BizTech Law Blog

Corporate Transparency Act: What You Need to Know Before 2024

Introduction and Scope of New Rule

With a stated goal of countering money laundering, the financing of terrorism and other illicit activities (including those of Russian oligarchs currently under U.S. sanctions), Congress passed the Corporate Transparency Act (CTA) in January 2021 as part of the National Defense Authorization Act. In 2022, the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) began to publish rules in its efforts to begin enforcement of the CTA likely beginning on January 1, 2024.

Some estimates indicate that the relatively new law, which is focused on small businesses, may affect up to 90 percent of domestic entities. These companies will be required to file key ownership and management information with FinCEN.

The result of this sweeping and unprecedented information-gathering initiative will be the creation of a colossal database, which will include entries for some 32-35 million companies, along with key ownership and corporate management details for each.

Although it’s received scant media coverage, this expansive measure marks a sea change in the tactics being employed by FinCEN in their efforts to counter money laundering, financing of terrorism and other illegal activities at the expense of self-reporting otherwise private corporate information.

Which Companies Are Required to Report Information?

The CTA broadly defines a reporting company as any corporation, limited liability company or similar entity that is:

• Created by filing a formation document with a secretary of state or similar office under state or tribal laws.
• Formed under the law of a foreign company and registered to conduct business in the U.S.

The CTA exempts certain entities from reporting including:

• Companies who have more than 20 full-time employees based in the United States, more than $5,000,000 in gross receipts as reported on their prior year’s tax returns, and a physical office in the United States; and
• Certain enumerated categories of companies, who likely already report similar information, such as banks, credit unions, public utilities, and publicly traded companies.

What Types of Information Must be Reported?

Companies that meet the reporting criteria are to deliver a report to FinCEN including the following information on the entity itself, each beneficial owner and company applicant:

Required Company Information

• Legal name of company, including DBAs, etc.
• Street address of principal place of business.
• Jurisdiction of formation and registration.
• Tax identification number, Dun & Bradstreet Data Universal Numbering System (DUNS) or legal entity identifier (LEI).

Required Beneficial Owner & Company Applicant Information

• Full legal name.
• Date of birth.
• Current residential or business street address.
• A unique identifying number from a non-expired acceptable document such as a U.S. passport; driver’s license; state or tribal ID card along with a copy of the document. A foreign passport is also acceptable.

Who Are the Beneficial Owners and Company Applicants of a Reporting Company?

The CTA broadly defines a “beneficial owner” of a reporting company as “any individual who, directly or indirectly, through any contract or arrangement, understanding, relationship of otherwise exercises “substantial control “over the entity and owns or controls not less than 25 percent of the company.”

Additionally, a person could be deemed to be a beneficial owner if the individual:

• Serves as a senior officer of the reporting entity.
• Has authority over appointment or removal of any senior officer or a majority of the board of directors (or similar governing body).
• Directs, determines or has substantial influence on important decisions made by the reporting company.
• Has any form or substantial control over the reporting company.

How Does the CTA Define Substantial Control and Ownership Interest?

The regulation states that substantial control can be exercised directly or indirectly, including as a trustee of a trust or similar arrangement and can include:

Criteria for Determining Substantial Control

• Board of directors representation.
• Ownership or control of a majority of voting power or voting rights of a reporting company.
• Rights associated with any financing arrangement or interest in a company.
• Control over one or more intermediary entities which separately or collectively exercise substantial control over a reporting company.
• Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees.
• Any other contract, arrangement, understanding, relationship or otherwise.

Criteria for Determining Ownership Interest

• Has equity and/or other types of interest (including profits interest, convertible instruments and options)
• Directly or indirectly controls ownership interests through various other mechanisms, including joint ownership; acting on behalf of another individual in roles regarding a trust or similar arrangement; and through ownership or control of intermediary entities.
• Holds the position of or exercises the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer or any other officer regardless of official title who performs a similar function.

Reporting Deadlines and Penalties for Non-Compliance

The effective date for enforcement of the CTA is, currently, January 1, 2024 and reporting companies will have one year to file their initial reports. Any company created or registered after January 1, 2024 will have 30 days to file an initial report. The expected filing fee for this report is $85.

Civil penalties of up to $500 per day and criminal penalties up to $10,000 and two years in jail for willful violations of the reporting requirements. If incorrect information is submitted, a correction filed within 90 days of the original report will prevent enforcement action.

Data Privacy Concerns: Will Our Company Information Be Safe?

The reporting requirements have raised significant privacy and security issues which the CTA has addressed through data protection parameters. FinCEN will be responsible for gathering and storing the reported data in a secure, non-public database using the highest level of security. Penalties are steep for any unauthorized individuals who attempt to improperly access information or violate the database protections, with criminal penalties of up to $250,000 and five years in jail.

What Should My Company Do Now?

Affected business owners should begin developing a full list of all the entities they own and control. Additionally, affected businesses should begin assembling a list of potential Beneficial Owners and meet with qualified counsel to help determine reporting requirements. Finally, it would be prudent to contact potential Beneficial Owners to begin gathering information which may need to be reported.

If you have any questions or concerns regarding the CTA, how to collect and present the information that needs to be reported or any other concerns about compliance, please contact Foster Swift employment attorney Robert Hamor at rhamor@fosterswift.com.

Be sure to also visit Foster Swift’s Corporate Transparency Act Resource Page for more tools on understanding the upcoming flood of reporting requirements.

Categories: Alerts and Updates, Did you Know?, Employment, Legislative Updates, News