On January 1, 2024, the Corporate Transparency Act (the “CTA”) will go into effect. The CTA is a U.S. law (31 U.S. Code § 5336), enacted January 1, 2021, that aims to combat money laundering and other illicit activities. The CTA requires reporting entities to disclose certain beneficial ownership information and other data to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury. While FinCEN is still finalizing details of CTA implementation, it is important that business entities begin planning now to ensure timely compliance and avoid unnecessary surprises.

In this article, one of a series of alerts we are providing to help our clients understand the new reporting requirements and manage compliance, we take a closer look at the beneficial ownership information being collected pursuant to the CTA.

What Beneficial Ownership Information must be reported?

Beneficial Ownership Information refers to certain identifying information about the individuals who directly or indirectly own or control a company. Beneficial Ownership Information includes the name, date of birth, street address (in most cases, a residential address), unique identification number (e.g. passport or driver’s license number), and an image of the document containing such unique identification number.

Who is required to report Beneficial Ownership Information?

“Reporting Companies” must file reports with FinCEN containing the Beneficial Ownership Information of its beneficial owners (and containing certain information regarding the Reporting Company itself, and in certain cases, information regarding its “company applicants”). Reporting Companies include domestic corporations, partnerships, LLCs and all other entities created by a filing with a secretary of state or equivalent office, as well as foreign entities that are registered to do business in any U.S. state. Certain types of entities are exempt.

Importantly, an individual may apply for a FinCEN Identifier by providing that individual’s Beneficial Ownership Information directly to FinCEN. The Reporting Company then reports the individual’s FinCEN Identifier on its reports to FinCEN.

Individuals may desire FinCEN identifiers for privacy purposes, if the individual would prefer to submit their personal data directly to FinCEN rather than through the Reporting Company, and for efficiency, where an individual is the Beneficial Owner of numerous Reporting Companies. If an individual obtains a FinCEN Identifier, that individual must file updates and corrections to the reported information to FinCEN.

Who are Beneficial Owners according to the CTA?

“Beneficial Owners” are individuals who directly or indirectly own or control 25% or more of the ownership interests in an entity, or who exercise substantial control over the entity.

Ownership interests include equity, profits interests, interests convertible into equity or profits interests, options to buy equity, and any other instrument, arrangement or relationship used to establish ownership.

“Substantial control” by an individual over an entity means an individual who (1) serves as a senior officer (which includes the president, CEO, COO, CFO, general counsel, or any other officer performing a similar function), (2) has the authority to appoint or remove any senior officer or a majority of the board of directors (or similar body), (3) directs, determines or has substantial influence over important decisions (including the sale of principal assets, major expenditures or investments, issuance of equity, incurrence of significant debt, selection or termination of business lines, or entry into significant contracts), or (4) has any other form of substantial control over the Reporting Company.

Exceptions to the definition of Beneficial Owner include:

• An individual whose only interest in a Reporting Company is a future interest through a right of inheritance;
• An employee of the Reporting Company, acting solely as an employee (provided that the person is not a senior officer);
• An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual (in which case that other individual would be the Beneficial Owner);
• Certain creditors of the Reporting Company; and
• Minor children (however, the Reporting Company must report information regarding the minor child’s parent or legal guardian).

When must Beneficial Ownership Information be reported to FinCEN?

Reporting Companies formed or registered:

• before January 1, 2024 have until January 1, 2025 to file their initial Beneficial Ownership Information Reports.
• during 2024 must file their initial Beneficial Ownership Information Reports within 30 days of formation, although FinCEN has proposed an amendment to the final rule to extend this deadline to 90 days for Reporting Companies formed or registered in 2024.
• after January 1, 2025 have 30 days to file their initial Beneficial Ownership Information reports.

Any corrections or updates to a previously filed report must be made within 30 days, including any change in the Beneficial Owners.

Who has access to Beneficial Ownership Information?

Beneficial Ownership Information is non-public and subject to statutory confidentiality provisions; however, law enforcement agencies and certain other government agencies will have access. Beneficial Ownership Information will be provided upon authorized request by a federal agency engaged in national security, intelligence, or law enforcement, or to a state, local, or Tribal law enforcement agency if a court authorizes the agency to seek the information in a criminal or civil investigation.

With the consent of the Reporting Company, a financial institution can obtain Beneficial Ownership Information to facilitate compliance with the financial institution’s customer due diligence requirements.

How should an entity prepare to provide and maintain its Beneficial Ownership Information?

Failure to comply with the Beneficial Ownership reporting requirements of the CTA can result in significant penalties including fines and imprisonment. Therefore, businesses subject to the CTA should take steps to ensure compliance, including the following:

• Establish a policy and plan for complying with the CTA, including collecting Beneficial Ownership Information.
• Identify individuals responsible for handling CTA reporting.
• Identify Reporting Companies and their respective Beneficial Owners.
• Establish internal procedures to monitor changes in ownership and control of each Reporting Company, and to update Beneficial Ownership information as necessary.
• Be aware of deadlines for initial submissions and updates, and file reports on time.
• Establish internal safeguards for Beneficial Owner Information, such as to restrict access to appropriate persons in the business.