Do Not Be Caught Unaware – The Reporting Requirements under the Corporate Transparency Act are Approaching

The Corporate Transparency Act (“CTA”) was passed on January 1, 2021, under the Anti-Money Laundering Act of 2020. As previously written about by Josh Sage[1] and Devin Mills[2], the CTA subjects reporting companies, their beneficial owners, and the company applicant (all defined hereunder) to report certain information to the Financial Crimes Enforcement Network (“FINCEN”), or else be subject to significant fines and penalties. In the final regulations issued September 30, 2022[3], FINCEN states, “[t]hese requirements are intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.” While no one can argue that preventing terrorist financing and other crimes is unjust, the reporting requirements of the CTA suscepts millions of Americans, most of whom are undoubtedly not participating in such crimes, to fines and penalties if they fail to meet the stringent requirements which go into effect January 1, 2024. While there has been talk of extension of this effective date, such remains uncertain conjecture at this point. The enforcement of these reporting requirements is quickly approaching, and frankly, not enough people are talking about it.

What companies are required to file under the CTA?

Under the CTA, reporting companies include both domestic and foreign reporting companies, but for purposes of this article, only domestic reporting companies will be addressed. A domestic reporting company includes any entity that is created by the filing of a document with a secretary of state or similar office of a jurisdiction within the United States (“Reporting Company”). Limited liability companies and corporations fall squarely within this definition, but some commentators have suggested that partnership entities, such as general partnerships, limited partnerships, and limited liability partnerships, do not, as they are not technically “created” by filing a document with a secretary of state. Still, most commentators believe that such partnership entities fall within the definition of a Reporting Company, and out of an abundance of caution, especially considering the different state laws pertaining to filing requirements with respect to such partnership entities, I would suggest treating such partnership entities as a Reporting Company.

Express Exemptions to Reporting Requirements

The CTA expressly exempts certain companies from the reporting requirements, as follows:

• Securities reporting issuers;
• Governmental authorities;
• Banks, credit unions, depository institution holding companies, and money services businesses;
• Brokers or dealers in securities;
• Securities exchanges or clearing agencies;
• Other Exchange Act required entities;
• Investment companies or investment advisers;
• Venture capital fund advisers;
• Insurance Companies;
• State licensed insurance producers;
• Commodity Exchange Act registered entities;
• Accounting firms;
• Public Utilities;
• Financial market utilities;
• Pooled investment vehicles;
• Tax-exempt entities;
• Entities assisting a tax-exempt entity;
• Large operating companies;
• Subsidiaries of certain exempt entities; and
• Inactive entities.

While this article will not delve into the precise definition of each entity exempt from the reporting requirements, it is worth noting that for purposes of the exemption, a “large operating company” is one that (1) employs more than 20 employees in the United States, (2) has an operating presence at a physical office in the United States, and (3) filed a Federal tax return for the prior year indicating more than $5,000,000 in gross receipts. Note that these requirements apply to each separate entity, without the aggregation or consolidation of entities operating in the same business enterprise. While this list of exemptions seems extensive, by FINCEN’s own estimate, approximately only 4,024,577 entities will fall under the exempt list, leaving approximately 32,556,929 entities that will meet the definition of a Reporting Company and thus must comply with the reporting requirements.[4]

Information to be Provided under the Reporting Requirements

Reporting Companies must provide (1) information directly pertaining to the company (below), (2) information related to beneficial owners of the company, as well as (3) information related to the company applicant. Information to be provided directly pertaining to the Reporting Company includes:

• The full legal name of the Reporting Company;
• All trade or “doing business as” names of the Reporting Company;
• The Reporting Company’s street address;
• The state jurisdiction of formation; and
• The IRS taxpayer identification number (often, the EIN) of the Reporting Company.

Beneficial Owners

Reporting Companies must provide information related to such companies’ beneficial owners, defined as “any individual who, directly or indirectly[5], [a] either exercises substantial control over such reporting company or [b] owns or controls at least 25 percent of the ownership interests of such reporting company” (“Beneficial Owner”) Notwithstanding, a Beneficial Owner does not include (1) a minor child (provided that a parent or guardian’s information is reported), (2) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual, (3) an individual acting solely as an employee of a reporting company in specified circumstances, (4) an individual whose only interest in a Reporting Company is a future interest through a right of inheritance, and (5) a creditor of a Reporting Company.[6]

The final regulations go on to define “substantial control” as:

1. Service as a senior officer of the reporting company. A “senior officer” is “any individual holding the position or exercising 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;”
2. Authority to appoint or remove any senior officer or a majority of the board of directors;
3. Direction, determination, or decision of, or substantial influence over, important decisions made by the reporting company; and
4. Any other substantial control over the reporting company.[7]

Further, “ownership interests” is defined to include (1) any equity, stock, or similar instrument, (2) capital or profit, (3) proprietorship, (4) options, and (5) any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.[8]

If you believe the foregoing definitions are confusing, you are not alone. FINCEN received numerous comments on the proposed regulations pertaining to the ambiguity contained in these definitions. In response, FINCEN stated that applying beneficial ownership rules will be a straightforward exercise for many reporting companies, further contemplating that most entities with complex structures will be exempt as a “large operating company.” In a way, FINCEN is correct in this regard, although it is clear through the catch-all provisions in the foregoing definitions that FINCEN desires to have as much information as possible fall under the reporting requirements.

Information that Must be Reported Pertaining to Beneficial Owners

For each and every Beneficial Owner, the reporting company must provide such Beneficial Owner’s:

• Full legal name;
• Residential address;
• Date of birth;
• Unique identification number (such as passport or driver’s license number, or FINCEN identification number); and
• Image of such identification (if not using FINCEN identification number).

Information that Must be Reported Pertaining to Company Applicants

Reporting Companies created after January 1, 2024, must also provide information related to the company applicant (“Company Applicant”). The final regulations define Company Applicant as the individual who files the document that creates the entity, as well as anyone who directs or controls the filing of an entity creation or registration document. Under this definition, a Company Applicant would include a paralegal who actually files the document that creates the entity, as well as the attorney who directed the paralegal to do so. Reporting Companies must provide the following information related to the Company Applicant:

• Legal name;
• Current address;
• Date of birth;
• Unique identification number (such as passport or driver’s license number, or FINCEN identification number); and
• Image of such identification (if not using FINCEN identification number).

Fortunately, Reporting Companies created prior to January 1, 2024, are not required to report this information pertaining to the Company Applicant.

Deadlines

The final regulations provide much different deadlines for Reporting Companies formed prior to January 1, 2024, and those formed after. For those formed prior to the aforementioned date, they must report all information by January 1, 2025. For those formed after January 1, 2024, however, all required information must be reported within 30 calendar days of notice of its formation with the secretary of state. Additionally, following January 1, 2024, any changes of the required information, such as a change in Beneficial Owners, must be reported to FINCEN within 30 days of such change.

Penalties

A person fails to report complete or updated beneficial ownership information to FINCEN if such person directs or controls another person with respect to any such failure to report or is in substantial control of a Reporting Company when it fails to report.[9] To this end, it is clear FINCEN will pursue individual liability related to failure to report. In FINCEN’s own words, “to the extent an individual willfully directs a Reporting Company not to report or willfully fails to report while in substantial control of a Reporting Company, individual liability is necessary to ensure that companies comply with their obligations.” Civil penalties include a fine of up to $500 per day for each day the Reporting Company is in violation and the violation is not remedied, and criminal penalties include fines of up to $10,000 and two years imprisonment. Reporting Companies who accidentally provide false information but rectify by providing correcting information within 90 days may be entitled to safe harbor relief.

How to Report the Required Information

The most obvious question going forward is “How do I provide this information?” Unfortunately, there remains substantial uncertainty regarding this very question. Despite being only months from the effective deadline of January 1, 2024, FINCEN is still in the process of developing the “Beneficial Ownership Secure System” or “BOSS,” to receive and store the reported information. It is expected that Reporting Companies will report the information required under the CTA online at no filing fee, but it remains to be seen if BOSS will be up and running by January 1, 2024, the effective deadline, much less if it can handle the voluminous traffic with which it will undoubtedly be inundated.

Conclusion

Substantial uncertainty remains as to if FINCEN will be prepared to handle the information of the millions of companies falling under the definition of Reporting Companies by the January 1, 2024, deadline. Nonetheless, owners and officers of limited liability companies and corporations (as well as the other entities falling under the Reporting Company definition) should be prepared to provide such information, and to keep such information updated with FINCEN, to avoid the substantial penalties and fines that accompany noncompliance.

[1] https://esapllc.com/corporate-transparency-act-ndaa2021/

[2] https://www.esapllc.com/cta-proposed-regs-dec-2021/; https://esapllc.com/the-corporate-transparency-act-potential-implications-for-businesses-and-practitioners/

[3] 87 FR 59498.

[4] Id at page 59,568.

[5] Substantial ambiguity remains with regards to ownership interests or control or ownership interests held in trust. Prop. Reg. § 1010.380(d)(3)(ii)(C) provides that an individual may directly or indirectly own or control an ownership interest with regards to a trust (1) as a trustee of the trust or other individual with the authority to dispose of trust assets;  (2) as a beneficiary who (i) is the sole permissible recipient of income and principal from the trust; or (ii) has the right to demand a distribution of or withdraw substantially all of the assets from the trust; or (3) as a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.

[6] 31 U.S.C. 5336(a)(3)(B).

[7] 31 CFR 1010.380(d)(2).

[8] Id.

[9] 31 U.S.C. 5336(h)(1).