Understanding the Corporate Transparency Act and Its Implications
There is a new sheriff in town. The U.S. Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN, maintains a network whose goal is to prevent and punish criminals and criminal networks that participate in money laundering and other financial crimes. FinCEN tracks what is termed “suspicious persons” and activity by looking into mandatory disclosures for financial institutions. This new federal law mandates that from January 1, 2024, numerous businesses in the U.S. will be obligated to disclose key ownership and control details. This mandate stems from the 2021 Corporate Transparency Act (CTA). While the specific reporting form is not yet available, FinCEN has provided some guidelines as of December 12, 2023. It claims that the new law is is an attempt to “crack down on illicit finance and enhance corporate transparency by issuing a final rule that establishes the framework for access to and protection of beneficial ownership information (BOI).” fincen.gov
Who has to report
The CTA requires “’reporting companies” to report, which include corporations, limited liability companies (LLCs), and similar entities formed in the U.S. or foreign businesses registered to operate in the U.S. It also encompasses other domestic entities like trusts and foundations, depending on state laws.
Sole proprietorships generally fall outside the scope unless they are formally registered in the U.S. Similarly, obtaining an IRS employer identification number, a fictitious business name, or a professional license does not categorize a sole proprietorship as a reporting company. The Act exempts 23 types of entities, including publicly traded companies, nonprofits, and certain large operating companies. Check FinCEN’s Small Entity Compliance Guide to see if your company qualifies for an exemption.
You can report online, with FinCEN soon providing a dedicated form on the FinCEN’s beneficial ownership information webpage. The report must detail the company’s legal and trade names, physical address, jurisdiction of formation, and Tax Identification Number. It must also include personal details of each beneficial owner, such as name, date of birth, address, and identification document details.
Definition of Beneficial Owner
A beneficial owner is someone who either directly or indirectly has substantial control over the company or owns at least 25% of its ownership interests. Substantial control can manifest in various ways, including holding a senior officer position, having the authority to appoint or remove officers or directors, or being a key decision-maker.
Existing companies have until January 1, 2025, to file their initial report. New companies formed between January 1, 2024, and January 1, 2025, have 90 days post-formation to report. Companies formed on or after January 1, 2025, must report within 30 days of formation.
Companies are required to file an initial report only once but must submit updates or corrections within 30 days of any changes, such as new business names, changes in beneficial ownership, or changes in a beneficial owner’s identification information.
Legal and Financial Implications
Failure to comply can lead to severe penalties, including fines and imprisonment. Companies are advised to ensure they have access to the required information for compliance. Civil penalties can add up fast, up to $500 for each day the violation continues. Criminal penalties can include up to two years imprisonment and a fine of up to $10,000. Potential violations include willfully failing to file a beneficial ownership information report, or filing false beneficial ownership information, or willfully failing to correct or update previously reported beneficial ownership information.
Access to Reports
Federal, state, local, tribal, and certain foreign officials, who have to go through a U.S. federal agency, can access these reports for national security, intelligence, and law enforcement purposes. Financial institutions and their regulators may access this information under specific circumstances.
Data Security and Fraud Awareness
Companies should be vigilant against fraudulent attempts to solicit information under the guise of compliance with the CTA. FinCEN advises working with trusted sources and warns against unsolicited requests.
For more information, companies can visit FinCEN’s BOI webpage or subscribe to their updates.