Beginning January 1, 2024, domestic entities and foreign entities registered to do business in the United States will need to comply with new information reporting requirements relating to their owners, officers, and controlling persons. The reporting requirements flow from the federal Corporate Transparency Act (“CTA”), a newly enacted law aimed at combating “money laundering, the financing of terrorism, and other illicit activity.” The reporting requirements will likely have significant implications for a broad range of domestic and foreign entities and may cause such entities to undertake sweeping data-gathering efforts. Clients should be aware of the CTA and its requirements to determine its applicability to their businesses.
What is the CTA?
The CTA, enacted by Congress in January 2021, directs the United States Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to establish and maintain a national registry of beneficial owners of entities defined as “reporting companies” (“Reporting Companies”). The national registry is part of the government’s efforts to thwart bad actors seeking to use shell companies or other opaque ownership structures to realize their unlawfully acquired gains. On September 29, 2022, FinCEN issued a Final Rule to implement the information reporting provisions of the CTA effective January 1, 2024.
What is a Reporting Company?
The CTA defines two categories of Reporting Companies. The first category includes domestic entities, which is defined to include corporations, limited liability companies, or other similar entities created by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian tribe. The second category includes foreign entities. The CTA provides that an entity formed under the law of a foreign country is only a Reporting Company if it is registered to do business in any state or in any Tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the laws of a state or Indian tribe. There are 23 types of entities that are exempt from the reporting requirements, discussed below in more detail.
Whose information must be reported?
Reporting Companies must file and maintain a beneficial owner report with FinCEN, which will include identifying information for (1) all beneficial owners, and (2) company applicants (only for Reporting Companies formed on or after January 1, 2024). A “beneficial owner” is any individual who exercises “substantial control” over the Reporting Company or who owns or controls a 25% “ownership interest” in the Reporting Company. A “company applicant” is any individual who directly files the document that creates the domestic Reporting Company or registers the foreign Reporting Company, and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.
When must a Reporting Company provide the information?
The CTA’s reporting requirements go into effect January 1, 2024. For existing Reporting Companies, the initial report must be filed by January 1, 2025. New Reporting Companies formed on or after January 1, 2024 have only 30 calendar days to file the initial report. The 30-calendar day period runs from the time the entity receives actual notice that its creation or registration is effective, or after a secretary of state or similar office first provides public notice of its creation or registration, whichever is earlier. If an entity initially was exempt from the CTA reporting requirements, but subsequently loses that exemption, the entity has 30 days to file the initial report. Going forward, Reporting Companies will have 30 calendar days to report any changes to previously reported information.
Note that on September 28, 2023, FinCEN published a Notice of Proposed Rulemaking to extend the deadline for some new Reporting Companies to file initial reports. Under the proposed rule, the initial reporting deadline for entities created or registered on or after January 1, 2024, but before January 1, 2025, would extend from 30 days to 90 days. FinCEN’s goal is to give these entities additional time to understand the new reporting system and to collect the necessary information.
Penalties for noncompliance
The CTA authorizes steep penalties, both civil and criminal, for noncompliance by any “person” (i.e., an individual, Reporting Company, or other entity). Violations may result in penalties of up to $500 per day (up to $10,000) and/or imprisonment for up to two years.
What are the specific reporting obligations?
Initial reports
A Reporting Company will be required to file an initial report that includes identification information about itself, its beneficial owners, and its company applicants. Required disclosures include:
- For the Reporting Company: full legal name, any trade name or DBA, address, jurisdiction of formation or registration, taxpayer identification number or other unique tax identification number.
- For each beneficial owner and company applicant: full legal name, birthdate, residential address (or business street address, in the case of a company applicant who formed or registered the entity in the course of the applicant’s business), photo identification with identification number (e.g., U.S. passport or driver’s license). Alternatively, a Reporting Company may obtain and submit a FinCEN identifier with respect to its beneficial owners—a unique identifier for an individual or entity.
Updated and corrected reports
After filing an initial report, Reporting Companies have 30 days to file an updated report after any change with respect to information previously reported. This is not an annual filing requirement; updates are required as often as there are changes. The following events (among others) would trigger an updated reporting requirement:
- Information about the Reporting Company changes (e.g., a change to the Reporting Company’s address);
- A Reporting Company becomes an exempt entity (e.g., the Reporting Company grows its number of employees and/or revenues such that it meets the criteria for the large operating company exemption);
- An individual acquires an interest in the Reporting Company and that individual satisfies the “beneficial owner” definition;
- A beneficial owner’s interest transfers after death, under certain circumstances;
- A minor attains age of majority;
- Substantive information that is contained on a beneficial owner’s identifying document that was required to be provided to FinCEN changes (e.g., name or address).
Reporting Companies must also correct any errors or inaccuracies in previously filed reports within 30 days after the date the Reporting Company becomes aware of the error. However, there is a safe harbor for any person who has reason to believe that a report submitted by the person contains inaccurate information and who voluntarily and promptly submits a report containing corrected information no later than 90 days after the date of the inaccurate submission.
How are initial and updated reports filed?
FinCEN is currently developing a secure filing system where Reporting Companies will electronically submit all the required information via FinCEN’s website. FinCEN continues to consider how to address exceptions to the online filing requirement.
FinCEN will store reports in a secure national database called the Beneficial Ownership Secure System and access will only be available to certain law enforcement agencies, taxing authorities, and a limited number of other potential users for specified purposes upon request. Reports will not be accessible to the public and are not subject to requests under the Freedom of Information Act.
What are the exemptions to the reporting obligations?
The CTA identifies 23 exemptions from the definition of Reporting Company. An entity that qualifies for any of these exemptions is not required to submit information to FinCEN. While the types of exempt entities vary, the main takeaway is that the CTA primarily targets small, private, for-profit entities that are not financial institutions or insurance providers. The CTA identifies the below exempt entities and provides a short definition and criteria for each. Several key definitions are highlighted below.
- Securities reporting issuer
- Governmental authority
- Bank
- Credit union
- Depository institution holding company
- Money services business
- Broker or dealer in securities
- Securities exchange or clearing agency
- Other Exchange Act registered entity
- Investment company or investment adviser
- Venture capital fund adviser
- Insurance company
- State-licensed insurance producer
- Commodity Exchange Act registered entity
- Accounting firm
- Public utility
- Financial market utility
- Pooled investment vehicle
- Tax-exempt entity
- Entity assisting a tax-exempt entity
- Large operating company: Any entity that: (a) employs more than 20 full time employees in the U.S., (b) has an operating presence at a physical office within the U.S., and (c) reported more than $5 million in gross receipts or sales from U.S.-sources only on its prior year federal tax return.
- Subsidiary of certain exempt entities: Any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by any exempt entity, except money services businesses, pooled investment vehicles, entities assisting a tax-exempt entity, or inactive entities.
- Inactive entity: Any entity that (a) was in existence before January 1, 2020; (b) is not engaged in active business; (c) is not owned by a foreign person directly or indirectly, wholly or partially; (d) has not experienced any change in ownership in the preceding twelve months; (e) has not sent or received any funds greater than $1,000, either directly or through any account the entity or an affiliate had an interest, in the preceding twelve months; and (f) does not hold any assets in the U.S. or abroad, including any ownership interests.
Preparing Your Business for the CTA
The CTA is likely to have significant implications for domestic and foreign entities that are formed or operating in the U.S. Those entities that are likely to be Reporting Companies should start preparing now for the CTA. Understanding the CTA’s reporting requirements and what steps your own business must take to comply is a fact-specific analysis to undertake with respect to your unique circumstances. However, following the below tips can help you prepare for your business’s reporting obligations and your continuing compliance with the CTA once it takes effect.
Determine whether your business is a Reporting Company. It is crucial for you to understand whether your existing business is a Reporting Company under the CTA, or whether it falls under one of the carved-out exemptions. Understanding your business’s reporting obligations and the key reporting deadlines under the CTA is necessary to devising an internal game plan for compliance.
Consider whether to form your new business in 2023. If you plan to start a business in the next year, consider whether to form your entity in 2023 in order to take advantage of the extended January 1, 2025 deadline. Otherwise, the new entity will have 30 calendar days from its “formation” to file its initial report, unless that deadline is otherwise extended to 90 calendar days pursuant to the recent Notice of Proposed Rulemaking.
Seek professional advice. We encourage you to seek advice from legal counsel or compliance experts to understand the complexities of the CTA and how it may impact your business. In some instances, these professionals may provide FinCEN filing services. If you have any questions about the CTA or your business’s own unique circumstances, consider contacting an attorney.
Prepare for your initial reporting and ongoing compliance obligations. Once you understand your business’s reporting obligations under the CTA, you can and should implement internal compliance processes to prepare for filing the initial report and to monitor and report any changes in a timely manner. Many businesses are familiar with annual requirements for state filings and regulatory updates. However, unlike those requirements, the CTA will require filings within 30 calendar days of changes to previously reported information. The real-time filing under the CTA will require businesses to have internal monitoring systems, processes to gather the necessary information for timely updates, and some method of policing compliance. Company management and leadership personnel can prepare by reviewing their business’s organizational structure to identify beneficial owners and create an internal beneficial ownership register or other recording system. Additionally, businesses can develop policies and procedures to ensure continuing compliance, such as a system to monitor for beneficial ownership changes. Businesses should also consider whether they will take on filing responsibility in-house, or whether they will outsource filing through a third-party service provider.
Stay Updated. The CTA is a new law with evolving and moving parts. Businesses should expect clarifications and updates to the CTA’s requirements and mechanisms. For instance, FinCEN has not yet completed the reporting database and many questions surround its functioning. Moreover, FinCEN expects to announce additional rules around the CTA in the coming months. Look out for additional Womble Bond Dickinson (US) LLP alerts regarding the CTA.
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