Corporate Transparency Act (CTA)

The Corporate Transparency Act, (CTA), was passed by the United States Congress in 2021 to better enforce existing laws surrounding tax fraud, money laundering and other financial crimes. Previously, the ownership information of anonymous companies was difficult for law enforcement agencies to obtain when researching crimes.

It’s important to note, anonymous companies’ owners, managers, etc. will still remain shielded from public view. The information submitted to the government is not going into a public database. That is, anonymous companies will remain private to the public. The information being submitted is largely similar to what the IRS, banks and other institutions gather already. It will simply be held in a centralized database for verified law enforcement agencies to access when they have a valid subpoena or reason. Federal employees are not allowed to disclose beneficial owner information without cause.

The reporting requirements, exemptions, penalties and a compliance guide are below, including definitions of beneficial owners and what data is required to be submitted to FinCEN to remain in compliance. These changes come into effect in 2024.

Your company will still be anonymous. The CTA directs the Secretary of the Treasury to maintain BOI ‘‘in a secure, nonpublic database, using information security methods and techniques that are appropriate to protect non-classified information security systems at the highest security level.’’ CTA, Section 6402(7). 59508 Federal Register / Vol. 87, No. 189 / Friday, September 30, 2022 / Rules and Regulations

The first question which comes to mind is which companies are required, and similarly which are not required, to report their information. There are 23 exceptions to the reporting requirements for specific types of entities. Those entities are listed below, but likely won’t apply to those reading this article as they include banks, public companies, utilities, etc.

For the average consumer, entities meeting these criteria are generally exempt:

1. Large Operating Entities:
   1. More than 20 full-time employees; or
   2. Lease or owned physical office (excluding registered agent address); or
   3. Income tax returns show greater than $5,000,000 in gross receipts from US sources.
2. Regulated Entities (list below)
3. Subsidiaries of Exempt Entities
4. Subsidiaries of Exempt Entities
   1. Corporations and LLCs owned or controlled by an exempt entity are themselves exempt.

The following 23 entity types are exempt:

1. Securities reporting issuer
2. Governmental authority
3. Bank
4. Credit union
5. Depository institution holding company
6. Money services business
7. Broker or dealer in securities
8. Securities exchange or clearing agency
9. Other Exchange Act registered entity
10. Investment company or investment adviser
11. Venture capital fund adviser
12. Insurance company
13. State-licensed insurance producer
14. Commodity Exchange Act registered entity
15. Accounting firm
16. Public utility
17. Financial market utility
18. Pooled investment vehicle
19. Tax-exempt entity
20. Entity assisting a tax-exempt entity
21. Large operating company
22. Subsidiary of certain exempt entities
23. Inactive entity

Are there any exemptions from the reporting requirements?

• There are several exemptions to the reporting requirements. Those exemptions include if the beneficial owner is a minor (though the minor’s parent’s information would need to be reported), an individual acting as a nominee, an employee of a reporting company (this does not include an officer) an individual with a future interest such as an inheritance, a creditor of a reporting company, or a third party company applicant.
• Financial Crimes Enforcement Network U.S. Department of the Treasury, Small Entity Compliance Guide, Sept. 2023 -Version 1, page 29, https://www.fincen.gov/boi/small-entity-compliance-guide 31 C.F.R. § 1010.380(d)(3)

Penalties for Failing to Comply

Willful failure to file accrues a $500 per day penalty to a maximum of $10,000, with up to 2 years in prison. Willfulness is well defined in law, but rest assured, if you’re reading this article then you’re aware of the requirements and failing to file cannot be chalked up to forgetting or not knowing.

Avoiding the penalty requires filing the report. Fortunately, this is a service we provide for our clients. Contact us for more information.

What if there are inaccuracies in previously reported information?

• If any report under this section was inaccurate when filed, the reporting company shall file a corrected report in the form and manner specified in paragraph” 31 C.F.R. § 1010.380

This term has become widely known since FATCA compliance spread worldwide. The ultimate beneficial owner is a natural person who benefits from an entity. The rules were put in place to avoid people using shell companies and trusts to mask the “real” owners of a company.

Every company must “bottom out” in a natural person for reporting purposes. That is to say a yacht or bank account cannot be enjoyed by a corporation or business entity. There is a human behind every transaction. This person, or persons, must be reported as part of the beneficial ownership information. This was previously only given to banks for Know Your Customer (KYC) and Anti-Money Laundering (AML) purposes.

Companies are required to disclose all direct or indirect owners of at least 25% of the shares. In addition, such individuals who have substantial control over the company must be disclosed. This includes all officers, the board of directors, and the authorized signatories of the parent company. Names, dates of birth, place of residence and passport information (including copy of ID) are requested.

FinCEN’s definition of Beneficial Ownership Information (BOI) will be somewhat different:

• FinCEN calls BOTH individuals who are owners of a company and individuals who have substantial control of the company, beneficial owners.
• Owners of the company who own 25% or more of the company must be included on the company report.
• In addition, anyone who exercises substantial control over the company must be reported. 31 C.F.R. § 1010.380

What is substantial control?

• Reporting companies are required to report all persons who exercise substantial control if the individual meets any of the following criteria:
  • (1) Serving as a senior officer of the reporting company
  • (2) Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) [A senior officer is any individual holding the position or exercising the authority of a president, chief financial officer (CFO), general counsel (GC), chief executive officer (CEO), chief operating officer (COO), or any other officer, regardless of official title, who performs a similar function as these officers.]
  • (3) Directs, determines, or has substantial influence over important decisions made by the reporting company
  • (4) the individual has any other form of substantial control over the reporting company
  • 31 C.F.R. § 1010.380 Financial Crimes Enforcement Network U.S. Department of the Treasury, Small Entity Compliance Guide, Sept. 2023 -Version 1, page 17

What is ownership interest?

• An ownership interest for purposes of determining beneficial ownership under the CTA is defined broadly and takes into account a variety of arrangements and ownership interests. In addition to stock and other equity interests, capital interest, and profits interests, put, call, and straddles may also be taken into account, as well as debt instruments with equity like features, in determining whether the 25% threshold is met. For these purposes, the total ownership interests that an individual owns or controls, directly or indirectly, is calculated as a percentage of the total outstanding ownership interests of the Reporting Company, and assumes all options are exercised.31 C.F.R. § 1010.380(d)(2)(iii).
• For Reporting Companies that issue capital or profit interests, an individual’s ownership interests are the capital and profit interests in the entity, calculated as a percentage of the total outstanding capital and profit interests in such entity. For Reporting Companies that issue shares of stock, the threshold is measured as a percentage of the greater of either the total voting power of all ownership interests entitled to vote or the total outstanding value of all classes of ownership interests. However, if the percentage of an ownership interest cannot be determined with “reasonable certainty” using this method, any individual owning or controlling 25% of any class or type of ownership interest of a Reporting Company will be deemed to own or control 25% of all ownership interests in the Reporting Company.31 C.F.R. § 1010.380(d)(2)(iii)(D).

Who is not a beneficial owner?

• Minors, though the parent or guardian will qualify
• Agent, Custodian, Nominee or Intermediary for another person
• An employee who does not benefit from profits or control the company
• Someone who only has an interests via inheritance
• A creditor

The Financial Crimes Enforcement Network is part of the US Department of Treasury. Its purpose is to aggregate and analyze transactional data to fight financial crimes. Historically, these efforts have been hampered by anonymous companies, thus the effort to “pull back the curtain” on such entities.

Reporting Companies

• The rule identifies two types of reporting companies: domestic and foreign. A domestic reporting company is a corporation, limited liability company (LLC), or any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. A foreign reporting company is a corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office. Under the rule, and in keeping with the CTA, twenty-three types of entities are exempt from the definition of “reporting company.”

What Must be Reported

For every individual who is a beneficial owner or control person of the company, the following information must be provided:

1. The full legal name of the individual. If you use a nickname or your maiden name, you should use the name listed on your identification documents.
2. The date of birth of the individual
3. A complete current residential street address. This must be a residential street address. You may not use a business address, PO BOX, mail center, etc. This is the place where you lay your head at night. If you have more than one residential address, you should use the address listed on your identification documents
4. The unique number from your identity document.
5. A photo of your identity document showing the unique number. Qualifying identity 31 C.F.R. § 1010.380

• What if I do not have a photo ID?

  • There is no alternative to the four acceptable forms of identification (passport, driver license, state/local/tribal issued id, foreign passport) 31 U.S.C. 5336(a)(1)

• Will a birth certificate be acceptable?

  • A birth certificate is not acceptable. 31 U.S.C. 5336(a)(1)

• Does the ID I provide need to be Real ID Compliant?

  • REAL ID rules are not currently effective, but when the REAL ID rules become effective in May 2025, ID provided will need to be REAL ID compliant. 31 U.S.C. 5336(a)(1)

Does my company have to report it's company applicant?

• A reporting company is required to report its company applicants if it is either a domestic or foreign reporting company created on or after January 1, 2024. A reporting company is not required to report its company applicants if it is either a domestic or foreign reporting company created after January 1, 2024.
• Each reporting company that is required to report company applicants will have to identify and report to FinCEN at least one company applicant, and at most two. All company applicants must be individuals. Companies or legal entities cannot be company applicants.

What is a FinCEN Identifier?

• A “FinCEN identifier” is a unique identifying number that FinCEN will issue to an individual or a reporting company upon request after the individual or reporting company provides certain information to FinCEN. An individual or reporting company is not required to obtain a FinCEN identifier. An individual or reporting company may only receive one FinCEN identifier. FinCEN identifiers can be included in reports to FinCEN by the reporting company in lieu of providing the underlying information for that particular individual.
• On or after January 1, 2024, individuals may electronically apply for FinCEN identifiers by completing an electronic web form and providing the same four pieces of personal information and identification that the reporting company must submit. After an individual submits an application, the individual will immediately receive a FinCEN identifier unique to that individual.
• A reporting company may also secure its own FinCEN identifier, but only after submitting its initial report and checking the box on the reporting form. If the reporting company wishes to request a FinCEN identifier after submitting its initial BOI report, it may submit an updated BOI report to request a FinCEN identifier, even if the company does not otherwise need to update its information. Individuals and entities that obtain FinCEN identifiers must update/correct the information within and in the same manner as required for updated/corrected reports under the Final Rule. See https://www.fincen.gov/boi-faqs (9/29/2023).

Who receives the information?

The Financial Crimes Enforcement Network ("FinCEN") at the U.S. Treasury. Access is also provided to law enforcement agencies, financial institutions, and other authorized persons, including foreign tax authorities.

When does the law go into effect?

January 1, 2024

How & When to File

Clients who choose our service will be able to file using our online platform. We collect the necessary information from you and your business partners, and file the report on your behalf. Alternatively, you may create your own login with FinCEN to file electronically through their system.

When and how should my company file its report?

Reports will be accepted starting on January 1, 2024. Reporting companies created or registered to do business before January 1, 2024, will have until January 1, 2025, to file their initial Beneficial Owner Information reports. Reporting companies created or registered on or after January 1, 2024, will have 30 days after receiving notice of their company’s creation or registration to file their initial BOI reports.

• If your company already exists as of January 1, 2024, it must file its initial BOI report by January 1, 2025. This includes companies that have been dissolved prior to January 1, 2024, unless that company falls within an exemption. If your company is created or registered to do business in the United States after January 1, 2024, then it must file its initial BOI report within 30 days after receiving actual or public notice that its creation or registration is effective. Notice can be actual (e.g. receiving Articles of Organization from the Secretary of State) or constructive notice (e.g. the articles have been posted on the Secretary of State’s site, but not directly received by the company). Financial Crimes Enforcement Network U.S. Department of the Treasury, Small Entity Compliance Guide, Sept. 2023 -Version 1, page 42, https://www.fincen.gov/boi/small-entity-compliance-guide
  • If the company is exempt as of January 1, 2024 but at a later date loses that exempt qualification (eg. reinstatement of a dissolved company that was previously exempt as inactive) the reporting must be done within 30 calendar days from the date the company no longer qualifies for the exemption. Id.
  • The report cannot be filed prior to January 1, 2024 for any company. Id.
  • When the time comes to report Beneficial Ownership Information, this will be achieved through FinCEN’s electronic filing system. There will be guidance on how to navigate this online reporting system, however this has not been released yet. Once available, it will be published at www.fincen.gov/boi
  • FinCEN is predicting that there may be certain circumstances where an electronic submission is unavailable to certain companies. In those instances, companies are encouraged to reach out to FinCEN directly. Financial Crimes Enforcement Network U.S. Department of the Treasury, Small Entity Compliance Guide, Sept. 2023 -Version 1, page 43, https://www.fincen.gov/boi/small-entity-compliance-guide

When and how should my company file its report?

• hanges to the reported information? If there is any change with respect to required information previously submitted to FinCEN concerning a reporting company or its beneficial owners, including any change with respect to who is a beneficial owner or information reported for any particular beneficial owner, the reporting company shall file an updated report in the form and manner specified in paragraph (b)(3) of this section within 30 calendar days after the date on which such change occurs.See, 3 CFR 101.380(a)(2) The timeframe to update inaccuracies is 30 days. See 31 CFR 101.380(a)(3)
  • A change necessary for reporting will be deemed when the following occur
    1. Member Turns 18: When a reporting company previously submitted information of a parent or legal guardian in lieu of the minor child's information, an updated report must be submitted when the child attains age of majority. See, 31 CFR 1010.380(b)(2)(ii) and (d)(3)(i)
    2. Death: “If an individual is a beneficial owner of a reporting company by virtue of property interests or other rights subject to transfer upon death, and such individual dies” 31 C.F.R. § 1010.380
    3. Change of identifying document: “a change with respect to required information will be deemed to occur when the name, date of birth, address, or unique identifying number on such document changes.” 31 C.F.R. § 1010.380
       1. NOTE: Other changes to the identifying documents, such as the individual’s personal characteristics or expiration date, do not require an updated BOI. Thus, a new picture on a driver’s license, U.S. passport or other governmental ID does not need to be reported on an updated BOI report. 31 CFR §1010.380(2)(2)

Is it possible to obtain an extension to file a report?

• A number of commenters stated that the final rule should include a mechanism for reporting companies to request extensions, or provide an automatic extension period, to address a range of challenges such as the calculation of ownership interests after transfers of membership interests, locating beneficial owners or company applicants, particularly in foreign countries, or other circumstances. While the final rule does not establish a specific mechanism for reporting companies to seek extensions to the filing periods for initial, updated, or corrected reports, FinCEN may consider providing guidance or relief as appropriate, depending on the facts and circumstances. Beneficial Ownership Information Reporting Requirements, 87 Fed Reg 59498 (Sept. 30, 2022)https://www.federalregister.gov/d/2022-21020/p-198

What if there are inaccuracies in previously reported information?

• If any report under this section was inaccurate when filed, the reporting company shall file a corrected report in the form and manner specified in paragraph” 31 C.F.R. § 1010.380

How do I avoid reporting?

• You can’t.

My company dissolved prior to 2024, do I need to report?

Companies Dissolved prior to 2024 Exemptions to reporting: Financial Crimes Enforcement Network U.S. Department of the Treasury, Small Entity Compliance Guide, Sept. 2023 -Version 1, page 14, https://www.fincen.gov/boi/small-entity-compliance-guide
• Inactive entity
• An entity qualifies for this exemption if all six of the following criteria apply:
• 1. The entity was in existence on or before January 1, 2020.
• 2. The entity is not engaged in active business.
• 3. The entity is not owned by a foreign person, whether directly or indirectly, wholly or partially. “Foreign person” means a person who is not a United States person. A United States person is defined in section 7701(a)(30) of the Internal Revenue Code of 1986 as a citizen or resident of the United States, domestic partnership and corporation, and other estates and trusts.
• 4. The entity has not experienced any change in ownership in the preceding twelve-month period.
• 5. The entity has not sent or received any funds in an amount greater than $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 twelve month period.
• 6. The entity does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

• Do I need to report if I dissolve my company?

  • There is no requirement to report a company’s termination or dissolution. Financial Crimes Enforcement Network U.S. Department of the Treasury, Small Entity Compliance Guide, Sept. 2023 -Version 1, page 46, https://www.fincen.gov/boi/small-entity-compliance-guide; 59514 Federal Register / Vol. 87, No. 189 / Friday, September 30, 2022 / Rules and Regulations
  • If the company was formed after January 1, 2020 and was dissolved prior to January 1 2024, you must still report BOI to FinCEN unless another exemption applies. Beneficial Ownership Information Reporting Requirements, 87 Fed Reg 59498 (Sept. 30, 2022) https://www.federalregister.gov/d/2022-21020/p-225

The Financial Crimes Enforcement Network (FinCEN) has issued a final rule implementing the bipartisan Corporate Transparency Act’s (CTA) beneficial ownership information (BOI) reporting provisions. The rule will enhance the ability of FinCEN and other agencies to protect U.S. national security and the U.S. financial system from illicit use and provide essential information to national security, intelligence, and law enforcement agencies; state, local, and Tribal officials; and financial institutions to help prevent drug traffickers, fraudsters, corrupt actors such as oligarchs, and proliferators from laundering or hiding money and other assets in the United States.

The rule describes who must file a BOI report, what information must be reported, and when a report is due. Specifically, the rule requires reporting companies to file reports with FinCEN that identify two categories of individuals: (1) the beneficial owners and/or persons with substantial control of the entity; and (2) the company applicants of the entity

The Anti-Money Laundering Act of 2020 (AMLA) established the Corporate Transparency Act (CTA). The CTA requires certain U.S. and foreign entities that are defined as reporting companies to report beneficial owners and company applicants to FinCEN (the Department of the Treasury’s Financial Crimes Enforcement Network), beginning January 1, 2024. FinCEN will establish and maintain a non-public national registry of beneficial owners and company applicants of reporting companies to prevent and combat money laundering, terrorist financing, corruption, tax fraud and other illicit activity.

As we understand the law, it is no different than providing information to the IRS. The information will not be publicly available as the law is currently written. Anonymity is almost never perfect, and it does not provide anonymity from the Government. The structure that you have created provides anonymity from the public. Additionally, anonymity is only part of what the structure offers. Limited liability is arguably the most important piece of the structure.