In 2020, Congress passed the Corporate Transparency Act (CTA) in an effort to combat money laundering and the financing of terrorism in the United States. The CTA requires most domestic and foreign entities to report significant personal information to the Financial Crimes Enforcement Network of the U.S. Treasury (FinCEN). The reported information will be maintained in a federal database that, under certain circumstances, may be shared by state, federal, and foreign law enforcement, as well as certain financial institutions.
On September 29, 2022, FinCEN issued the final rule ("Rule") implementing the CTA. The Rule will go into effect January 1, 2024, and will add new reporting obligations to most entities formed or registered to do business in the U.S. Any person that willfully reports false information or fails to report complete or updated information and any person that knowingly discloses or uses beneficial ownership information, in violation of the CTA or Rule, may be subject to significant monetary fines and even imprisonment.
Covered Entities
The Rule applies to most entities created by filing formation documentation with a state's secretary of state, including LLCs and corporations. The Rule also applies to foreign entities registered to do business in the U.S. by filing documentation with a state's secretary of state.
The Rule does not apply to:
(1) Common law general partnerships, sole proprietorships, and certain trusts.
(2) Twenty-three types of companies operating in regulated settings and already subject to specific AML laws, including public companies, charitable organizations, certain investment advisers, and pooled investment funds.
(3) “Large operating companies,” i.e., companies that:
- employ over 20 employees on a full-time basis in the U.S.;
- have reported over $5M in gross receipts or sales in U.S. tax returns; and
- have an operating presence at a physical office within the U.S. that the entity rents or owns.
Required Information to Report
Covered Entities will need to disclose three (3) sets of information to FinCEN: (1) information about the Covered Entity, (2) information about beneficial owners of the Covered Entity, and (3) information about “company applicants” who assisted in forming or registering the Covered Entity.
(1) Information about a Covered Entity:
- Full legal name;
- Trade name and DBAs;
- Business street address of the Covered Entity’s primary location in the United States where it conducts business;
- Jurisdiction of formation and/or registration; and
- Company IRS Tax ID Number or a foreign tax identification number.
(2) Information about beneficial owners of a Covered Entity:
A beneficial owner is any individual who directly or indirectly (i) owns or controls 25% or more of the ownership interests of the Covered Entity or (ii) exercises "substantial control" over the Covered Entity. Substantial control is broadly applied in the Rule and includes, without limitation:
- Senior officers and/or individuals who exercise the authority or control of performing the functions of a senior officer (excluding corporate secretary or treasurer);
- Persons with authority over appointment/removal of officers or a majority of the board of directors;
- Persons with “substantial influence” over “important decisions” of the Covered Entity, including the lease/sale of assets, corporate structure, major expenditures, selection/termination of business lines or geographic focus, senior officer compensation schemes, significant contracts, and amendments of substantial governance documents.
Covered Entities must report the following information regarding its beneficial owners:
- Full legal name;
- Date of birth;
- Current residential address;
- Unique identifying number from an acceptable ID document; and
- Image of the ID document.
(3) Company Applicants of a Covered Entity:
A “Company Applicant” is the company and/or individual that makes the decision to file and/or files the formation or registration documents with a secretary of state on behalf of the Covered Entity. This may include, for example, attorneys and paralegals. Covered Entities must report the same information for Company Applicants as reported regarding beneficial owners.
Initial Compliance Deadlines
Newly-created or newly-registered entities, whether domestic or foreign, on or after January 1, 2024, must report the required information to FinCEN within 30 days of such formation and/or registration with a state’s secretary of state.
Companies formed or registered with a state’s secretary of state before January 1, 2024, must report the required information to FinCEN within 12 months of the effective date of the Rule or January 1, 2025.
Ongoing Compliance Deadlines
Any entity that was previously qualified for an exemption under the Rule, but subsequently fails to continue to meet such exemption, must report the required information within 30 days of the loss of the exemption.
Companies must correct any inaccurate information concerning the reporting company or its beneficiation owners and file updated reports within 30 calendar days of becoming aware or having reason to know that such reported information is inaccurate.
Companies must file updated reporting within 30 calendar days of a change in reported information.
Recommendations
Companies should begin preparing for compliance with the Rule now and can take the following steps toward compliance:
- Evaluate exempt/non-exempt status.
- Amend key agreements to compel investors/shareholders to report and provide updates requisite information.
- Maintain updated organizational chart with all applicable ownership information.
- Consider CTA implications regarding merger and acquisition transactions, capital raising, and other restructuring strategies.
- Prepare a compliance policy and appoint compliance officer.
The CTA and the Rule present sweeping changes to entity formation practices in the U.S. Michael Best has attorneys who can assist companies in complying with the CTA and Rule. Please contact a member of our team for more information.