Change Is Coming: Are You Ready? Corporate Transparency Act of 2020

If you use special purpose entities created by the filing of a document with a Secretary of State (or similar office under state law, Indian Tribal law, or foreign jurisdictions) or have a small company with less than 20 employees, you should be aware of an important new law that will directly affect you and your business. Specifically, the Corporate Transparency Act of 2020 (the “CTA”) requires you to provide information to FinCEN (Financial Crimes Enforcement Network) as to the ultimate beneficial owners of the enterprise.

The CTA was approved as part of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021. The Final Rule (184 pages) was adopted on September 29, 2022. It becomes effective January 1, 2024. Preparations should be made now to ensure your business will meet its requirements under the new law. FinCEN will accept reports electronically beginning January 1, 2024.

The stated purpose of the CTA is to “protect the U.S. financial system from illicit use and impeding malign actors from abusing legal entities, like shell companies, to conceal proceeds of corrupt and criminal acts.” In other words, it seeks the disclosure of corporate ownership and the prevention of money laundering.

Who is Impacted

Unless covered by an exemption, the CTA requires small corporations, limited liability companies, limited partnerships, statutory trusts, or any other entity created in or registered to do business in the United States (“Reporting Companies”) to disclose information regarding the Reporting Company, Beneficial Owners, and Company Applicants. [1]

Beneficial Owners are those that:

1. Exercise substantial control over the entity (serve as a senior officer, appoint or remove senior officers, or make/approve major decisions for the entity);
2. Own 25% or more of the entity; or
3. Receive substantial economic benefits from the assets of an entity.

Company Applicant is the individual(s) who files the document that creates the company, as well as any individual primarily responsible for directing or controlling the filing incorporators, initial partners, etc.

Requirements

The information required of the Reporting Company includes (i), the full legal name of the entity, (ii) any trade or d/b/a name, (iii) the current address in the U.S., (iv) the State, tribal, or foreign jurisdiction of formation, and (v) a tax payor identification number (including the EIN).

The Beneficial Owners and Company Applicants are required to provide their (i) full legal name, (ii) their date of birth, (iii) their current address, and (iv) a unique identification number assigned by an issuing jurisdiction (e.g., current passport or driver’s license), plus a copy of the document from which the ID number was taken).

Reporting is not required if the entity qualifies for one of 23 exemptions. Most of the exemptions relate to entities that already are subject to federal or state regulation, the premise being that beneficial ownership of those entities already is known. Some examples are: (i) entities that file reports with the SEC, (ii) government authorities, (iii) banks, (iv) credit unions, (v) money services businesses, (vi) investment advisors, (vii) securities brokers and dealers, (viii) tax exempt entities, (ix) entities assisting tax exempt entities, (x) insurance companies, (xi) state-licensed insurance producers, (xii) pooled investment vehicles, (xiii) public utilities, (xiv) inactive entities, (xv) subsidiaries of certain exempt entities, (xvi) accounting firms, and (xvii) large operating companies.

Large operating companies also are exempt from the reporting requirements of the CTA. Large operating companies are those entities that (i) employ more than 20 full time employees in the US, (ii) have an operating presence at a physical office in the U.S., and (iii) have filed federal income tax or information returns in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales on IRS form 1120 or other applicable forms, excluding gross receipts or sales from sources outside the U.S. All three conditions set out above must be satisfied for the exemption to apply.

Timing

Reporting Companies created or registered before January 1, 2024, will have until January 1, 2025, to file their initial reports and only needs to provide information about themselves and their Beneficial Owners. They do not need to provide information about their Company Applicants.

Reporting Companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports and will need to report information about themselves, their Beneficial Owners, and their Company Applicants.

Reporting Companies will have 30 days to report any changes to the reported information, such as a change in the Beneficial Owners or a change in any information previously provided. For updates, the 30 days start when the relevant change occurs. For corrections, the 30 days start after the Company becomes aware of, or have reason to know of, an inaccuracy in a prior report. It is unclear at the moment whose knowledge triggers the 30 day start period.

The report filed with FinCen must be certified as true and correct via the reporting portal. The CTA permits (i) civil penalties of $500 per day (up to a maximum of $10,000) for a failure to timely report and (ii) criminal penalties of up to two years imprisonment if the failure to report is willful (or if a report knowingly includes erroneous information). As a related matter, the CTA also imposes increased penalties for violations of anti-money laundering and counter-terrorism financing.  

Authorized Disclosures

The CTA authorizes FinCEN to disclose beneficial ownership information in certain circumstances to six types of requesters: (i) U.S. Federal agencies engaged in national security, intelligence, and law enforcement activities; (ii) state, local, and Tribal law enforcement agencies with court authorization; (iii) the U.S. Department of the Treasury; (iv) financial institutions using beneficial ownership information to conduct legally required customer due diligence, provided the financial institutions have their customer consent to retrieve the information; (v) federal and state regulators assessing financial institutions for compliance with legally required customer due diligence obligations; and (vi) foreign law enforcement agencies and certain other foreign authorities who submit qualifying requests for the information through a U.S. Federal agency. The CTA imposes stringent access requirements and safeguards on each group of requesters.

We will keep you informed of further developments. Feel free to contact the authors or anyone else on our CTA team if  you have questions.

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[1] A general partnership would appear to be excluded from any reporting under the CTA.