of its principal place of business, (c) jurisdiction of formation or registration, and (d) tax identification number (or, if a TIN has not been issued, alternatives include a Dun & Bradstreet Data Universal Numbering System (DUNS) number or Legal Entity Identifier number).
Beneficial Owner Information
The information required to be reported for a “beneficial owner” of the reporting company includes: (a) full legal name, (b) date of birth, (c) current residence street address, and (d) a unique identifying number from an acceptable identification document (e.g., driver’s license or passport) and image of such document which includes both the identifying number and photograph. Beneficial owners may alternatively provide their FinCEN identifiers (unique identifying numbers that FinCEN issues to individuals or entities upon request).
- A “beneficial owner” is any individual who directly or indirectly exercises “substantial control” over the reporting company or owns or controls (including through a trust) not less than 25% of the “ownership interests" in the reporting company.
- “Substantial control” means: (a) serving as a “senior officer” of a reporting company, (b) having authority over the appointment or removal of any senior officer of the reporting company or a majority of the board of directors (or similar body), and (c) having the right to direct, determine, or have substantial influence over important decisions made by a reporting company. “Senior officer” includes any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.
- “Ownership interests” in an entity include both equity and other types of interests, such as capital or profits interest or convertible instruments, warrants, or rights or other options or privileges to acquire equity, capital or other interests in a reporting company. Debt instruments are included if the holder can exercise the same rights as one of the specified equity or other interests, including conversion rights.
- There are five exceptions to the definition of beneficial owner: (i) a minor child, provided that a parent or guardian’s information is reported; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an individual acting as an employee of a reporting company who is acting “solely as an employee” and deriving control or economic benefits “solely from the[ir] employment status”; (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance; and (v) a creditor of a reporting company.
Company Applicant Information
For entities formed after January 1, 2024, the information required for a “company applicant” includes the same information required for a beneficial owner, except a company applicant who forms an entity in the course of the applicant’s business may use the street address of such business. For entities formed prior to January 1, 2024, the information required for a “company applicant” does not include any details of the company applicant other than to report that the reporting company was created before January 1, 2024.
- A “company applicant” is the person who files a document to form the reporting company (or in the case of a foreign entity, filing the document to register to do business in the United States) and includes any person who directs or controls filing (such as an attorney supervising the work of a paralegal).
When Will Reporting Be Required?
The deadline for submitting reports under the CTA depends on the formation date of the reporting company:
- For an entity formed before January 1, 2024, reports are due within one year (by January 1, 2025).
- For an entity formed after January 1, 2024, reports are due 30 days after the entity receives notice that it has been registered to do business or the secretary of state (or similar officer) provides public notice of the entity’s registration.
For entities that need to update their information, or for entities that have previously been exempt from reporting but are no longer exempt, changes in information must be filed within 30 days of the change. If a reporting company needs to make a correction, the updated report must be filed within 30 days of the date the entity knew or should have known the information was inaccurate.
Who Will Be Able to Access This Information?
The CTA does not permit public access to information concerning beneficial owners. On December 15, 2022, FinCEN issued a Notice of Proposed Rulemaking for public comment on its proposed rules governing access and safeguarding of information concerning beneficial owners to be finalized prior to the January 1, 2024 effective date. FinCEN proposed limiting access to information concerning beneficial owners to the following groups and purposes:
- federal agencies engaged in national security, intelligence, or law enforcement activities;
- state and local enforcement agencies, with prior court authorization;
- financial institutions for customer due diligence requirements, as well as the federal regulators supervising them;
- foreign law enforcement agencies, judges, prosecutors, central authorities, and other agencies that meet specific criteria, and whose requests are made under an international treaty, agreement, or convention, or via law enforcement, judicial, or prosecutorial authorities in trusted foreign countries; and
- U.S. Treasury employees whose official duties require beneficial owner inspection or disclosure, or for tax administration.
Those who are or may be impacted by the CTA and its mandated reporting requirements should start planning now and establish a process for initial reporting and any subsequent reports, noting the very short 30-day filing window.
Please contact Paul Allaer, Mark Conway or Ashley Weyenberg if you have any questions.
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