The Corporate Transparency Act (CTA), which aims to curb illicit financial activities like money laundering and other fraudulent activities, will go into effect on January 1, 2024. Consequentially, many types of businesses, known as “reporting companies,” will be required to provide certain identifying information to the Financial Crimes Enforcement Network (FinCEN) related to the individuals who directly and indirectly own them. The information will then be stored in a non-public database to be used in a variety of government enforcement efforts.
A reporting company is defined as a domestic or foreign corporation, limited liability company, or similar entity that was either formed or registered to do business in any state or jurisdiction by filing a document with a Secretary of State or other similar office or was formed under the laws of a foreign country but is registered to do business in the United States. These existing companies will be required to submit a confidential report called a Beneficial Ownership Information Report (BOIR) to FinCEN within a year of the January 1, 2024, effective date. FinCEN estimates that there will be at least 32.6 million organizations that meet the definition of a reporting company, the majority of which will be small businesses.
Exemptions
The definition of a reporting company is very broad, however there are 23 categories of exemptions negating reporting requirements. One of which, “large” companies, is defined as those organizations employing over 21 full-time employees, having over $5 million or more of annual revenue, and operating from physical premises in the United States. Other exemptions include public companies, banks, public utilities, tax-exempt nonprofits, wholly-owned subsidiaries of most exempt companies and more.
If you don’t fall into an exemption, the BOIR will require the following:
- The full legal name and any trade name or “doing business as” name of the reporting company.
- A complete current address.
- The state, tribal, or foreign jurisdiction of formation or registration of the reporting company.
- The IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number) of the reporting company.
- The full legal name, date of birth, complete current address (in the case of a company applicant, a business address may be used; in all other cases, a residential address must be used), and a unique identifying number from an acceptable identification document, as well as copies of such documents, for both the “beneficial owner” and “company applicant.”
A “beneficial owner” is defined as any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, either exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company.
A “company applicant” is either of the following:
- In the case of a domestic reporting company, the individual who filed the documents needed to create the entity.
- In the case of a foreign reporting company, the individual filing the documents when it first registered as a foreign reporting company to do business in a state.
In either case, if more than one individual is involved, the individual is primarily responsible for directing or controlling the filing of required formation or registration information.
While January 1, 2024, marks the first day that reporting companies can submit their BOIRs, reporting deadlines vary depending on the date of a reporting company’s incorporation. Those reporting companies that were formed or registered prior to January 1, 2024, must submit their BOIR to FinCEN prior to January 1, 2025.
In addition, the final rule stated that reporting companies formed or registered on or after January 1, 2024, would be required to submit BOIR within 30 days of receiving actual or public notice of the creation or registration of the reporting company. However, a recently issued Notice of Proposed Rulemaking (NPRM) would extend that deadline. Assuming the NPRM is finalized, reporting companies formed or registered on or after January 1, 2024, and before January 1, 2025, would have 90 days after receiving actual or public notice to file their BOIRs.
Those reporting companies formed or registered on or after January 1, 2025, would still only be given 30 days from receiving actual or public notice of the creation or registration of the reporting company to comply.
Penalties
A company’s failure to comply with the CTA may result in both civil and criminal penalties. Individuals and entities can be assessed a $500 per day fine until they come into compliance with CTA requirements. Further, criminal penalties can result in up to two years in jail and/or a financial penalty of up to $10,000.
A Potential Wave of Enforcement Actions
While penalties for noncompliance can be substantial, the newly acquired information could drive a wave of enforcement actions under various other statutes. The database housing the BOIR information is non-public. However, the CTA authorizes FinCEN to disclose Beneficial Ownership Information (BOI) under specific circumstances, including to federal agencies for authorized activities related to national security and/or law enforcement.
The Defense Counterintelligence and Security Agency (DCSA) administering the Foreign Ownership, Control, and Influence (FOCI) program, the Treasury Department’s Committee of Foreign Investment in the United States (CFIUS), and the Office of Foreign Asset Control (OFAC) could all benefit from the newly available BOI.
Impact on Small Businesses
The reporting requirements could impose significant administrative burdens on small businesses. As the requirements are novel, it may take time for companies to fully understand their obligations under the legislation. Similarly, collecting the required information may prove onerous and time-intensive.
In addition, the CTA requires companies to file updated reports within 30 days of any change in the information initially reported to FinCEN. Similarly, if a business falls out of conformity with one of the exemptions, it becomes a reporting company, therefore necessitating a BOIR submission. This requirement demands constant monitoring and provides a limited timetable for collecting necessary information and submitting a report. Companies should consider amending policies and implementing specifically delineated procedures for collecting, storing, and submitting BOI information. FinCEN recently published a “Small Entity Compliance Guide” to help small business understand their obligations and comply with the new requirements. The Guide can be found here.
Consider the CTA in Entity Formation Planning
Reporting companies formed or registered prior to January 1, 2024, are given an extensive window to comply with CTA requirements—a full year. In contrast, absent an applicable exemption, companies formed or registered on or after January 1, 2024 (but before January 1, 2025) will be given, at most, 90 days to comply. Given the potentially labor and time-intensive task of compiling relevant documentation and submitting a responsive BOIR, if circumstances allow, it may make sense to form a new entity prior to the January 1, 2024 deadline.
Going Forward
The CTA will likely be an effective tool to combat financial crimes like money laundering and enhance the effectiveness of U.S. national security enforcement efforts around the FOCI, CFIUS, and U.S. sanctions regimes. However, the legal regime brings new reporting and monitoring burdens that primarily impact small businesses. Small businesses should begin to plan their approach to compliance sooner rather than later.
