Executive Summary:

Beginning with the Panama Papers leak in 2016, there has been an increasing focus on the use of business entities to facilitate money laundering and conceal profits of crime and corruption. Europe and the UK are far ahead of the U.S. in the implementation of beneficial ownership registers for business entities and trusts and, in recent years, the U.S. has come under increasing pressure to do the same.

The Corporate Transparency Act (“CTA”) is a response to this pressure and was authorized under the Anti-Money Laundering Act of 2020 with the intent of combating money laundering and terrorist financing by expanding the regulatory power of the Financial Crimes Enforcement Network (“FinCEN”); a bureau of the U.S. Department of the Treasury.

The CTA, which was enacted on January 1, 2021, will come into effect on January 1, 2024, and impose new federal reporting requirements on many business entities operating in the U.S.

While there are exceptions for certain highly-regulated entities (such as banks or entities that report to the U.S. Securities and Exchange Commission) and large operating companies, most business entities formed by a filing with a secretary of state’s office will be required to disclose to FinCEN personal identifying information about the individual creating the entity and the beneficial owners of such newly created entity. The CTA will also require that such information be updated and/or corrected within 30 days of any changes to the initially reported information.

This client alert will provide an overview of (1) which business entities will have reporting obligations; (2) what Beneficial Ownership Information must be reported; (3) who is considered a Company Applicant and a Beneficial Owner under the CTA; (4) important CTA deadlines; and (5) the steps that can be taken now to prepare for the reporting obligations of the CTA. More in-depth explanations of each of these topics will be covered in subsequent client alerts.

I. Who is required to file reports with FinCEN?

Reports must be filed by domestic and foreign “reporting companies.”

• A domestic reporting company is any entity that is a corporation, a limited liability company, or is otherwise created by the filing of a document with a secretary of state or similar office (common law trusts would not fall into this category).
• A foreign reporting company is any entity formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or similar office.

There are 23 reporting exemptions under the CTA. These exemptions include:

• Highly regulated entities, such as regulated securities and financial services companies, governmental authorities, regulated financial institutions, and regulated insurance companies
• Large Operating Companies that meet the following general criteria:
  • Employ more than 20 full-time employees in the U.S.;
  • Have an operating presence at a physical office in the U.S.; and
  • Filed a federal income tax return showing greater than $5,000,000 in gross receipts/sales.
• Accounting Firms
• Tax-exempt entities, subsidiaries of tax-exempt entities, and entities assisting tax-exempt entities
• Inactive entities

II. What Beneficial Ownership Information must be reported?

Reporting companies must provide the following information to FinCEN: (1) the company’s legal name and trade name or DBA; (2) the company’s address; (3) the jurisdiction where the company was formed or is currently registered; and (4) the company’s TIN or foreign tax ID.

Beneficial Owners of reporting companies and Company Applicants who form reporting companies must provide: (1) full legal name; (2) date of birth; (3) residential address (this will be the business street address for certain Company Applicants); and (4) photo ID number and image. Forms of acceptable photo ID include a non-expired U.S. passport, a state/local identification document, state-issued driver’s license or foreign passport if none of the above is available.

To ease the burden of having to provide the above information multiple times for an individual who has reporting obligations as to multiple entities, the CTA provides for a “FinCen Identifier”: a unique identifying number assigned to a person by submitting to FinCEN an application containing the information about that person which would be required in a report filed by a reporting company.

For more information on Beneficial Ownership Information, please visit here.

III. Who are Company Applicants and Beneficial Owners?

Company Applicants are the individuals who file or direct the filing of the document that: (1) creates the domestic reporting company, or (2) first registers the foreign reporting company in the U.S. If more than one individual is involved in the filing of the document, the individual who is primarily responsible for directing or controlling such filing is the Company Applicant.  There can be a maximum of two Company Applicants for each entity; i.e., the person who directly files the relevant document and the person who is primarily responsible for directing or controlling the filing of the relevant document. Only reporting companies formed on or after January 1, 2024, must report Company Applicants.

A Beneficial Owner is an individual who either: (1) exercises substantial control over the reporting company; or (2) owns or controls at least 25% of the (direct or indirect) ownership interests of the reporting company. All reporting companies, whether formed before or after January 1, 2024, must report Beneficial Owners.

IV. Important CTA Deadlines

Reporting companies formed before January 1, 2024, will have until January 1, 2025, to comply with the above reporting requirements. 

Reporting companies formed on or after January 1, 2024, will have 30 days from the time of formation to comply with the above reporting requirements.

Updates and corrections to the initially filed information must be reported within 30 days of such changes.

V.  What can you do now to prepare?

• Review your corporate structure and update organizational flow charts
• Create a Beneficial Ownership Register
• Develop an internal CTA Compliance Program
• Stay up to date on changes to CTA Forms and Regulations

If you have any questions about the content of this alert, please reach out to Arthur Moore.