Congress enacted the Corporate Transparency Act (CTA) on January 1, 2021, as part of the National Defense Authorization Act. On December 8, 2021, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a notice of proposed rule-making, wherein it proposed regulations to implement CTA; and on September 29, 2022, FinCEN issued its Final Rule.
The CTA requires disclosure of certain company information (as described later), the company’s beneficial owners or persons having control over such company, and the company’s applicants. The CTA’s disclosure requirements (as summarized below) take effect on January 1, 2024. In sum, the CTA combats money laundering and other illicit conduct by attempting to thwart the improper use of shell companies. The CTA mandates “reporting companies” under its wide scope to identify “beneficial owners” and “company applicants.”
The CTA applies to existing and new corporations, limited liability companies, and similar entities that are (1) created by filing a document with the secretary of state or similar office in any U.S. state, territory, or federally recognized Native American Tribe, or (2) formed under the laws of a foreign company and registered to do business in the U.S. The CTA currently has twenty-three (23) exemptions that relieve certain entities from CTA obligations, such as large operating companies (i.e., companies with 20 or more full-time U.S. employees, more than $5 million in U.S.-sourced revenue, and a physical operating presence in the U.S.), issuers registered with the Securities and Exchange Commission, banks, insurance companies and inactive entities. FinCEN has the authority to expand on those exemptions but did not in its recent Final Rule.
Each reporting company must disclose the following information: (1) full legal name; (2) any trade name; (3) street address of principal place of business for a U.S. entity; or street address of primary location in U.S. where business is conducted for a foreign entity; (4) jurisdiction of formation; and (5) IRS taxpayer ID of the reporting company; or the identification number issued by foreign jurisdiction and the name of said jurisdiction for a foreign entity.
Under the Final Rule, a “beneficial owner” is defined as “any individual who, directly or indirectly, either (1) exercises substantial control over such reporting company; or (2) owns or controls at least 25 percent of the ownership interests of such reporting company.” Individuals who can exercise “substantial control” include senior officers; individuals with authority over the appointment or removal of senior officers or a majority of the board; and individuals who have “substantial influence over important decisions;” or those who have any other form of substantial control over the reporting entity. These broad categories may implicate third parties. There are some limited exceptions to a beneficial owner, such as minor children or individuals whose only interest is a future interest.
The Final Rule also mandates the disclosure of “company applicants” who are (1) the individual(s) who actually files the document creating the reporting entity or for foreign entities the document to register to do business in the U.S.; and (2) the individual(s) primarily responsible for directing or controlling the filing of the relevant document by another.
For each beneficial owner and company applicant, the following information must be provided by the reporting company: (1) individual’s full legal name; (2) date of birth; (3) current residential street address for all individuals other than company applicants or the business street address for company applicants; and (4) unique identifying number from an acceptable identification document and image of such document (such as a driver’s license) or individual FinCEN identifier.
The CTA may implicate trust and estate plans already in place. While a trust may not be a “reporting company,” it may hold interests in a reporting company, which may require the trustee and/or other ‘beneficial owner(s)’ to be disclosed.
Finally, the Final Rule establishes a timeline for compliance. Reporting companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports, while reporting companies created or registered after January 1, 2024, will have 30 calendar days after creation or registration to file their initial reports. Any changes in beneficial owners (e.g., death of an individual) will need to be reported to FinCEN within 30 calendar days.
In many ways, the CTA is an important statutory tool to modernize law enforcement. It does, however, encroach on private information that law-abiding individuals and entities have come to expect. Individuals and entities will benefit from receiving guidance to navigate the new CTA era. The “nuts and bolts” of compliance will be the subject of another article later this year. For more information, please contact Thomas B. Noonan or another BW attorney.