Background

On January 1, 2021, with bipartisan support, Congress enacted the Corporate Transparency Act (“CTA”) as part of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) when it overrode former President Trump’s veto of the NDAA. As part of an effort to combat money laundering, the financing of terrorism, and other illicit activities, the CTA requires business entities formed or registered in the United States that fall within the definition of a “reporting company” to disclose beneficial ownership information to the Financial Crimes Enforcement Network (“FinCEN”) of the Department of Treasury. While the purpose of the legislation may be commendable, it casts an extremely wide net and imposes new compliance burdens on businesses beginning in 2024.

On September 30, 2022, FinCEN issued final regulations under the CTA (“Final Rule”) that require certain new business entities formed or registered in the United States on or after January 1, 2024, to file reports with FinCEN within 30 days after receipt of actual or public notice that formation or registration is effective. A recent proposed regulation would increase this reporting deadline from 30 days to 90 days. In addition, certain business entities already in existence prior to 2024 must file these reports by no later than January 1, 2025.

Reporting Company

The CTA requires any “reporting company” to disclose its beneficial ownership information to FinCEN. A “reporting company” includes a corporation, limited liability company, or other similar entity created by filing a document with the secretary of state or similar office under the law of a State or Indian Tribe (each a “domestic reporting company” under the Final Rule). It further includes a corporation, limited liability company, or other similar entity formed under the law of a foreign country and registered to do business in the United States by filing a document with the secretary of state or similar office under the law of a State or Indian Tribe (each a “foreign reporting company” under the Final Rule). The definition excludes entities that are not required to file formation or registration documents with a State or Indian Tribe, such as trusts, sole proprietorships, or general partnerships.

The CTA includes over 20 exceptions to the definition of “reporting company” that primarily cover entities that are already regulated and/or already provide ownership or control information to government agencies. Some of the main exemptions include entities registered with the Securities and Exchange Commission, banks and credit unions, insurance companies, public utilities, tax-exempt 501(c)(3) organizations, and certain large operating companies (meeting U.S. physical presence, employee, and gross receipt requirements).

Information That Must Be Filed with FinCEN

Under the CTA and Final Rule, reporting companies will be required to file reports with FinCEN including identifying information for “beneficial owners” and “company applicants.”

Beneficial owner

A “beneficial owner” for this purpose is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, either (i) exercises substantial control over the entity, or (ii) owns or controls at least 25% of the ownership interests of the entity.

Under the Final Rule, an individual exercises substantial control over an entity if he or she: (A) serves as a senior officer of the reporting company, (B) has authority over the appointment or removal of any senior officer or of a majority of the board of directors or similar body, (C) directs, determines, or has substantial influence over important decisions of the reporting entity, including (1) nature, scope, and attributes of the business, including the sale, lease, mortgage, or other transfer of the principal assets of the reporting company, (2) the reorganization, dissolution, or merger of the reporting company, (3) major expenditures or investments, issuance of equity, incurrence of significant debt, or approval of the operating budget of the reporting company, (4) the selection or termination of lines off business or geographic focus of the reporting company, (5) compensation of senior officers, (6) entry into, termination or fulfillment of significant contracts, (7) amendments of governing documents, or (D) has any other form of substantial control.

Ownership interests are broadly defined and include profits or capital interests in an entity, convertible instruments, and options. Ownership interests are calculated treating any options or similar interests as exercised. An exception is provided for a minor child, as long as the required information is provided for a parent or guardian. A reporting company owned by exempt entities will be allowed to include the names of the exempt entities instead of individual information.

Company Applicant

A “company applicant” is, for a domestic reporting company, the individual who directly files the document that creates the domestic reporting company, and for a foreign reporting company, the individual who first registers the foreign reporting company in the United States. If more than one individual is involved in the filing, the company applicant is the individual responsible for controlling or directing the filing.

Required Information: For reporting companies created or first registered in the United States on or after January 1, 2024, identifying information will be required for beneficial owners and company applicants. For reporting companies formed or first registered prior to January 1, 2024, this information will only be required for beneficial owners and will not be required for company applicants. An initial report will be required to contain:

1. For the reporting company:
   1. The full legal name of the reporting company;
   2. any trade name or DBA name;
   3. the street address of the principal place of business or primary location in the United States where the reporting company conducts business;
   4. the State, Tribal, or foreign jurisdiction of formation;
   5. for a foreign reporting company, the State or Tribal jurisdiction where it first registers; and
   6. the IRS taxpayer identification number (“TIN,” including an employer identification number “EIN”) of the reporting company or for a foreign reporting company not issued a TIN, its foreign taxpayer identification number including the name of the issuing jurisdiction.
2. For each individual beneficial owner and company applicant (if required):
   1. The full legal name of the individual;
   2. the date of birth of the individual;
   3. a complete current address – in the case of a company applicant, the street address of his or her business, in all other cases, the individual’s residential street address;
   4. a unique identifying number and issuing jurisdiction from one of the following:
      1. a non-expired United States passport;
      2. a non-expired identification document issued by a State, local government, or Indian tribe;
      3. a non-expired driver’s license issued by a State; or
      4. a non-expired passport issued by a foreign government if the individual does not possess any of the foregoing; and
   5. an image of the document with the unique identifying number.

Use of FinCEN Identifier

Under the Final Rule, an individual may obtain a FinCEN identifier by submitting an application to FinCEN with the information that would be required to be provided with respect to that individual by a reporting company. A reporting company can also obtain a FinCEN identifier by submitting an application at or after the time it files its initial report. Reporting companies will be allowed to include an individual’s FinCEN identifier in lieu of the full individual information otherwise required. Individuals with significant ownership or control of multiple entities and company applicants responsible for forming or registering multiple entities would have an incentive to obtain a FinCEN identifier. Proposed amendments to the Final Rule issued December 15, 2022, would permit a reporting company to report the FinCEN identifier of an entity through which an individual is a beneficial owner of the reporting company in lieu of the individual’s beneficial ownership information when: (1) the intermediate entity has obtained a FinCEN identifier and provided it to the reporting company; (2) the individual is a beneficial owner by virtue of an interest in the reporting company that the individual holds through the intermediate entity; and (3) only the individuals that are beneficial owners of the intermediate entity are beneficial owners of the reporting company, and vice versa.

How to Report

CTA reports will be required to be filed electronically. FinCEN is currently developing an online portal to do these filings and will publish guidance as it becomes available at www.fincen.gov/boi. Reports will not be accepted before January 1, 2024.

Updated and Corrected Reports

Under the Final Rule, if there is any change with respect to information previously submitted to FinCEN concerning a reporting company or its beneficial owners, the reporting company is required to file an updated report within 30 calendar days after the date on which the change occurs. If a reporting company files an initial report and subsequently becomes exempt, that is considered a change that necessitates an updated report.

If a filed report is inaccurate, the reporting company must file a corrected report within 30 calendar days after the reporting company becomes aware of the inaccuracy.

Uses of Beneficial Ownership Information

The CTA authorizes FinCEN to disclose beneficial ownership information under specific circumstances to five general categories of recipients: (1) U.S. Federal, state, local, and Tribal government agencies including law enforcement agencies requesting beneficial ownership information for specified purposes; (2) foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities (foreign requesters); (3) financial institutions (“FIs”) using beneficial ownership information to facilitate compliance with customer due diligence (“CDD”) requirements under applicable law, but only with the consent of the reporting company; (4) Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing FIs for compliance with CDD requirements; and (5) the U.S. Department of the Treasury itself and its officers, employees, contractors, or agents, including for tax enforcement. Foreign requesters would be required to make their requests for beneficial ownership information through intermediary Federal agencies. In addition to meeting other criteria, requests from foreign requesters would have to be made either (1) under an international treaty, agreement, or convention or (2) via a request made by law enforcement, judicial, or prosecutorial authorities in a trusted foreign country.

Penalties for Noncompliance

The CTA provides that it shall be unlawful to (A) willfully provide or attempt to provide false or fraudulent beneficial ownership information to FinCEN or (B) willfully fail to report complete or updated beneficial ownership information to FinCEN. Any person who violates either (A) or (B) is liable for a civil penalty of up to $500 per day while the violation remains not remedied. The individual is also potentially subject to a criminal fine of up to $250,000 and/or imprisonment up to five years. The potential criminal penalty is increased to a fine of up to $500,000 and up to 10 years in prison where the violation occurs while violating other U.S. law or when engaged in other illegal activity involving more than $100,000 over a 12-month period. The civil and criminal penalties will not apply where the person voluntarily and promptly corrects the report within 90 days after the date on which the person filed the report containing incorrect information. Ambiguities include the definition of “willfully.” Courts have interpreted willfulness in similar contexts, including reporting of foreign bank and financial accounts to FinCEN, as including reckless disregard or willful blindness. Further, it is not clear who ultimately would be liable for civil and criminal penalties. Under the Final Rule, persons who may be held liable include a person who either causes the failure, or is a senior officer of the entity at the time of the failure.

The misuse or unauthorized disclosure of beneficial ownership information can result in criminal penalties up to $250,000 in fines and/or imprisonment for up to five years.

FinCEN is continuing to propose regulations and publish additional guidance regarding CTA requirements. See FAQs published and updated by FinCEN. FinCEN further released a Small Business Compliance Guide.

Stites & Harbison, PLLC attorneys are closely monitoring the status of CTA regulations and guidance. If you have any questions about this client alert, please contact the authors or your regular Stites & Harbison contact.