On September 29, 2022, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule implementing a beneficial ownership information reporting requirement pursuant to the bipartisan Corporate Transparency Act (CTA). The CTA requires certain domestic and foreign entities, called reporting companies, to provide beneficial ownership information to FinCEN. This information will be maintained in a beneficial ownership database accessible by authorized government authorities and financial institutions.
The CTA is a major step forward in combating money laundering, as it will provide law enforcement with valuable information about the individuals who own and control reporting companies. The goal is to weed out bad actors who seek to conceal their ownership of business entities through the use of shell companies.
What are Reporting Companies?
The CTA defines reporting companies broadly, including any corporation, LLC, or other entity created by filing a document with the appropriate state entities (often the Secretary of State) and registered to do business in the United States.
The final rule also describes two types of reporting companies: domestic reporting companies and foreign reporting companies. A domestic reporting company is any entity created by filing a document with the Secretary of State or a similar office. A foreign reporting company is an entity created in a foreign country registered to do business in the U.S. by filing a document with the Secretary of State or a similar office.
Exceptions to the Beneficial Ownership Information Reporting Requirement
Because the CTA’s focus is on shell companies, it provides several exceptions for entities already subject to reporting requirements. The following types of entities are exempt from reporting requirements under the CTA:
- Securities issuers
- Domestic governmental authorities
- Domestic credit unions
- Depository institution holding companies
- Money transmitting businesses
- Brokers or securities dealings
- Securities exchange or clearing agencies
- Other Securities Exchange Act of 1934 entities
- Registered investment companies and advisors
- Venture capital fund advisors
- Insurance companies
- State-licensed insurance producers
- Commodity Exchange Act registered entities
- Accounting firms
- Public utilities
- Financial market utilities
- Certain pooled investment vehicles
- Tax-exempt entities
- Entities assisting tax-exempt entities
- Large operating companies
- Subsidiaries of certain exempt entities
- Inactive businesses.
What Must be Reported?
Reporting companies must provide the following information:
- Each beneficial owner’s name, date of birth, address, and a unique identifying number from an acceptable identification document (e.g., driver’s license or passport).
- The reporting company’s name, as well as any trade names or DBA names.
- The street address of the reporting company’s principal place of business.
- The reporting company’s jurisdiction of formation.
- Foreign reporting companies must provide the jurisdiction where it first registered to do business.
- The reporting company’s taxpayer identification number (EIN).
When these reports must be submitted depends on whether the reporting company is newly formed or an existing entity. Reporting companies formed after January 1, 2024, must report the required information within 30 days of their formation. Existing entities must provide the required information by January 1, 2025.
In addition, if there are any changes in the information the reporting company provides, the reporting company must file an updated report within 30 calendar days after the change occurs.
What is “Beneficial Ownership?”
A beneficial owner is any individual who, directly or indirectly, exercises substantial control over the entity or owns or controls at least 25% of the entity. An individual is considered to exercise substantial control if they (1) serve as a senior officer of the reporting company, (2) have authority over the appointment or removal of any senior officer or a majority of the board, (3) have substantial influence over important matters, or (4) have any other form of substantial control.
There are also individuals who are excluded from the definition of beneficial owners and, therefore, will not need to be reported:
- Minor children, as long as the child’s parents’ or guardians’ information is reported,
- An individual acting as an intermediary or agent on behalf of another,
- A person acting solely as an employee and not a senior officer,
- An individual whose only interest in the reporting company is through a right of future inheritance, and
- Creditors of a reporting company unless they are considered a beneficial owner by means of substantial control or equity ownership.
Penalties for Violating CTA
Violating the beneficial ownership information reporting requirements of the CTA by providing false or incomplete information can result in significant penalties, including fines of up to $10,000 and imprisonment for up to two years.
However, a safe harbor provision allows entities to correct their reports if they have submitted inaccurate information to FinCEN. Entities that discover that they have provided inaccurate information have 30 days to correct their report voluntarily. This safe harbor provision was designed to ensure that entities that make an honest mistake will not be unduly penalized.
This article is intended to provide a brief overview of the Corporate Transparency Act. It is not a substitute for speaking with an expert advisor. If you’d like to learn more, please contact your attorney.