Updated October 20, 2023
U.S. companies will soon face new reporting requirements under the Corporate Transparency Act (“CTA”). The new law will require entities identified as reporting companies to provide information about their beneficial owners. The information will be compiled into a private database maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) to combat money laundering activities. If reporting companies fail to disclose the necessary information, then they could face both severe civil and criminal penalties.
BACKGROUND
On January 1, 2021, Congress enacted the National Defense Authorization Act of 2021 (“NDAA”). Both the Senate and the House of Representatives voted to override President Trump’s veto of the legislation with an overwhelming majority, 81-13 and 322-87, respectively. Title LXIV of the NDAA included the CTA. The CTA is recognized as an amendment to the Anti-Money Laundering Act of 2020 (“AMLA”), and it is a significant addition to the most comprehensive legislative crackdown on money laundering in recent history.
The CTA discourages the use of shell companies by mandating a new layer of transparency during entity formation. Prior to the CTA, Congress identified anonymous shell companies as a serious loophole to the existing AMLA legal framework. The CTA marks a bipartisan effort to address that loophole and to shift the burden of collecting ownership information from financial institutions to reporting companies.
REPORTING REQUIREMENTS
The statute identifies a reporting company as a corporation, limited liability company, or other similar entity created by a filing document with a secretary of state (or similar office), or formed under the law of a foreign country and registered to do business in the United States.
Under the statute, a beneficial owner is any individual who directly or indirectly exercises substantial control over an entity or holds or controls at least 25% of the ownership interests of that company.
The CTA will require a reporting company to provide the following information about its beneficial owners to the FinCEN database:
- Full Name
- Date of Birth
- Current Residential address; and
- A unique identifying number from a state-issued identification document (ID)
- This may include a passport, driver’s license, or a FinCEN identifier, which will be scanned into a FinCEN database.
The database maintained by FinCEN will have limited access. Authorized users will include federal government agencies (e.g. FBI), state and local law enforcement with an appropriate court order (i.e. warrant), Non-U.S. law enforcement (i.e. Interpol), or financial institutions granted the reporting company’s permission.
EXCEPTIONS
Some entities will be exempt from reporting beneficial ownership information. The exceptions apply to entities that already disclose beneficial ownership information through other federal laws/regulations or those entities which are impracticable for money-laundering activities.
The most prominent exceptions include:
- Publicly traded companies (subject to SEC regulations)
- Companies employing more than 20 full-time employees in the United States, operating from a physical office in the United States, AND having filed a tax return demonstrating more than $5 million in gross receipts/sales
- Dormant companies which existed on or before January 1, 2020, are not engaged in “active business,” AND not owned (either directly or indirectly) by a non-U.S. individual
- Additional exceptions exist for certain financial institutions, tax exempt entities, and pooled investment vehicles
TIMELINE
The CTA takes effect January 1, 2024. Companies that were formed or registered prior to the effective date will have one year to comply. Companies that are formed or registered on or after the effective date in 2024 will be required to report the beneficial ownership information within 90 days of formation or registration. Entities created in 2025 and after shall have 30 days to report. Any changes to reported information must reported to FinCEN within 30 days of the change occurring.
PENALTIES
Failure to comply with the new CTA reporting requirements will result in serious penalties. An individual who fails to meet the reporting standards may face civil penalties of up to $500 per day. An individual who willfully provides or attempts to provide false or fraudulent information, or willfully fails to provide FinCEN with the requisite information, may face criminal fines up to $10,000 and/or imprisonment for up to two years.
NEXT STEPS
It is essential for a company to determine whether its entity structure qualifies as a reporting company under the CTA. Reporting companies need to keep abreast of forthcoming regulations and consider a compliance plan. Identifying beneficial owners and keeping FinCEN information up to date is essential for businesses to avoid civil and criminal penalties going forward. Hahn Loeser & Parks LLP provides strategic legal advice to its business clients regarding regulatory compliance. We are available to counsel business owners who want to learn more about the CTA and to prepare for how it may affect their business in the coming year.
