The Corporate Transparency Act (CTA) is a new federal law that requires certain business entities to report their Beneficial Owners to the Financial Crimes Enforcement Network (FinCEN).[1]  The law was enacted by Congress in January of 2021, and became effective January 1, 2024.  The purpose behind the law is to combat money laundering schemes and other financial crimes through business entities in the US.[2]  The CTA’s reporting obligations are estimated to extend to more than 30 million small business entities, including those in the oil and gas industry.  A summary of key provisions and reporting requirements of the CTA follows.

Who has reporting obligations under the CTA?

Companies that must report their Beneficial Owners to FinCEN are called “Reporting Companies.” Under the CTA, a “Reporting Company” is defined as a corporation, LLC, or similar entity created by the filing of a document with a US state or Indian tribe.[3]  It also includes entities formed under the laws of a foreign country that have registered to do business in any US state or tribal jurisdiction by filing a document with the state or tribe.[4]  Trusts may also fall under the definition of “Reporting Company” if they were formed in states where trusts are required to register with the state at their time of formation (this is rare).[5]

The CTA provides a long list of exemptions – 23, to be exact.[6]  Two (2) of the exemptions will commonly apply to companies in the energy industry: publicly traded companies and large operating companies.  Publicly traded companies registered with the SEC, but which are not securities reporting issuers or broker dealers are exempt.[7]  Also, large operating companies, defined as companies with more than twenty (20) full time employees with an operating presence at a physical office in the United States, with more than $5,000,000.00 in gross receipts in the previous tax year, among other qualifications, are exempt.[8]  Subsidiaries of exempt entities are also exempt.[9]  Careful consideration must be given to foreign entities operating in the United States to determine whether any exemptions apply.  Furthermore, even if a company is exempt at one point in time, it may not be later.

So, who should pay attention to the CTA?  Primarily, the owners of privately-owned entities with less than 20 full-time employees and less than $5,000,000.00 in gross receipts in the previous tax year.  This includes owners of entities created for estate planning purposes.

You can view the full list of exemptions and checklists to help determine if your entity qualifies for an exemption here, or contact us for assistance in determining if your company is exempt.

What information must be reported?

Reporting Companies who are not exempt must report their “Beneficial Owners” to FinCEN.[10]  Who is a “Beneficial Owner?”

“Beneficial Owners” under the CTA are individuals who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (1) exercise substantial control over a Reporting Company, or (2) who own or control at least 25% of the ownership interests of a Reporting Company.[11]  There are five (5) exceptions that apply: minor children; agents, nominees, custodians, and intermediaries; employees; inheritors; and creditors.[12]

Note the word “individual” in the definition.  Even if a Reporting Company is owned by another entity, the CTA requires reporting of individuals who exercise substantial control or own or control at least 25% of the ownership interest in a Reporting Company.  The CTA seeks to identify the individuals who ultimately own or control a Reporting Company, regardless of tiered corporate, LLC, or trust ownership structures.

Substantial Control.  An individual exercises substantial control over a reporting company if the individual (1) is a senior officer; (2) has authority to appoint or remove certain officers or a majority of directors of the Reporting Company; (3) is an important decision-maker in the business (over nature and scope of the business, finances, or structure); or (4) has any other form of substantial control over the Reporting Company.[13]  Note that a trustee of a trust or similar arrangement may exercise substantial control over a Reporting Company.

Own or Control 25% of the Ownership Interest.  Ownership Interests include equity, stock, voting rights, a capital or profit interest, convertible instruments, options, and any other instrument, contract, arrangement, understanding relationship, or other mechanism used to establish ownership.[14]  Any individual who owns or controls not less than 25% of the ownership interest of a Reporting Company is a Beneficial owner and must be included on a Reporting Company’s Beneficial Owners Information Report (BOI Report).[15]

Information Reported.  When filing a BOI Report, a Reporting Company must report each Beneficial Owner’s name, date of birth, residential addresses, and identifying number (social security number of FinCEN ID).[16]

Additional reporting requirements for entities formed after January 1, 2024.

Entities formed after January 1, 2024, also need to report their “Company Applicant,” being the person who files the formation document with the state.[17]  This could be a corporation service, an attorney, a paralegal, an accountant, an officer, employee, or owner of a Reporting Company, or anyone who files articles of incorporation or articles of organization, or other filing, with the state when forming an entity or registering to do business in any state or tribal territory in the US.

Who can see the information reported to FinCEN?

Information reported to FinCEN under the CTA is kept in a secure, private database maintained by FinCEN.  The agency, however, has broad authority to permit Federal, State, local, and Tribal officials, and certain foreign officials, to obtain beneficial ownership information for authorized national security, intelligence, and law enforcement activities.  Financial institutions will have access with consent from a reporting company.  Financial regulators will also have access.[18]

When do Reporting Companies need to file a BOI Report?

Entities formed after January 1, 2024, and before January 1, 2025, must file a BOI Report within ninety (90) calendar days after receipt of confirmation of formation.  Reporting Companies formed after January 1, 2025, have only thirty (30) calendar days after receipt of confirmation of formation to file a BOI Report.  Entities in existence before January 1, 2024, including foreign entities who registered to do business in any US State before January 1, 2024, have until January 1, 2025, to file a BOI Report.[19]

Reporting requirements continue after the initial BOI Report, and it is not a simple annual filing.  Rather, a BOI Report must be updated whenever there is a change in the entity or its Beneficial Owners.[20]  This means that if the owners or officers change, or if the company changes its name or domicile, or registers a new DBA, an updated BOI Report will need to be filed.  The CTA gives the Reporting Company thirty (30) calendar days after the change to file the updated BOI Report.[21]  If you are unsure of reporting obligations and what events may trigger the necessity to file an updated BOI Report, contact us for assistance.

What happens if a BOI Report is not filed within the required time frame?

Willful failure to comply with the CTA’s reporting requirements carries penalties, including up to $10,000 in fines and up to two (2) years of imprisonment.[22]  The key word here is “willful.”  There are safe harbor provisions in the case of inadvertent failure to file or accidental reporting of incorrect information.[23]

In conclusion, the CTA presents critical compliance challenges for energy businesses.  Understanding its intricacies is vital for effective corporate governance and regulatory compliance. Determining whether your entity is a Reporting Company, identifying Beneficial Owners, and applying the various exceptions in the CTA can be a complex process. We encourage companies in the energy sector to seek specialized legal guidance on navigating the CTA to ensure proper reporting is done correctly and within the time frames mandated by the CTA.

References

[1] 31 USCS § 5336 (added and amended Jan. 1, 2021).

[2] P.L. 116-283, Div F, Title LXIV, § 6402.

[3] 31 USCS § 5336(a)(11).

[4] Id.

[5] Id.

[6] 31 USCS § 5336(a)(11)(B)(i)-(xxiv).

[7] Id. at § 5336(a)(11)(B)(ix).

[8] Id. at § 5336(a)(11)(B)(xxi).

[9] Id. at § 5336(a)(11)(B)(xxii).

[10] Id. at § 5336(b)(1).

[11] Id. at § 5336(a)(3).

[12] Id. at § 5336(a)(3)(B).

[13] 31 C.F.R. §1010.380(d)(1).

[14] Id. at §1010.380(d)(2)(i).

[15] Id. at §1010.380(d)(2)(ii), (iii).

[16] Id. at § 5336(b)(2)(A).

[17] 31 USCS § 5336(a)(2); 31 C.F.R. §1010.380(e).

[18] 31 USCS § 5336(c).

[19] 31 C.F.R. §1010.380(a)(1).

[20] Id. at §1010.380(a)(2).

[21] Id.

[22] 31 C.F.R. §1010.380(h).

[23] 31 USCS § 5336(h)(3)(C).