Editor’s Update: U.S. District Judge Liles C. Burke decided late Friday, March 1, 2024, that the Corporate Transparency Act, a U.S. anti-money laundering law enacted as part of the National Defense Authorization Act for fiscal year 2021, is unconstitutional on the grounds that Congress exceeded its powers in enacting the law — and so the rulemaking stemming from it is unlawful. The guest column below was written prior to this ruling, but spells out what the law required.
Initially enacted on January 1, 2021, to enhance corporate transparency, reduce money laundering and other financial crimes in the United States, the Corporate Transparency Act (CTA) requires “reporting companies” to submit certain beneficial ownership information to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
Passed with bi-partisan support as part of more sweeping legislation, the CTA aims to minimize criminal actors’ ability to use shell corporations and other corporate structures to move around dirty money. The CTA notes that while more than 2 million corporations and limited liability companies are formed under United States law each year, few, if any, states require information regarding beneficial ownership. This lack of transparency allows illicit activity threatening the national security interests of the United States to hide behind secret corporations and other corporate-like structures. The CTA imposes both civil and criminal penalties for certain reporting violations. Specifically, it makes it unlawful for any person to (1) willfully provide, or attempt to provide, false or fraudulent beneficial ownership information or (2) willfully fail to report complete or updated beneficial ownership information. Violators are subject to a civil penalty of up to $500 per day for each day a violation continues. Violators may also be subject to criminal penalties of up to $10,000 or two years in prison.
Over the past three years, FinCen has been developing rules and regulations surrounding the implementation of the CTA, which became effective on Jan. 1, 2024. FinCEN estimates that 32 million business entities already in existence as of Jan. 1, 2024, will be required to register with FinCEN, with 5 million additional reporting companies being added each following year. There is no arguing with the admirable intent of the CTA, but the reality is that many businesses, particularly smaller ones, are now faced with additional compliance and administrative burdens arising from the CTA, and many of those businesses are still in the dark about these new requirements and their potential impact.
Who has to report?
The first step is for an organization to determine whether it is a “reporting company” under the CTA. The term “reporting companies” is broadly defined as an entity that is created or registered to do business by filing a document with a secretary of state or similar office unless it meets a specific exemption. This would include corporations, limited liability companies, limited liability partnerships, limited liability limited partnerships, statutory trusts and most limited partnerships. Therefore, in general terms, most organized business entities will likely be a reporting company unless they fall into one of the 23 exemption categories. If an entity becomes exempt after an initial filing, it will make a filing to that effect with FinCEN. Those currently exempt entities do not have to file anything with FinCEN to maintain that exemption but will have to file a beneficial ownership report within 30 days after losing an exemption.
Most of the 23 exemption categories relate to regulated entities that likely already disclose information about beneficial ownership to other agencies, such as public companies, banks, credit unions, securities brokers and dealers, investment companies, investment advisors, insurance companies, accounting firms and 501(c)(3) tax-exempt entities. Wholly owned subsidiaries of an exempt entity are also exempt, but subsidiary status could be impacted by any outside ownership (including incentive equity) and should be considered with thorough attention to detail. Each of the 23 exemptions contains complex requirements that an entity must meet to qualify for the exemption. Even those that might, at first blush, consider themselves exempt from the requirement may find some logistical challenges or details that could be problematic.
A notable exemption is the large operating company exception, defined as a company that (1) employs more than 20 full-time employees in the United States, (2) has an operating presence at a physical office in the United States, and (3) has filed a federal income tax or information return in the United States for the previous year demonstrating more than $5 million of gross receipts or sales (excluding gross receipts or sales from sources outside the United States). It is important to note that all three of these elements must be met to qualify for the large operating company exception, and while the gross receipts element may be evaluated on a consolidated basis within an organization, the employment requirement stands on its own and cannot be reviewed on a consolidated basis. Large organizations with complex legal structures should not necessarily assume that they will meet this qualification and should undertake a careful analysis of their business and the applicability of the CTA to avoid unintended compliance issues. Additionally, the physical office requirement will make it challenging for virtual businesses to qualify for this exemption. While the CTA is, by legislative and regulatory admission, expected to impact small businesses, large companies should not assume they are exempt without doing the requisite analysis based on their applicable corporate organization.
Who is a beneficial owner?
The CTA requires all reporting companies to submit certain information about their “beneficial owners.” The term “beneficial owner” includes those who own or control at least 25% of the ownership interests of the reporting company, as well as those who exercise substantial control over the reporting company, such as senior officers, individuals with authority to appoint or remove senior officers or board members and those with substantial influence over important decisions. Reporting companies will always have to identify at least one beneficial owner. Despite the use of the term “beneficial owner,” reporting companies should understand that the term is quite broad and will likely include non-owners who play a critical role in decision-making in an organization, and the determination of beneficial ownership may be more complex and less straightforward than expected.
Reporting companies must submit the following personal information for each of their beneficial owners: (1) legal name, (2) date of birth, (3) residential street address, (4) a unique identifying number from an acceptable identification document and (5) an image of such document. Additionally, reporting companies formed after Jan. 1, 2024, have to identify and provide the same information about the “company applicant,” who will be the one or two people who serve to organize or incorporate the entity. This can be someone on behalf of the company, but it may also be an attorney or third party who helped organize the company. Beneficial ownership reports are filed with FinCEN through its online portal.
Beneficial ownership information will be stored in a non-public database managed by FinCEN, but the CTA authorizes FinCEN to disclose reported information to law enforcement and security agencies, as well as financial institutions using the information to conduct legally required customer due diligence. It should be noted that these reports are not subject to Freedom of Information Act requests, and the CTA does impose security standards on FinCEN in connection with its management of the reported information.
Streamlining the process
To streamline reporting, individuals and reporting companies can obtain a FinCEN Identifier, which is a unique identifying number issued by FinCEN, through an online application. FinCEN has indicated the online application will be open on or after Jan. 1, 2024. FinCEN Identifiers will simplify the process by allowing reporting companies to simply report each individual’s unique identifying number to FinCEN. An individual’s application for a FinCEN Identifier will require the same pieces of information discussed above. However, the use of a FinCEN Identifier shifts the potentially arduous burden of updating an individual’s personal information from the reporting company to the individual. This may be attractive to reporting companies with a larger number of individuals who are considered beneficial owners.
Any reporting company formed after Jan. 1, 2024, will have 90 days after formation to submit its beneficial ownership report to FinCen, and beginning in 2025, this timeline will reduce to 30 days. Reporting companies in existence prior to Jan. 1, 2024, have until the end of 2024 to file their beneficial ownership report. The reporting requirement is not annual; instead, it must be updated upon any change in the beneficial owners or the information provided about the beneficial owners. For example, if a beneficial owner moves, a reporting company has to file an updated report within 30 days of such change. It is not difficult to see how this may become a heavy administrative task for some businesses, particularly those with a number of beneficial owners or subsidiary/affiliated organizations that have the same beneficial owners.
Even though the CTA was passed over three years ago, it seems to have flown under the radar for many businesses that could potentially be impacted and need to take steps to achieve compliance with the reporting requirements. On a conversational level, the CTA may not seem complicated or burdensome, and for some businesses, it may not be. After all, most law-abiding citizens would be hard-pressed to argue against the aspiration of fighting financial crime and money laundering. However, as with any law with such a sweeping impact, the reality is that it will not always be that simple, and for some businesses, compliance may feel like a trap for even those with the best intentions. Adding to the challenge are the ongoing updates to guidance from FinCEN as people face open questions, grey areas and unresolved issues in real-time, in many cases leaving more questions than answers under a new and untested law.
Change, particularly change that creates additional administrative burdens, tends to draw its fair share of criticism, but on the bright side, FinCEN does seem to be trying to educate the small business community on these new requirements, having published a compliance guide for small businesses available on its website (www.fincen.gov). Ultimately, businesses should be able to find ways to adjust to ensure initial and continued compliance. Until then, they will need to educate themselves on the impact this new law will have on their operations.
Callie Whatley is a partner with Burr & Forman LLP. She is an experienced transactional attorney, focusing on mergers and acquisitions, business formation and capital needs for both startups and more established companies. Whatley serves as vice chair of the firm’s corporate and tax practice group.
