What this is - On September 30, 2022, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued its long-anticipated final rules (“Final Rules”) for the beneficial ownership reporting requirements of the Corporate Transparency Act (“CTA”), and announced a January 1, 2024, effective date.
What this means - The effective date will trigger the filing due dates for beneficial ownership reports. Below are some of the key elements of the CTA and the Final Rules.
The CTA’s Beneficial Ownership Reporting Requirements
The CTA requires all “reporting companies” to disclose to FinCEN the full legal name, date of birth, address, and unique identifying number (e.g., unexpired state identification card number, unexpired driver’s license number or an unexpired passport number) of each of its “beneficial owners” and “applicants”.
The Final Rules require that a beneficial owner’s address must be his or her residential street address. For applicants (referred to as “company applicants” in the Final Rules), the Final Rules require a business address for those who provide a business service as “a corporate or formation agent”, and a residential street address for all other company applicants.
Additionally, the Final Rules require that reporting companies also provide a “scanned copy of the identification document from which the unique identifying number of the beneficial owner or company applicant is obtained.”
Key Definitions
A “reporting company” is defined in the CTA as “a corporation, LLC, or other similar entity that is created by the filing of a document with the secretary of state or a similar office under the law of a state or Indian Tribe; or formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with such a filing office.” The CTA does not further define “other similar entity” and neither does FinCEN in its Final Rules. But FinCEN does emphasize that “the core consideration for the purposes of the CTA’s statutory text and the final rule is whether an ‘entity’ is ‘created’ by the filing of the document with the relevant authority.”
A “beneficial owner” is defined in the CTA as an “individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity, or owns or controls 25 percent or more of the ownership interests of the entity, or receives substantial economic benefits from the assets of the entity.” The definition excludes minors and certain others. The Final Rules define “substantial control”.
An “applicant” (referred to as a “company applicant” in the Final Rules) is defined in the CTA as “any individual who files an application to form a corporation, limited liability company, or other similar entity under the laws of a state or Indian Tribe; or registers or files an application to register a corporation, limited liability company, or other similar entity formed under the laws of a foreign country to do business in the U.S.” The Final Rules specify that the term “company applicant” means “the individual who directly files the document to create or register the reporting company, and the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing.”
Exemptions to the Reporting Requirements
The CTA provides 23 exemptions to the reporting company definition, including any entity that: employs more than 20 full-time employees in the U.S., in the previous year filed federal income tax returns in the U.S. demonstrating more than $5 million in gross receipts or sales in the aggregate, and has an operating presence at a physical office within the U.S. The exemptions in the CTA also include many industries that are already heavily regulated, such as banks and insurance providers, as well as publicly traded companies subject to SEC reporting.
The Final Rules do not add any additional exemptions. FinCEN has left open the possibility of considering additional exemptions in the future, but only if the Secretary of Treasury, the US Attorney General, and the Secretary of Homeland Security approve the additions.
Issuance of Regulations Governing the CTA Reporting Requirements.
FinCEN has indicated that these Final Rules for beneficial ownership reporting represent the first of three sets of regulations that FinCEN is creating related to the CTA. FinCEN says for the second and third set, it will issue proposed rules with a public commentary period for both, as it did for the first set. The second set will be for implementing protocols for access to and disclosure of the beneficial ownership information, and the third set will address amendments to the Customer Due Diligence section of the Bank Secrecy Act. FinCEN has not indicated dates for when it will be issuing proposed rulemaking for the second and third set of proposed rules; but mentioned that it may issue the second set later this year.
Reporting Due Dates
The CTA’s effective date is January 1, 2024.
Initial Reports - Newly Created or Registered Reporting Companies
For reporting companies that are newly formed or registered on or after the January 1, 2024 effective date, the Final Rules require initial reports within 30 days from the earlier of: “the date on which the reporting company receives actual notice that its creation (or registration) has become effective; or a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the reporting company has been created (or registered).” The initial report must include the required information/documentation about the reporting company, its beneficial owners, and its company applicants.
Initial Reports - Existing Reporting Companies
The Final Rules require reporting companies that are in existence prior to the January 1, 2024 effective date to file their initial reports within a year of the effective date. The initial report must include the required information/documentation about the reporting company and its beneficial owners. Importantly, the Final Rules do not require these existing reporting companies to include company applicant information in their reports. In its commentary to the Final Rules, FinCEN noted the potential burden on existing reporting companies in having to locate company applicants and indicated that, for reasons explained in the commentary, the burden outweighs the potential usefulness of this information.
Correction and Update Reports
The Final Rules require reporting companies to correct any inaccurate information in the initial report within 30 days from that the inaccuracy is discovered. For information that has changed since the initial filing, the reporting company has 30 days from the date of the change to file an updated report.
Violations and Penalties
The CTA includes substantial civil and criminal penalties for willful failure to report, willfully providing false or fraudulent information, and for unauthorized disclosure or use of the reporting information. Penalties for reporting violations can be as high as $10,000 or 2 years in prison, or both, and penalties for unauthorized disclosure or use violations can be up to $250,000 or 5 years in prison, or both (or higher if part of violating another law).
Conclusion
These are some, but not all, of the key details of the CTA and FinCEN’s Final Rules. Business and legal professionals can begin preparing for the CTA’s beneficial ownership reporting requirements by carefully reviewing the CTA itself along with the Final Rules, and if applicable, begin gathering reporting information.
We discuss the Final Rules and explore many of the CTA’s provisions in-depth in our on-demand webinar, The Corporate Transparency Act, Updates and Changes.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
