The reporting requirements for beneficial ownership information under the Corporate Transparency Act (CTA) will come into effect on January 1st, 2024.

The CTA, a bipartisan law enacted by Congress on January 1st, 2021, aims to boost corporate transparency and counter illicit activities such as money laundering, terrorist financing, corruption, tax fraud, and others within the United States.

More recently, on September 30, 2022, final CTA regulations were promulgated, mandating certain entities to disclose their beneficial ownership information to the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN), addressing financial crimes as mentioned earlier.

This article will delve into key aspects of the CTA’s beneficial ownership information reporting requirements, encompassing who must report, the information to be reported, exemptions from reporting, relevant definitions, treatment of trusts, obligation effective dates, sanctions for noncompliance, and other pertinent considerations.

Who Shall Report

Under the CTA, entities required to report their beneficial ownership information are identified as Reporting Companies. These encompass any domestic corporation, limited liability company (LLC), and similar entities formed by filing documents with the Secretary of State or a similar office under State or Indian Tribe laws.

Foreign corporations, LLCs, or similar entities registering to conduct business in the United States through filing with the Secretary of State or a similar office may also fall under Reporting Company classification.

There are 23 exemptions for companies falling under the Reporting Company definition, primarily because they are already subject to high regulatory oversight and likely disclose this information to the Government. Some examples of these exempt entities include banks, credit unions, insurance companies, registered investment companies, and registered securities brokers.

An important exemption is the “large operating company” category, applying to entities with more than 20 full-time employees, over $5,000,000 in gross receipts, and a physical presence in the United States, along with their exempt subsidiaries.

What Shall Be Reported

For Reporting Companies formed before January 1st, 2024, their reports should detail information about the Reporting Company and its beneficial owners.

For Reporting Companies created on or after January 1st, 2024, their reports should cover information about the Reporting Company, their beneficial owners, and company applicants.

The information expected regarding Reporting Companies includes full legal names, any trade names or “doing business as” (d/b/a) names, current addresses, jurisdiction of formation, and EIN (or a similar foreign unique identifier for foreign entities without a US EIN).

Reporting Companies must disclose their beneficial owners’ full names, dates of birth, addresses, unique identifying numbers (e.g., Social Security numbers, driver’s license numbers, passport numbers), and a picture of the document containing the unique ID number.

To avoid circulating this private information, individuals and companies can obtain a FinCEN identifier, a unique identifying number issued by FinCEN. A beneficial owner or company applicant can provide the individual’s FinCEN identifier instead of the aforementioned information, which the Reporting Company will include in its filing.

Relevant Definitions

A. Beneficial Owners: Individuals directly or indirectly exercising substantial control over the Reporting Company or owning or controlling at least 25 percent of the ownership interests fall under this definition. Ownership interests can be equity, stock, voting rights, capital or profit interest, convertible instruments, options or any other instrument, contract, or other mechanism used to establish ownership.

There is no limit to the number of beneficial owners, and children, creditors, or employees do not qualify.

B. Substantial Control: The CTA defines substantial control in various ways, including serving as a senior officer, having authority over senior officer appointments or board of directors, influencing important decisions, or exercising other forms of substantial control.

C. Company Applicants: These individuals directly file formation or registration documents with the Secretary of State or direct/control such filings. The CTA limits the reported number of company applicants to two individuals.

Treatment of Trusts

The CTA acknowledges the role of trusts in financial and estate planning. While most trusts aren’t created by filing before any Secretary of State and are thus not subject to reporting, Reporting Companies must identify and report any natural person exercising substantial control through a trust and qualifying as a beneficial owner.

The Act provides guidelines for determining beneficial ownership through trusts, considering settlors, trustees, and beneficiaries. An individual with authority to dispose of trust assets will be deemed a beneficial owner, subject to a case-by-case analysis based on specific trust details.

Effective Dates of Obligations

Beneficial ownership information will be submitted to FinCEN via an online interface and stored through “The Beneficial Ownership Secure System (BOSS).” This information won’t be publicly accessible and will only be shared with law enforcement agencies under strict protocols.

Reporting Companies formed or registered before January 1, 2024, must submit beneficial ownership information to FinCEN no later than January 1, 2025.

Reporting Companies formed or registered on or after January 1, 2024, must submit beneficial ownership information to FinCEN within 30 days of formation or registration.

FinCEN has proposed extending the 30-day period to 90 days for entities formed or first registered to do business in the United States during calendar year 2024, pending approval at the time of this article.

Sanctions for Noncompliance

To ensure compliance, individuals intentionally providing false or fraudulent information or failing to submit a complete initial or updated report to FinCEN may face penalties. These penalties can amount to a fine of $500 per day, up to a maximum of $10,000, and imprisonment for up to two years.

Unauthorized disclosure or use of beneficial ownership information carries penalties of $500 per day, up to a maximum of $250,000, and imprisonment for up to five years for individuals knowingly disclosing or using this information without proper authorization. A provision allows avoiding penalties by promptly correcting any inaccuracies within 90 days of becoming aware of them.

Conclusion

While FinCEN is yet to release the BOSS system or the identifier application, the CTA’s beneficial ownership reporting rules will take effect on January 1, 2024. Company stakeholders, investors, managers, officers, legal representatives, among others, should familiarize themselves with this impending rule to avoid potential penalties and legal repercussions.

We strongly encourage clients who believe they might fall under this new rule to reach out if they have any queries.