The Federal Corporate Transparency Act (the CTA), 31 U.S.C. §5336, will soon require certain entities to disclose to the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN) certain pieces of identifying information related to the disclosing entity, its beneficial owners, and company applicants. While the CTA's purpose is to better regulate "shell" companies, which are often used to facilitate illicit activities, typically the legitimate activities of for-profit healthcare businesses and medical practices ("Healthcare Providers") with fewer than 20 employees will be subject to the CTA's disclosure obligations. With these disclosure obligations taking effect on January 1, 2024, non-exempt Healthcare Providers must begin taking steps to not only bring themselves into compliance with the CTA, but also to ensure any information reported to FinCEN under the CTA does not contradict other disclosures typically made to regulators by Healthcare Providers.
Reporting Companies
Under the CTA, certain entities must disclose the required identifying information. These "reporting companies" can be either "domestic" or "foreign" entities. A domestic reporting company includes domestic corporations, limited liability companies, or "similar" entities created by a filing with a state department or similar office. Similarly, a foreign entity that files with a state department or similar office in the United States is considered a foreign reporting company. The CTA exempts 23 categories of entities, which are mainly entities already subject to federal regulation, such as public companies, financial institutions, and certain tax-exempt entities.
From a healthcare perspective, a Healthcare Provider practicing in sole proprietorships and general partnerships would not be considered a reporting company under the CTA's standards if the Healthcare Provider has not registered or filed any kind of formation document with a secretary of state's office. However, Healthcare Providers organized as corporations, limited liability companies, limited partnerships, or other entity types that have filed with the state will be subject to the CTA's disclosure requirements unless an exemption applies.
Who Is a Beneficial Owner?
A reporting company will have to disclose information regarding its beneficial owners and, depending on when the reporting company was created, its company applicants. A beneficial owner is an individual who, directly or indirectly, exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of the reporting company. Generally, an individual exercises substantial control over a reporting company if, among other requirements specified in the CTA, that individual is a senior executive officer, has authority to appoint or remove a senior officer or a majority of the board of directors, or is able to make or direct important decisions for the reporting company. That individual does not have to own or control any ownership interests of the reporting company. The CTA does not impose an artificial limit on the number of beneficial owners a reporting company may have.
There are few exemptions for individuals who would otherwise be classified as beneficial owners under the CTA. These exemptions include individuals who are minors or creditors of the reporting company.
A reporting company will also be required to disclose information on company applicants. A company applicant under the CTA is (i) an individual who directly files the document that either registers or creates the reporting company and (ii) if more than one person is involved in the filing, the individual who is primarily responsible for directing or controlling the filing. A reporting company, however, will not be required to file information for a company applicant if the company was registered or created before January 1, 2024. There will never be more than two company applicants per reporting company.
A specific consideration for Healthcare Providers with regard to the CTA's definition of beneficial owner is that the definition is likely broad enough to capture not only the individuals who own and operate a non-exempt Healthcare Provider, but potentially the administrative or management service organizations (MSOs) that are frequently employed to manage the business. Often these MSOs are empowered to exercise significant indirect control over the business's non-medical/clinical decisions. Thus, Healthcare Providers attempting to comply with the CTA must take into consideration their relationships with third parties and who exactly may be considered a beneficial owner of the non-exempt Healthcare Provider.
Required Disclosures
A reporting company will have to make initial disclosures about itself, its beneficial owners, and, for entities created or registered after January 1, 2024, its company applicants. Regarding its beneficial owners and company applicants, a reporting company must disclose certain personally identifiable information (PII), such as (i) full legal name, (ii) date of birth, and (iii) current address. Rather than provide PII to each reporting company, an individual beneficial owner or company applicant may apply for a unique identification number from FinCEN ("FinCEN identifier") and provide that FinCEN identifier to the reporting company in lieu of PII.
The reporting company will also have to disclose (i) its full legal name, including any trade name or "doing business as" name, (ii) the address of its principal place of business, (iii) the jurisdiction where the reporting company was formed (or where the company first registered for foreign reporting companies), and (iv) a tax identification number.
If any of the above information about the reporting company or beneficial owner(s) changes, the reporting company is required to update that information with FinCEN not more than 30 days after the change occurs.
A key issue for Healthcare Providers when making the required CTA disclosures is ensuring the consistency of information disclosed to other regulatory bodies. Similar to the required disclosures under the CTA, Medicare and Medicaid enrollment and other state licensure requirements regularly require the disclosure of ownership and control information. The Centers for Medicare and Medicaid Services (CMS), as well as other federal and state regulatory agencies, may eventually have data-matching capabilities in place with FinCEN, similar to what CMS has with the Internal Revenue Service and other government agencies. The FinCEN registry will house reporting company and beneficial owner information, creating the risk that unintentional inaccuracies between CTA and other regulatory disclosures may result in information discrepancies and leave Healthcare Providers open to sanctions or even disenrollment from federal or state healthcare programs. Variations between disclosures should be avoided unless the disclosure requirements differ.
Healthcare Providers participating in the Medicare program, for example, should be certain that any beneficial ownership disclosure information provided in compliance with the CTA is consistent with anything disclosed in a CMS Form 855 (whether on paper or via PECOS) or similar Medicaid enrollment documentation/disclosures. Additionally, Healthcare Providers should note that changes in information pursuant to 42 CFR §424.516 and Section 10.4.4 of Chapter 10 of the Medicare Program Integrity Manual may trigger similar changes to CTA disclosures.
Applicable Deadlines
Various deadlines exist for filing under the CTA, depending on when the reporting company was created or registered. If a reporting company was created (or first registers if a foreign reporting company) before January 1, 2024, the company must file a report before January 1, 2025, i.e., it has a full calendar year to file. If the company is created (or first registers if a foreign reporting company) on or after January 1, 2024, up to and including December 31, 2024, the company must file a report within 90 days of filing with the secretary of state. For those created on or after January 1, 2025, the filing deadline is 30 days, and the 30-day period applies also to other changes in a company's information, such as a change in beneficial owner or the entity no longer being considered exempt from reporting.
Failure to Make Required Disclosures
The CTA penalizes reporting companies that willfully fail to disclose the required information. If a reporting company willfully fails to report, or intentionally provides false or fraudulent beneficial ownership information, the reporting company and its owners could face civil and criminal penalties, including fines of $500 per day (up to $10,000), imprisonment not exceeding two years, or both. FinCEN will consider all available information to determine whether a disclosure failure is willful. The severity of these penalties increases the significance of the administrative burdens the CTA will levy on the thousands of non-exempt Healthcare Provider across the country, as they will need to ensure timely, accurate disclosures are made or risk, at the very least, serious financial repercussions.
Next Steps
The CTA is expected to impact millions of small businesses across the United States, a sizable portion of which will be smaller Healthcare Providers. With the CTA's effective date rapidly approaching, non-exempt Healthcare Providers must begin preparations to comply with the CTA's disclosure requirements. Compliance will require Healthcare Providers to conduct an analysis of the regulatory definitions tied to disclosure. Initially, the decision of which disclosures to make will likely be guided by the Healthcare Provider's own judgment until disclosure requirements are more clearly interpreted. Healthcare Providers must also remain vigilant regarding the information they are disclosing within the broader regulatory landscape, as inconsistent beneficial ownership information disclosures may prove detrimental to Healthcare Providers, particularly where data match programs are used in furtherance of federal healthcare program integrity.
