The Corporate Transparency Act enacted in 2021 is set to become effective on January 1, 2024. The Act was passed with the aim of enhancing transparency in corporate ownership, thereby aiding in the combat against illicit financial transactions. The legislation will capture information about the ownership of corporations and other entities through reporting requirements. This article provides a general overview of the Corporate Transparency Act, its implications, and its potential impact on businesses.
The Corporate Transparency Act (CTA or ACT) was included in Title LXIV of the William M. Thornberry National Defense Authorization Act (NDAA) for Fiscal Year 2021, Public Law 116–283 (Jan. 1, 2021). Part of the NDAA included the Anti-Money Laundering Act of 2020, which includes the CTA. Section 6403 of the Act, among other things, amended the Bank Secrecy Act (BSA) by adding a new section 5336, Beneficial Ownership Information Reporting Requirements, to subchapter II of chapter 53 of title 31, United States Code.
There are over 2,000,000 corporations and limited liability companies formed every year in the U.S. without any requirement to disclose the individuals who directly or indirectly control the company called “beneficial owners.” The impetus for the CTA was Congress’ realization that “malign actors” use these corporations or organizations to launder money, finance terrorist activities, commit tax fraud, fund human and drug trafficking, among other illicit financial transactions. The difficulty in tracking and prosecuting criminal activity is exacerbated by the obscurity and unavailability of information regarding beneficial ownership of corporations.
The Treasury Department’s Financial Crime Enforcement Network (FinCEN) is the agency responsible for safeguarding the U.S. financial system from criminal use. The Act requires certain corporations to now report the identity of their beneficial owners to FinCEN who, in turn, may share the information with law enforcement or financial institutions ideally making it harder for bad actors to engage in illicit financial transactions. The beneficial ownership information reporting requirements under the Act can be found here.
Beginning January 1, 2024, corporations formed before January 1, 2024 have until January 1, 2025 to file an initial beneficial ownership report to FinCEN about itself and its beneficial owners. Businesses formed after January 1, 2024, have 30 days after notice of registration to file a report or after a secretary of state provides public notice of its creation, whichever is earlier. Those businesses are required to report information about itself, its beneficial owners and its company applicants. Changes in ownership require updates within 30 days.
Companies Required to Report
Domestic and foreign companies will be required to report to FinCEN unless an exemption applies. Domestic companies are defined in the CTA as corporations, limited liability companies or any other entity created by the filing of a document with their respective secretary of state or any similar office under the law of a state or Indian tribe. A foreign reporting company is defined in the CTA as a corporation, limited liability company or other entity formed under the law of a foreign country and is registered to do business in any U.S. state or Tribal jurisdiction by filing a document with a secretary of state or any similar office under the law of a U.S. state or Indian tribe.
Exemptions to Reporting Requirements
There are twenty three types of organizations that are exempt from the CTA’s reporting requirements including, among others, certain types of banks, money transmitting or money services businesses, venture capital fund advisers, regulated public utilities, federal and state credit unions, a broker or dealer under the Securities Exchange Act of 1934. A full list of all 23 types of organizations that are exempt can be found at 31 CFR § 1010.380(c)(2). There are also specific criteria that these organizations must satisfy for the exemption. FinCEN’s summary of the businesses that are exempt from reporting can be found here.
Who, What and Where to Report
Organizations required to report must identify all beneficial owners of the entity. A beneficial owner is defined in 31 U.S.C. § 5336(a)(11)(A), as an individual who “exercises substantial control” over the entity or “owns or controls not less than 25 percent of the ownership interests of the entity.” It does not include children under certain circumstances or individuals whose control over such an entity is derived solely from the employment status of the person. There are many other individuals it does not include. Additional information about the definition of substantial control, who qualifies as exercising substantial control and whether a person’s ownership interest must be reported can be found in the Beneficial Ownership Information Reporting Regulations at 31 CFR § 1010.380(d)(1) and (2). The report must be filed with FinCEN using their secure electronic filing system on their website.
FinCEN has posted Frequently Asked Questions (FAQs) in response to inquiries relating to the new Act and its requirements along with reference materials. Their website also assists users in answering how to file, whether your entity qualifies for an exemption, and how to get a FinCEN ID number for reporting purposes. They also published a Small Entity Compliance Guide. All of these publications are very helpful and provide assistance in navigating this new regulatory requirement.