The Corporate Transparency Implementation Overview
The Corporate Transparency Act will require certain US entities (and certain foreign entities) to report information relating to their ultimate Beneficial Owner to FinCEN. FinCEN issued its Final Rule implementing the CTA on September 29, setting the enforcement date to be January 1, 2024. This new Act and its reporting obligations are discussed in detail below.
WHAT IS THE CORPORATE TRANSPARENCY ACT?
The Corporate Transparency Act (“CTA”) was passed in early 2021 and is intended to expand upon the Anti-Money Laundering Act of 2020 (“AML Act”). The CTA is administered and enforced by the Financial Crimes Enforcement Network (“FinCEN”). FinCEN is a bureau in the U.S. Department of the Treasury responsible for combating money laundering and promoting national security through the collection and treatment of financial data for law enforcement purposes by building global cooperation with counterpart organizations in other countries.
The CTA will require all US corporate entities, such as corporations and LLCs, as well as other entities deemed as Reporting Entities to disclose their ultimate Beneficial Owner Information (“BOI”). Certain foreign entities registered to do business in the United States may also be determined to be Reporting Entities. A Reporting Entity will be required to file a BOI report with FinCEN to identify itself and provide details of its Beneficial Owner(s). Although entities which are not Reporting Entities will have no obligations to report and will themselves not be reported, any individual who, directly or indirectly, exercises substantial control over or owns or controls at least 25 percent of the ownership interests of Reporting Company will have to be reported. This means that individual directors, officers, shareholders, as well as settlors, trustees or beneficiaries of trusts, may all be considered Beneficial Owners of a Reporting Entity under the control and ownership tests as discussed below.
The Beneficial Owner of a Reporting Entity includes any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise either:
(i) exercises substantial control over the entity; or
(ii) owns or controls not less than 25 percent of the ownership interests of the entity.
Minors, nominees and creditors are generally exempt from the definition of a Beneficial Owner (though creditors holding convertible debt interests may be owners as discussed above). Note that there is an employee exception, but it is limited to individuals “acting solely as an employee” and where their “control over or economic benefits from” a reporting company are derived “solely” from their employment status—but only if they are not senior officers of a company.
FinCEN has narrowed the broad definition of Reporting Entities with a listing of 23 entities which are exempt from the definition of “reporting company” (each an “Exempt Entity”), including:
- Entities in regulated industries such as banking, insurance, securities, accounting firms, brokers, dealers, credit unions, etc.
- Large operating companies with a substantial physical presence in the US (greater than 20 employees and $5 million in gross receipts from US Sources)
- Certain tax-exempt entities
- Any entity whose ownership is controlled or wholly owned, directly or indirectly, by an Exempt Entity
Most trusts – foreign or domestic – will not be Reporting Entities as they are not entities created by filings with a state or tribal office. But if a trust owns upwards of 25% or has substantial control over a Reporting Company, the trust is a Beneficial Owner. However, the trust itself cannot be the Beneficial Owner because this must be an individual. Therefore, it is then possible for multiple individuals who are associated with a trust which is connected to a Reporting Entity to be considered Beneficial Owners under the CTA.
REPORTING – BENEFICIAL OWNER INFORMATION (BOI) REPORTS
Reporting Entities created before January 1, 2024 have until January 1, 2025 to file their initial report while Reporting Entities created after January 1, 2024, must file their initial BOI Reports within 30 calendar days of their creation or registration.
Filing BOI Reports will be done electronically through an online interface. The Report will include information about the Reporting Entity itself.
Also, for each Beneficial Owner the Reporting Entity must report:
- Full name
- Date of birth
- Address in their resident tax jurisdiction, and
- A unique identifying number from an acceptable identification document (such as a state-issued ID or passport) along with an image of the document.
A Reporting Entity may be charged with civil or criminal penalties or both for failure to comply with the CTA under FinCEN’s general enforcement powers provided to the agency under US law. These penalties include civil monetary penalties ranging from $25,000 to $250,000 depending on the nature of the violation, and possible criminal liability for wilful violations.
Operating under the assumption that all entities created before the January 1st, 2024 date will file, FinCEN estimates that 32,556,929 BOI initial reports will be filed within Year 1 (2024). These numbers tell us that the CTA will impose reporting requirements on many US corporate-type entities. We finally note that if no Reporting Entity exists within a structure, then no reporting is required under the CTA.
The above is for general information only and should not be considered as legal advice. For more information please contact us.