The Corporate Transparency Act ("CTA") is found at 31 USC § 336. It became effective on January 1, 2021 (but see discussion of regulations below). It was created to address deficiencies in the United States Treasury Department's ability to determine the underlying beneficial ownership of domestic and foreign business entities.
It is primarily aimed at helping the Financial Crimes and Enforcement Network ("FinCEN" or "FINCEN") of the Department of the Treasury to be able to better detect and prosecute persons committing money laundering and other financial crimes.
The act calls for regulations to be created in early 2022; as of the time of writing of this article, the proposed regulations have just exited public comment and we should be receiving the final rules soon. What does the CTA do?
The CTA will require each "reporting company" disclosure to FinCEN of:
- all beneficial owners; and
- each applicant with respect to such reporting company
A "beneficial owner" is an individal who "directly, or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:"
- "exercises substantial control over the entity"; or
- "owns or controls not less than 25 percent of the ownership interests"
There are 23 different entity types that are excluded from the definition of "reporting company"; however, these exclusions tend to cover entities that already have stringent reporting requirements, such as banks, public companies, insurance companies, investment advisers, some non-profits, charitable trusts, state and other governmental entities, and so forth.
There does not appear to be a mechanism to exclude your typical small-business entity, or the entity of even a small real-estate investor. There is also an exclusion for certain operating entities that "(a) employs more than 20 employees on a full-time basis in the United States, (b)filed federal income tax returns for the previous year reflecting $5 million in consolidated revenue, and (c) has operating presence at a United States office." It's unclear at this time whether we can consolidate a group of parent and child companies to meet this threshold or not.
The final rule was implemented in September 2022, and will go live on January 1, 2024. This means that we need to be ready to start filing the FINCEN disclosures on or after January 1, 2024.
From FINCEN's website:
A final rule implementing the beneficial ownership information reporting requirements of the Corporate Transparency Act (CTA) was issued in September 2022. These regulations go into effect on January 1, 2024. Beneficial ownership information will not be accepted prior to January 1, 2024.
Entities formed after the regulations are finalized will have to file "at the time of formation or registration." This means that soon a vast majority of newly formed business entities will need to include as part of their formation, filing a report with FinCEN.
Entities formed before the effective date of the regulations shall submit the required report "in a timely manner, and not later than 2 years after" the effective date of the regulations. This means that existing entities have some amount of time to file the report but there is no express exemption to grandfathered entities; however, there are harsh penalties to non-compliance, so I suggest that clients do not procrastinate to file such reports once the regulations are finalized.
Each "reporting company shall, in a timely manner, and not later than 1 year after the date on which there is a change" submit to FinCEN a report that updates the information.
Treasury can change these filing deadlines to shorter periods once the CTA has been enacted for 2 years
There are rules on when the information can be used by FinCEN. There are civil and criminal penalties to a requesting agency that violates the CTA's "protocals". We don't know exactly what those protocols are at the time of writing this article. FinCEN may make disclosures "by request through protocols from certain Federal, state, and foreign governmental bodies". It will be interesting to see if that means any lawyer in any lawsuit may request through protocols as part of their normal rights of discovery, or if there needs to be a judge's order for such request. Financial institutions are allowed to request this information as well if they have the consent of the reporting company. I read this as get used to all lenders, banks, brokers, etc., including language giving them consent to request information from FinCEN on all their customers / borrowers.
It is unlawful for any person to "willfully" provide false or fraudulent beneficial ownership information to FinCEN OR to "willfully" fail to report complete or updated beneficial ownersihp information to FinCEN.
There is a civil penalty of not more than $500 per day, and for criminal penalties: up to $10,000 in fines, and "imprisoned for not more than 2 years, or both".
There is also a safe harbor to avoid civil and criminal penalties if a person corrects inaccurate information in a report voluntarily and promptly (looks to be 90 days as of the time of writing). So, moral of the story, lawyers and clients need to be reviewing their most-recent FinCEN report for all reporting companies and updating these ASAP if a mistake is discovered to avoid civil and criminal penalties.
The act even includes that "a corporation, limited liability company, or other similar entity" may not issue a certificate in bearer form. This is a fancy way of saying you have to name the actual owner of the ownership interest, and you can't just make the person that is physically in possession of the certificate be the owner.
Entity documents should likely be updated to include express obligations of members/stockholders to provide FinCEN required information (and periodic updates), and add in representations that such provided information is true and correct. Consequences to failure to report should likely be added in as well, such as exlcusions to indemnification and exculpation, and perhaps even removal from ownersihp after written notice of default and failure to cure etc.