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Client Alert: Corporate Transparency Act Update: FinCEN Reporting and Compliance Begins in 2024

Date: January 2, 2024
CTA Reporting Went Live on January 1, 2024

The Corporate Transparency Act’s (the “CTA”) reporting requirements are effective as of January 1, 2024. As a result, many companies in the United States will have to report information about their beneficial owners, i.e., the individuals who ultimately own or control the company. They will have to report the information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.

A Quick Refresher
 
The CTA was enacted on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021. The CTA is a federal anti-money laundering law.

The underlying policy objective of the CTA is to address Congress’s concern about the use of “shell companies” to  facilitate criminal activity, tax evasion, terrorist financing, and even human trafficking. Given these objectives, it is not surprising that Congress, through the CTA, cast a wide net in terms of the information to be gathered and reported to FinCEN by Reporting Companies.

The CTA directs FinCEN to develop processes and a platform for the reporting of beneficial ownership and company applicant information by Reporting Companies. FinCEN’s platform went  live on January 1, 2024.

Reporting Companies are defined broadly to include both new and existing entities, and to include both domestic and certain foreign entities. Essentially, any legal entity will be considered a Reporting Company, including corporations, limited liability companies, limited partnerships, limited liability partnerships, etc. The term also includes any similar entity that is created by filing a document with a state’s secretary of state (or similar office) or formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with the secretary of state (or similar office). Reporting Companies may include entities that are not strictly formal business entities as well, including community associations and some general partnerships. Furthermore, the BOI is not always a one-time filing. A company may file an initial report, but then could be required to file another report as a Reporting Company in the next year, if beneficial ownership changes. Or, a company may not be a Reporting Company in one year, because it qualifies for an exemption, but be a Reporting Company in a subsequent time period because it no longer meets an exemption. Thus, there is an ongoing obligation to update reported information. While the definition of what is a Reporting Company is expansive, the CTA exempts 23 categories of companies. However, small and middle market companies generally do not meet any of the exemptions.

The majority of the exemptions from the CTA are for larger companies that, notwithstanding the CTA, are already obligated to disclose similar beneficial ownership information as part of their corporate compliance obligations. The exemptions  include, among others, companies that file reports with the U.S. Securities and Exchange Commission, governmental authorities, banks, credit unions, money service businesses, investment advisors, securities brokers and dealers, tax exempt entities under Section 501(c), insurance companies, state-licensed insurance producers, pooled investment vehicles, public utilities, inactive entities, subsidiaries of certain exempt entities, accounting firms, and large operating companies. Furthermore, the CTA also excludes sole proprietorships, trusts, some general partnerships, and other entities that would not otherwise obscure an individual’s identity. However, these entities should be aware that they may be included in future legislation or regulations.

Additionally, the “Large Operating Company” exemption applies to companies employing more than 20 full-time employees in the U.S., which on a prior-year federal income tax return have reported gross receipts or sales in excess of $5 million. Such “Large Operating Companies” must also have  current operating activities and actual offices in the United States.

Beneficial Owner Information (BOI) Reports: Ownership Disclosures

Reporting Companies must file reports (called Beneficial Owner Information or BOI reports (“BOIs”)) with FinCEN. The BOIs will disclose who: (1) owns a 25% equity stake or (2) exercises substantial control over the entity.

Persons who exercise substantial control may include senior officers, persons with the power of appointment and removal of senior officers or a dominant majority of the Board of Directors, and persons who have a substantial influence over important matters of the company, such as major expenditures or investments and the selection or termination of business lines or ventures.

Exercising substantial control does not require ownership in an entity but instead relates to authority and decision making. Reporting Companies must identify and report all persons who exercise substantial control over the entity, which requires due diligence to document all reportable information for every beneficial owner.

Furthermore, the Reporting Company must provide the following information on the BOI report for each beneficial owner or person exercising substantial control over the entity: (1) taxpayer identification number; (2) full legal name; (3) birthdate; (4) address; and (5) a unique identifying number from, and image of, an acceptable identification document, such as a passport.

Reporting Company Information

The Reporting Company must also disclose on a BOI report: (1) its full legal name; (2) any trade or “doing business as” names; (3) a complete current address consisting of: (i) in the case of a Reporting Company with a principal place of business in the United States, the street address of the principal place of business, and (ii) in all other cases, the street address of the primary location in the United States where the Reporting Company conducts business; (4) the state, tribal or foreign jurisdiction of formation; (5) for a foreign Reporting Company, the state or tribal jurisdiction where the company first registers; and (6) the IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number) or, where a foreign Reporting Company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of that jurisdiction.

Action Steps to Prepare for Reporting
  1. Determine whether a CTA exemption may apply.
  • Companies within a large corporate structure will report on an entity-by-entity basis and need to be analyzed.
  1. If an exemption is unavailable, it is imperative for companies to take the following protective measures, if they have not already done so:
  • Identify Beneficial Owners & Company Applicants: For each existing entity determine your beneficial owners and company applicants. Note, a company applicant includes the person who formed the entity and persons who are primarily responsible for directing or controlling the applicable entity formation filing.
  • Collect Information: Gather beneficial owner and company applicant information requiring disclosure to FinCEN. As mentioned above, this includes each such person’s (a) full legal name, (b) date of birth, (c) business—and for beneficial owners, residential—address, and (d) unique, non-expired identifying number, such as from a driver’s license or passport—an image of this document is also required. Alternatively, beneficial owners and company applicants can apply for a unique identifier number from FinCEN.
  • Establish Protocols:  Now is the time to map out and develop internal protocols to enable timely compliance with the CTA’s reporting requirements. 
  • Review of Company Docs: The CTA is already in effect.  The time is NOW to review entity governing documents and consider implementing revisions and updates to include (or, for documents still being negotiated, consider including) provisions that obligate partners and investors to provide management with their necessary beneficial ownership information to ensure CTA compliance.
  • Privacy Policy Updates: Review entity data privacy policies and consider revising same to better enable CTA compliance.
  • Educate & Train: Identify company applicants, and ensure each has sufficient knowledge and resources to properly comply with the CTA’s reporting requirements.
  • Establish a Realistic Corporate Compliance Budget: Allocate reasonable monetary and time resources to comply with the CTA’s beneficial ownership reporting requirements in your budgeting and planning for 2024.
  • FinCEN cost estimates per report range from $85 for companies with a simple ownership structure to $2,200 for more complex companies.
  • Furthermore, FinCEN estimated to the Office of Management and Budget that it would take an average of 90 minutes to complete a simple BOI report and  over 10 hours to complete a more complex report.

Reporting Deadlines

Reports will be accepted starting on January 1, 2024.
 
  • Companies formed or registered prior to January 1, 2024, will have until January 1, 2025, to report BOI.
  • Companies formed or registered on or after January 1, 2024, and before January 1, 2025, must file their BOIs within 90 calendar days after receiving actual or public notice of a company’s formation or registration is effective, whichever is earlier.
  • Companies formed or registered on or after January 1, 2025, must file within 30 calendar days after owners or management receive actual or public notice that a company’s formation or registration is effective.
  • Any updates or corrections to beneficial ownership information previously filed with FinCEN must be submitted within 30 days. 

What if Compliance is Overlooked or Missed

Businesses failing to comply with the CTA’s new reporting rules, including failing to report complete or updated beneficial ownership information or reporting false or fraudulent information, could face civil penalties of up to $500 a day and criminal penalties, including up to $10,000 in fines and/or imprisonment for up to two years. Although the Reporting Company has the filing obligation under the CTA, it is critical that individuals exercising substantial control over the entity follow and comply with the CTA’s reporting requirements to avoid civil or criminal penalties.
 
How Can Whiteford Help

Whiteford’s Corporate & Securities, Data Privacy, and Tax Practices are uniquely positioned to assist clients with their CTA compliance efforts. Our attorneys and paralegals have been following the enactment of the CTA and FinCEN’s rule-making efforts since the law’s enactment in 2021.

We are positioned to assist clients with:
  1. Developing proper data collection protocols;
  2. Sorting through beneficial ownership and control information in an efficient manner and organizing it for reporting purposes;
  3. With one of our firm’s technology/software providers, implementing a secure cloud application to enable timely filing and updating of BOI reports;
  4. Given our knowledge of the CTA and expertise with similar disclosure laws, providing clients, their management, and compliance teams with instruction and updates as to compliance steps and best practices; and
  5. Assisting with required updates or modifications to corporate documents to ensure future and ongoing CTA compliance.  
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.