The Corporate Transparency Act goes into effect on January 1, 2024.
In January 2021, Congress enacted the Corporate Transparency Act (CTA) to protect the United States financial system from being used for money laundering and/or other illicit activities. Oftentimes when these illegal activities are occurring, the perpetrators are not using their names to conduct the schemes, but rather use the shield of a corporation or an LLC. Because law enforcement had difficulty uncovering these individuals, Congress enacted CTA to attempt to prevent these illegal activities.
The Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule implementing the beneficial ownership (BOI) reporting requirements on September 21, 2022. The effective date of this requirement is January 1, 2024.
Under the Act, most LLCs (and other entities) will need to supply basic personal identification data regarding their “beneficial owners” to FinCEN.
FinCEN has clarified that if a reporting company is created or registered before Jan. 1, 2024, then the company will have one year (until Jan. 1, 2025) to file an initial BOI report with FinCEN. FinCEN specified in its final rule that these companies do not need to submit information on company applicants.
If a reporting company is created after Jan. 1, 2024, the company will have 30 days after receiving notice of its creation or registration to file its initial BOI report, which must include information on the company itself, its beneficial owner(s), and its company applicant(s).
Furthermore, if any information previously disclosed to FinCEN changes, reporting companies will have 30 days to report the change to FinCEN, and if inaccurate information is reported to FinCEN, reporting companies will also have 30 days after becoming aware of the inaccuracy to correct the report.
Under the Act, “beneficial owner” is anyone who, directly or indirectly
(1) exercises substantial control over the entity,
or (2) owns or controls at least 25 percent of the entity.
“Beneficial owner” does not include minor children, an employee whose “control” of the entity stems purely from employment status, someone whose only interest in the entity is “through a right of inheritance,” and most creditors. Reporting requirements are also triggered by changes in beneficial ownership. An “applicant” includes anyone who: (1) files an application with the State to form an entity, or (2) registers or applies to register a foreign entity.
The Act provides a long laundry list of exceptions for certain entities that will not be subject to the reporting requirements. There are a series of exemptions for entities that do not have to file under the CTA. Primarily, these entities are already subject to state or Federal reporting requirements. These entities include but are not limited to banks, credit unions, money service businesses, investment advisors, security brokers and dealers, tax-exempt entities, entities assisting tax-exempt entities, insurance companies, state-licensed insurance producers, pooled investment vehicles, public utilities, inactive entities, subsidiaries of certain exempt entities, accounting firms, large operating companies, entities with more than 20 full-time employees located in the United States, and a charitable trust de¬scribed in Internal Revenue Code section 4947(a).
The information for each beneficial owner or applicant required for reporting includes:
full legal name,
date of birth,
current residential or business address,
unique identifying number from an acceptable identification document (or an issued FinCEN identifier).
The information is maintained by FinCEN until at least 5 years after the entity terminates. Disclosure of the information by FinCEN is allowed only upon proper request from limited sources, including:
(1) a Federal agency engaged in national security, intelligence, or law enforcement activity;
(2) a state or local law enforcement agency with a court order authorizing the request;
(3) a Federal agency on behalf of a law enforcement agency from another country;
(4) financial institutions fulfilling customer due diligence requirements;
and (5) Federal regulatory agencies.
The Act provides that the personal information reporting requirement is aimed at “facilitating important national security, intelligence, and law enforcement activities” and facilitating financial institutions’ compliance with “anti-money laundering, countering the finance of terrorism, and customer due diligence requirements.”
The legislative materials relating to the Act indicate congressional concern regarding “malign actors” seeking to “conceal their ownership” of entities “to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States.”
The Act also provides penalties for unauthorized disclosure or use of the beneficial ownership information obtained from the reports submitted to FinCEN.
By Giacomo Breda