OVERVIEW

The Corporate Transparency Act (CTA), enacted into law in 2021, requires reports to be submitted to the Financial Crimes Enforcement Network (FinCEN) containing personal information about the “beneficial owners” of certain U.S. and foreign corporations – “reporting companies.” The CTA aims to reduce terrorist financing, money laundering, tax fraud, and other illicit activities through shell companies by requiring corporations, LLCs, limited partnerships and other entities formed by filing a certificate with a state regulatory authority. It is targeted at smaller companies that are not currently subject to oversight by a federal government regulatory authority.

Existing regulatory requirements require companies formed between January 1, 2024 and January 1, 2025 to file their initial report with FinCEN within 90 days of formation. Reporting companies formed before January 1, 2024 have until January 1, 2025 to file their initial report with FinCEN, and companies formed after January 1, 2025 must file their initial report within 30 days of formation. A report filed with FinCEN must be updated within 30 days of an event occurring that changes the information contained in the initial or prior report. Willful failure to comply with these reporting requirements can result in civil and criminal penalties.

THIS IS A HIGH LEVEL SUMMARY OF DETAILED LEGAL REQUIREMENTS AND IS NOT LEGAL ADVICE.  PLEASE SEE “HOW TO GET ASSISTANCE” BELOW.

THE DETAILS

Reporting Companies And Exempt Entities

A “reporting company” is any legal entity that is not exempt from the final regulations adopted by FinCEN on September 30, 2022.  The regulations provide that companies meeting one of 23 specified exemptions do not have to report (each, an “exempt entity”).  These exemptions generally apply to highly regulated businesses including:

• Finance Companies: bank holding companies, banks, credit unions, depository institutions, insurance companies and state-licensed insurance providers, a securities exchange, a money services business, brokers or dealers in securities, regulated investment companies, investment advisers, venture capital fund advisers, and accounting firms formed under applicable federal laws or subject to oversight by federal regulatory authorities;
• Publicly Regulated Companies: companies registered with the SEC under the Securities Act of 1934, the Investment Company Act of 1940, or the Commodities Exchange Act, venture capital fund advisers registered under the Investment Advisers Act of 1940, and registered public utilities[1];
• Tax-Exempt Entities: tax-exempt entities described in Code section 501(c) and exempt from tax under Code section 501(a), a political organization, as defined in Code section 527(e)(1), or trusts described in paragraph (1) or (2) of Code section 4947(a);
• Inactive Entities: entities that: (1) were in existence on or before January 1, 2020; (2) are not engaged in an active business; (3) are not owned by a foreign person, whether directly or indirectly, wholly or partially; (4) have not experienced any change in ownership in the preceding 12 months; (5) have not sent or received any funds in an amount greater than US$1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12 months; and (6) do not otherwise hold any kind or type of assets, whether in the U.S. or abroad; and
• Other: entities established under the laws of the United States, a state or tribal authority, or a political subdivision of a state.

In addition, “large reporting companies” – those companies that satisfy all of the following requirements:  (1) have more than 20 full-time employees in the U.S. (excluding 1099 service providers and determined on a per-entity basis); (2) have an operating presence at a physical office within the U.S. that is not shared with a non-affiliate entity; and (3) have filed a federal tax or information return in the U.S. for the previous year demonstrating more than US$5,000,000 in gross receipts or sales (excluding gross receipts or sales from any source located outside the U.S.) – are also exempt from the reporting requirements of the CTA.

Information To Be Reported

Generally, a reporting company must report information on itself, its “beneficial owners” and its “company applicants” (with the company applicant only relevant for entities formed on or after January 1, 2024). 

• Reporting Companies:  Each reporting company must provide the company’s legal name, trade name or “doing business as” name, current address, the company’s jurisdiction of formation (or, for a foreign reporting company, the state, territory or tribunal jurisdiction where it first registers), and the company’s EIN.[2]  Foreign reporting companies must provide a foreign tax identification number if they do not have an EIN.
• “Beneficial Owner”:  Reporting companies must identify each of their “beneficial owners.”  A “beneficial owner” is any individual who, directly or indirectly, exercises “substantial control” over the reporting company or who owns or controls at least 25% of the “ownership interests” in a reporting company (ownership interests include equity, stock or voting rights, capital or profit interests, convertible instruments, options, warrants, and any other instrument, contract or other mechanism used to establish ownership, without regard as to whether any such instrument is transferable, is classified as stock or anything similar, or convers voting power or voting rights[3]).  A reporting company can have multiple beneficial owners and will always have at least one individual that is reportable as the beneficial owner.

The regulations provide guidance for what constitutes “substantial control.”  For example, an individual has “substantial control” if such individual exercises a certain degree of power over a reporting company. This definition is very broad and can include anyone who has the authority to appoint or remove certain officers or a majority of directors or who can direct or has substantial influence over matters at the reporting company, such as compensation schemes and incentive programs for senior officers (e.g., president, chief executive officer, chief financial officer, or general counsel).  Under certain circumstances, a holder of rights to approve or veto certain “major decisions” may be deemed to possess substantial control.  Board representation may also be deemed to confer substantial control.

The regulations also provided guidance on what constitutes “ownership or control of ownership interests.”  An individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding, relationship or otherwise, including: (1) joint ownership with one or more other person; (2) through another individual acting as a nominee, intermediary, custodian or agent of such individual; (3) with respect to a trust or similar arrangement that holds such ownership interest, (a) trustee or other individual that has authority to dispose of trust assets, (b) a beneficiary who is the sole permissible recipient of income and principal from the trust or has the right to demand distribution of or withdraw substantially all of the assets from the trust, or (c) as a grantor or settlor who has the right to revoke the trust; and (4) through ownership or control of one or more intermediary entities, or ownership or control of the ownership interests of such entities, that separately or collectively own or control the ownership interests of the reporting company.

“Beneficial owners” do not include:  (1) a “minor child” as defined in the law of the State or Indian tribe in which a domestic reporting company is created or a foreign reporting company is first registered, provided the reporting company reports the information of a parent or legal guardian; (2) in individual acting as a nominee, intermediary, custodian or agent on behalf of another individual; (3) an employee of a reporting company, acting solely as an employee, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee, provided such person is not a “senior officer;” (4) an individual whose only interest in a reporting company is a future interest through a right of inheritance; or (5) a “creditor” of a reporting company (a creditor is an individual who meets the requirements to be a beneficial owner solely through rights or interests for the payment of a predetermined sum of money, such as a debt incurred by the reporting company, or a loan covenant or other similar right associated with such right to receive payment that is intended to secure the right to receive payment or enhance the likelihood of repayment).

• Company Applicants.  Up to two “company applicants” must be identified for reporting companies formed on or after January 1, 2024.  A company applicant is an individual(s) who (1) directly filed the documents to create or register a reporting company with a State or Indian tribe and (2) is primarily responsible for directing or controlling such filing.  For example, individual A, who wants to create a company, prepares the necessary formation documents and directs individual B to file the documents with the relevant state regulatory office.  In this case, individual A and individual B are both company applicants – individual B directly filed the documents and individual A was directly responsible for controlling the filing.

For every beneficial owner and company applicant, the report must include the individual’s full legal name, date of birth, current residential address (or business address for a company applicant in the business of forming entities), and an “identifying number” and “image” from documents like a U.S. passport, U.S. driver’s license, U.S. government-issued identification card or, if no U.S.-issued document is available, a foreign passport.

In lieu of including the information set forth in the preceding sentence, a beneficial owner or company applicant can obtain a “FinCEN identifier” – a unique identifying number that FinCEN will issue to individuals or entities upon request. To obtain a FinCEN identifier, the beneficial owner or company applicant must provide the information required above by submitting an application to FinCEN.  The FinCEN identifier is then included in the reported information in lieu of the detailed information required for the beneficial owner or company applicant.

Special Rules

Reporting Company Owned by Exempt Entity:  If one or more exempt entities has or will have a direct ownership interest in a reporting company and an individual is a beneficial owner of the reporting company solely by virtue of its ownership interest in such exempt entity, the report may include the names of the exempt entities in lieu of the information (described above) related to the beneficial owner.

Minor child:  If a reporting company reports the information required of a beneficial owner who is the parent or legal guardian of a “minor child” (as defined above), the report shall state that such information relates to the parent or legal guardian.

Foreign “Pooled Investment Vehicle”[4]:  If an entity would be a reporting company but for the exemption provided for pooled investment vehicles and is formed under the laws of a foreign country, such entity shall be deemed a reporting company under the regulations, except that the report shall include the beneficial owner information solely with respect to an individual that exercises substantial control over the entity.  If more than one individual exercises substantial control over the reporting company, the reporting company shall report information with respect to the individual who has the greatest authority over the strategic management of the reporting company.

How to Report

All reports are to be filed electronically via FinCEN’s newly developed Beneficial Ownership Secure System, known as BOSS. BOSS is a cloud-based, non-public database meeting the requirements of the Federal Information Security Modernization Act.  Information contained in BOSS is confidential and may not be disclosed by an officer or employee of the United States, any State, local or Tribal agency or any financial institution or regulatory agency receiving information under the CTA.  Information provided by a reporting company may be disclosed by FinCEN upon receipt of a request, through specified protocols, from (1) a U.S. federal agency engaged in national security, intelligence or law enforcement activity for use in furtherance of such activity, or a State, local or Tribal law enforcement agencies if a court of competent jurisdiction has authorized the law enforcement agency to seek the information in a criminal or civil investigation, (2) a U.S. federal agency on behalf of a law enforcement agency of a foreign country, (3) a financial institution subject to customer due diligence requirements with the consent of the reporting company, (4) a U.S. federal agency in the manner prescribed by the regulations, and (5) the U.S. Department of Treasury.

FinCEN is in the process of creating forms by which reporting companies will report beneficial ownership information.  FinCEN published proposed revised filing forms on September 29, 2023 and requested comments on or before October 30, 2023.  Final approved filing forms are expected to be published prior to January 1, 2024.

A reporting company can provide beneficial ownership information either directly or indirectly, including by providing such information to another person for purposes of a report or application in compliance with the CTA.  FinCEN will not accept filings prior to January 1, 2024.

Penalties for Non-Compliance

The CTA provides that it is unlawful for any person to provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN or to willfully fail to report complete or updated beneficial ownership information to FinCEN when due. Civil penalties include a fine of US$500 per day (up to US$10,000) per occurrence and criminal penalties of up to 2 years in prison, or both, per occurrence. Furthermore, it is unlawful for any person to knowingly disclose or use beneficial ownership information obtained by that person through a report submitted to FinCEN or a disclosure made by FinCEN. Civil penalties for the unauthorized disclosure or use of beneficial ownership information can be a fine of US$500 per day up to a total fine of US$250,000, imprisonment for up to 5 years, or both. Where such activity is part of a pattern of any illegal activity under U.S. law, the penalty can be a fine of not more than US$500,000, imprisonment for not more than 10 years, or both.

Safe harbor rules apply to individuals who provide inaccurate information as long as they (a) did not know about the inaccuracy, (b) were not attempting to evade reporting requirements, and (c) correct any inaccurately reported information “voluntarily and promptly,” but not more than 90 days after submission.  No civil or criminal penalties apply to negligent violations of the Act or Regulations.

How to Get Assistance

To further discuss the requirements of the CTA or obtain assistance with determining your need to report to FinCEN as a reporting company, please contact Phil Whitcomb (by phone at 214.855.7500 or by e-mail at pwhitcomb@munsch.com).