Thursday, September 29, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a Final Rule regarding the beneficial ownership reporting requirements under the Corporate Transparency Act (CTA). By imposing beneficial ownership information reporting requirements on certain entities, the CTA aims to discourage the use of shell corporations to disguise and move illicit funds. The Final Rule addresses, among other things, who must report beneficial ownership information, when they must report and what information they must provide.
Reporting Companies Subject to the CTA
The Final Rule identifies two types of companies that are required to file reports with FinCEN — domestic reporting companies and foreign reporting companies. The CTA defines a “reporting company” as a “corporation, limited liability company or other similar entity” that is created by filing with a secretary of state under the law of a state, or is formed under the laws of a foreign country and registered to do business in the United States.
The Final Rule exempts several types of entities from the definition of “reporting company,” thereby exempting these entities from the CTA’s reporting requirements. These entities include, amongst others, publicly traded companies, banks and bank holding companies, credit unions, registered investment companies and registered investment advisers, registered public accounting firms, certain tax-exempt entities and inactive businesses meeting certain requirements. Importantly, the Final Rule also exempts operating entities that have at least 20 full-time employees in the U.S., more than $5 million in gross revenues and a physical location in the U.S. Even with the exemptions, an overwhelming majority of all entities in existence will constitute “reporting companies” with reporting obligations.
Reporting Requirements Under the CTA
Upon formation or registration, a reporting company is required to submit a report to FinCEN identifying the reporting company’s:
- Full legal name, including trade names and d/b/a names.
- Business street address.
- State of formation.
- Taxpayer Identification Number, including an Employer Identification Number.
The report must also include personal information for each “beneficial owner” of the reporting company. This information includes the individual’s:
- Full legal name.
- Date of birth.
- Current residential address.
- A unique identifying number from an acceptable identification document (i.e., a driver’s license, passport or other government-issued identification document).
- An image of the identification document.
The report must also include the same personal information as above for “applicants,” but only for entities formed after January 1, 2024. Entities formed prior to January 1, 2024, are not required to provide “applicant” information when submitting their report.
A “beneficial owner” is any individual who, directly or indirectly, either 1) exercises substantial control over the reporting company or 2) owns or controls 25% or more of the ownership interests of the reporting company.
An “applicant” is any individual who 1) files an application to form an entity under the laws of a U.S. state or 2) registers or files an application that first registers a foreign reporting company to do business in the U.S. An “applicant” also includes any individual who is primarily responsible for directing or controlling the filing of such documents by another person.
Consequences for Noncompliance
The CTA provides that it is unlawful for any individual or reporting company to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information or to willfully fail to report complete or updated beneficial ownership information. Any person who engages in such unlawful conduct is subject to civil penalties of no more than $500 for each day that the violation continues and criminal penalties consisting of a fine of not more than $10,000 and/or imprisonment for not more than two years.
The Final Rule’s effective date is January 1, 2024.
Reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their formation or registration to file their initial report. Companies created before January 1, 2024, have an extended filing deadline for their initial report – January 1, 2025.
The CTA includes a continuing obligation to maintain accurate reports. Reporting companies will have a 30-day deadline to file updates to their previously filed reports for changes in beneficial owners, personal information or exempt status. Additionally, reporting companies must correct inaccurate reports within 30 days after they discover or should have discovered the reported information is inaccurate.
A summary “fact sheet” issued by FinCEN regarding the Final Rule can be found here.
The rules surrounding the CTA are complex, and FinCEN anticipates additional rulemaking to establish rules for who may access beneficial ownership information reported under the CTA, for what purposes, and what safeguards will be required to maintain the security of reported information. Warner’s Corporate Practice Group is closely monitoring developments on this issue and will provide updates as new information becomes available. In the meantime, business owners should begin assembling beneficial ownership information.
Associate Alan Jurcak contributed to this eAlert.