Corporate Transparency Act

As part of the National Defense Authorization Act of 2021 Congress adopted the Corporate Transparency Act (or "CTA"). The CTA includes some of the most significant changes to US anti-money laundering ("AML") laws in recent years.

Among other things, the CTA requires that U.S.. companies file a beneficial ownership report with FinCEN - the Financial Crimes Enforcement Network of the U.S. Treasury Department. These beneficial ownership reports will enable FinCEN to assemble a massive database of beneficial ownership information. FinCEN will use its database to fight money laundering in cooperation with other U.S. law enforcement agencies.

Complying with the Corporate Transparency Act will impose major new obligations on companies and their owners.

What Does the Corporate Transparency Act Require?

The Corporate Transparency Act requires reporting companies to file a beneficial ownership information report with FinCEN.

The Corporate Transparency Act defines a "reporting company" as any corporation, limited partnership, limited liability company or other entity that is formed by the filing of a document with a secretary of state or tribal government.

A "foreign reporting company" is any legal entity that registers to do business in the United States by the filing of a document with a secretary of state or tribal government.

If a reporting company is not exempt, the reporting company must file a beneficial ownership information report with FinCEN that contains specified items of personally identifiable information about each beneficial owner of the reporting company.

Complying with these Corporate Transparency Act requirements will have a significant impact on entrepreneurs, business owners, attorneys and others in forming and managing companies.

What is a Beneficial Owner?

FinCEN issued its Final Rule on the beneficial ownership requirements of the Corporate Transparency Act on September 29, 2022. The Final Rule clarifies the definition of "beneficial owner" under the CTA.

The Final Rule defines "beneficial owner" as any individual who, directly or indirectly:

1. Holds 25 percent or more of the ownership interest in a reporting company, or

2. Exercises substantial control over a reporting company.

Importantly, the definition of "beneficial owner" only includes individuals who are natural persons. As a result, any interest in a reporting company held by a legal entity will be calculated with respect to the individual natural person who has the ultimate beneficial ownership of that interest.

How Does the Final Rule define Substantial Control?

FinCEN's Final Rule defines "substantial control" through a facts and circumstances test that requires the reporting company to look at a number of factors.

An individual exercise substantial control over a reporting company if that individual:

(A) Serves as a senior officer of the reporting company;

(B) Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body);

(C) Directs, determines, or has substantial influence over important decisions made by the reporting company, including decisions regarding:

(1) The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;

(2) The reorganization, dissolution, or merger of the reporting company;

(3) Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;

(4) The selection or termination of business lines or ventures, or geographic focus, of the reporting company;

(5) Compensation schemes and incentive programs for senior officers;

(6) The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts;

(7) Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures; or

(D) Has any other form of substantial control over the reporting company.

Because the definition of "substantial control" is a facts and circumstances test, many reporting companies will need legal advice from an attorney to identify the individuals who exercise substantial control over the reporting company.

Are Some Beneficial Owners Exempt?

FinCEN's Final Rule creates some exceptions for certain individuals who would otherwise be included in the definition of "beneficial owner".

The Final Rule provides that "beneficial owner" does not include:

(i) A minor child, as defined under the law of the State or Indian tribe in which a domestic reporting company is created or a foreign reporting company is first registered, provided the reporting company reports the required information of a parent or legal guardian of the minor child as specified in paragraph (b)(2)(ii) of this section;

(ii) An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;

(iii) An employee of a reporting company, acting solely as an employee, whose substantial control over or economic benefits from such entity are derived solely from the employment status of the employee, provided that such person is not a senior officer as defined in paragraph (f)(8) of this section;

(iv) An individual whose only interest in a reporting company is a future interest through a right of inheritance;

(v) A creditor of a reporting company. For purposes of this paragraph (d)(3)(v), a creditor is an individual who meets the requirements of paragraph (d) of this section solely through rights or interests for the payment of a predetermined sum of money, such as a debt incurred by the reporting company, or a loan covenant or other similar right associated with such right to receive payment that is intended to secure the right to receive payment or enhance the likelihood of repayment.

Individuals whose only interest in the reporting company is described these categories are excluded from the definition of "beneficial owner."

What Information Must a Report Company Disclose on its Beneficial Ownership Report?

A reporting company must disclose the following information about each of its beneficial owners:

1. Full legal name,

2. Date of birth,

3. Current residential or business street address,

4. A unique identifying number from an acceptable identity document (such as an unexpired drivers license or passport), and

5. An image file of the document that provides the unique identifying number.

Which Companies are Exempt from the Corporate Transparency Act?

The Corporate Transparency Act exempts twenty-three types of companies from the obligation to file a beneficial ownership report. Most exempt entities are already subject to some form of federal regulation that gives federal law enforcement visibility into their ownership.

The following companies are exempt from the CTA's filing requirement:

(i) Securities reporting issuer. Any issuer of securities that is either (A) an issuer of registered securities under Section 12 of the Securities Exchange Act of 1934, or (B) required to file supplementary and periodic information under Section 15(d) of the Securities Exchange Act of 1934;

(ii) Governmental Authority. Any agency of the U.S. government, any state government or any tribal government;

(iii) Bank. Any bank, as defined in various federal laws;

(iv) Credit Union. Any federal credit union or state credit union;

(v) Depository institution holding company. Any holding company under listed federal laws;

(vi) Money services business. Any money transmitting business registered with FinCEN;

(vii) Broker or dealer in securities. Any licensed securities broker or dealer;

(viii) Securities exchange or clearing agency. Any exchange or clearing agency as defined in federal laws;

(ix) Other Exchange Act registered entity. Any other entities that is registered with the Securities and Exchange Commission;

(x) Investment company or investment advisor. Any entity that is an investment company or investment advisor under listed federal laws;

(xi) Venture capital fund adviser. Any venture capital fund adviser as defined in the Final Rule;

(xii) Insurance company. Any insurance company as defined in Section 2 of the Investment Company Act of 1940;

(xiii) State-licensed insurance producer. Any insurance producer as defined in the Final Rule;

(xiv) Commodity Exchange Act registered entity. Any commodity exchange registered entity as defined in the Final Rule;

(xv) Accounting firm. Any public accounting firm registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002;

(xvi) Public utility. Any regulated public utility as defined in 26 U.S.C. 7701(a)(33)(A);

(xvii) Financial market utility. Any financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing and Settlement Supervision Act of 2010;

(xviii) Pooled investment vehicle. Any pooled investment vehicle that is operated or advised by a person described in exemptions (iii), (iv), (vii), (x) or (xi);

(xix) Tax-exempt entity. Any entity that is exempt from federal income tax and covered by the definition in the Final Rule;

(xx) Entity assisting a tax-exempt entity. Any entity that operates exclusively to provide financial assistance to, or hold governance rights over an entity that is exempt under subsection (xix) and who falls within the definition in the Final Rule;

(xxi) Large operating company. Any entity that (A) employs more than 20 full time employees in the United States, (B) has an operating presence at a physical office within the United States, and (C) has filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts;

(xxii) Subsidiary of certain exempt entities. An entity whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities described in exemptions (i), (ii), (iii), (iv), (v), (vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv), (xvi), (xvii), (xix), or (xxi); and

(xxiii) Inactive entity. Any entity that (A) was in existence on or before January 1, 2020, (B) is not engaged in active business, (C) is not owned by a foreign person, whether directly or indirectly, wholly or partially, (D) has not experienced any change in ownership in the preceding twelve month period, (E) Has not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding twelve month period, and (F) Does not otherwise hold any kind or type of assets, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity.

When Does the Corporate Transparency Act Take Effect?

The Corporate Transparency Act takes effect on January 1, 2024.

Any domestic reporting company created on or after January 1, 2024 must a report within 30 calendar days of the earlier of the date on which it receives actual notice that its creation has become effective or the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the domestic reporting company has been created.

Any entity that becomes a foreign reporting company on or after January 1, 2024 must file a report within 30 calendar days of the earlier of the date on which it receives actual notice that it has been registered to do business or the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the foreign reporting company has been registered to do business.

Any domestic reporting company created before January 1, 2024 and any entity that became a foreign reporting company before January 1, 2024 shall file a report not later than January 1, 2025.

What is a Company Applicant?

The Final Rule defines "company applicant" as

(1) For a domestic reporting company, the individual who directly files the document that creates the domestic reporting company;

(2) For a foreign reporting company, the individual who directly files the document that first registers the foreign reporting company in the U.S.; and

(3) Whether for a domestic or a foreign reporting company, the individual who is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document.

What Information Must a Reporting Company Disclose Regarding its Company Applicant?

Reporting companies created or registered before January 1, 2024 do not need to report information regarding their company applicant.

Companies created or registered on or after January 1, 2024, must provide the same information for their company applicant as they provide for their beneficial owners; provided, however, that in the case of a company applicant who forms or registers an entity in the course of the company applicant's business, the reporting company should report the street address of the company applicant's business in lieu of the company applicant's residential address.

What is the Penalty for Violating the Corporate Transparency Act?

Violations of the CTA, including the failure to report beneficial ownership information or the reporting of false or fraudulent information, may lead to civil or criminal penalties.

A reporting company that fails to file its beneficial ownership report on time may be fined up to $500 for each day the violation continues.

A willful failure to file or an intentional misstatement in a filing may lead to criminal penalties include fines up to $10,000 and/or imprisonment for up to two years.