This is the second in a two-part series discussing the Corporate Transparency Act (CTA) – new legislation enacted by Congress in January 2021, as part of the Anti-Money Laundering Act of 2020. Read the first part of this series, "What You Need to Know About the U.S. Corporate Transparency Act", here.

At its core, its purpose is to help enhance transparency of beneficial ownership information for certain types of business entities and curb against illicit financial activity which use corporate creations to obfuscate fraudulent identities.

The CTA will come into effect on January 1, 2024 allowing for the first robust and comprehensive classification of beneficial ownership information. For new companies (those created on or after January 1, 2024), the CTA will apply on January 1, 2024 and reporting companies will have 30 calendar days thereafter to file a disclosure report. Existing companies (those that were created or registered before January 1, 2024),  will have until January 1, 2025file their disclosure report. 

Reporting companies encompass any domestic or foreign corporation, limited liability company, or other entity created or registered to do business with a secretary of state or similar office under the laws of any state.

Filing Requirements 
Once the rules come into effect, reporting companies will submit a disclosure report to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) through its IT System called the Beneficial Ownership Secure System. FinCEN will thereafter be able to track the beneficial owners of business entities through its monitoring systems. The system is not currently accessible, and reports will not be accepted prior to January 1, 2024.

The disclosure reports must include the full legal name of the reporting company, its trading name if any, current address, the state, tribal or foreign jurisdiction of formation or registration, and its IRS Taxpayer Identification Number (TIN) and Employer Identification Number (EIN).

Each beneficial owner must also disclose their full legal name, date of birth and current residential address, an identification number such as a non-expired ID, driver’s license or passport number, and an image of the corresponding identifying document.

If there is any correction or change with respect to the initial disclosure report filed, a new report must be filed within 30 days of the correction or change. Otherwise, there is no ongoing filing requirement.

Exemptions
There are 23 types of entities that can be exempt from complying with the CTA. These include but are not limited to government agencies, public utilities, banks and credit unions, tax-exempt entities, subsidiaries of exempt entities, and large operating companies*.
 
*Large operating companies must meet the following criteria:

1. They employ more than 20 full-time employees in the United States. In this case, FinCEN uses the IRS definition of “full-time employee,” which includes anyone who works at least 30 hours per week or 130 hours per month.
2. They have filed a Federal U.S. income tax return for the previous year that showed more than $5,000,000 in gross receipts or sales.
3. Operates from physical premises in the United States. 

Failure to Report
The penalties for failing to comply with the CTA may result in both civil and criminal penalties. Any individual or entity will be assessed a penalty of up to $500 for each day the violation continues. Criminal violations may also result in a harsher penalty of up to $10,000 along with imprisonment up to two years. Individuals would potentially be charged and indicted under the federal criminal code for providing false information or concealing a material fact to the federal government.
 
Safeguards
Reports filed with FinCEN will not be accessible to the general public. Those privy to accessing and reviewing the disclosure reports include Federal agencies engaged in national security, intelligence, and civil and criminal law enforcement, the Department of Treasury, and State and local law enforcement agencies involved with civil or criminal investigation.

Steps to Take Now 
When beginning to consider complying with the CTA, reporting companies should conduct an extensive review of their corporate structures to identify beneficial owners (i.e. directors, members or managers, officers, and shareholders).

Takeaways
The companies that qualify as reporting companies should be encouraged to take initiative to prepare for the CTA’s implementation to evaluate whether they are ready to comply.

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