For the first time, the U.S government will require most U.S. corporate and other entities to disclose information concerning ownership and control pursuant to the federal Corporate Transparency Act (CTA), an expansion of the bi-partisan federal Anti-Money Laundering Act of 2020. Currently, the federal government and most U.S. states do not require disclosure of corporate ownership information. The CTA changes this reality. Beginning January 1, 2024, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) will begin collecting corporate ownership and control information from most new and existing U.S. corporate and other entities.
Purpose of the Corporate Transparency Act.
The CTA became law on January 1, 2021. The CTA is intended to be an anti-money laundering measure by expanding ownership and financial reporting requirements, thereby creating a database of beneficial ownership and control with FinCEN. The expectation is that the database will combat the use of shell companies and other corporate structures used to facilitate money laundering and terrorist financing. Additionally, the CTA will bring the United States into compliance with international anti-money laundering and counter-terrorism financing standards.
What Do I Need to Know About the Corporate Transparency Act?
Subject to several exceptions, discussed briefly below, U.S. for-profit corporate entities (known as “Reporting Companies”) will need to prepare and file with FinCEN, via its online reporting system, a report containing certain ownership information of the Reporting Company and its Beneficial Owners. The CTA broadly defines a “Beneficial Owner” as any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (a) exercises substantial control over the entity (this may include individuals that are not owners); or (b) owns 25% or more of the ownership interests of a Reporting Company. “Substantial control” is defined as those who can direct, determine, or have substantial influence over “important” matters affecting the Reporting Company, which could include certain officers, directors or mangers. FinCEN will not accept reports prior to January 1, 2024.
The penalties associated with non-compliance are not insignificant, as violations are punishable by civil penalties of up to $500 per day for each day the violation continues. The CTA makes it unlawful for any person to willfully provide (or attempt to provide) FinCEN with false or fraudulent beneficial ownership information, with penalties including criminal fines of up to $10,000, imprisonment or both.
The CTA requires a Reporting Company to report its: (a) entity name, including trade names or DBAs; (b) current business street address; (c) jurisdiction of formation; and (d) tax identification number. Reporting Companies must also file updated reports within 30 days of any change to reported information.
Additionally, Reporting Companies must provide each Beneficial Owner’s: (a) legal name; (b) date of birth; (c) current residential street address; and (d) a unique identifying number from an accepted identification document (e.g., passport, driver’s license or other government issued ID), including an image of the applicable identification document.
Repeat players may apply for and obtain a unique FinCEN identifier, which Reporting Companies and Beneficial Owners can use in subsequent filings.
What Should I Be Doing Now?
The CTA reporting rule goes into effect on January 1, 2024. The due date for the initial report differs for new entities and existing entities. For entities created on or after January 1, 2024, the initial report is due within 30 days of entity formation. For entities formed before January 1, 2024, the initial report is due no later than January 1, 2025.
The CTA identifies 23 categories of companies exempt from reporting obligations. For existing entities unsure of the CTA’s applicability, we recommend reaching out to your LCOJ attorney to discuss. In the meantime, existing entities should dust off their entity formation documents to assist in making applicability determinations, and, if applicable, ensure they have complete and accurate reporting information come January 1, 2024.