In 2021, Congress enacted the Corporate Transparency Act (CTA), which updates anti-money laundering laws. The CTA mandates that certain companies submit a report to the Treasury Department's Federal Crimes Enforcement Network (FinCEN) detailing the company's beneficial ownership interests. The goal is to increase transparency of ownership and decrease money laundering and similar financial crimes. There are substantial penalties for non-compliance.
On Jan. 1, 2024, a one-year window opens for any "Reporting Company" that existed prior to Jan. 1, 2024, to submit its initial report to FinCEN. Any Reporting Companies incorporated or formed in calendar year 2024 has 90 days from the date of incorporation or formation to file their reports. All Reporting Companies formed or incorporated thereafter have 30 days from formation to file.
1. Which entities must file a report with FinCEN?
Subject to a lengthy list of exceptions, any U.S. entity created, or foreign entity which registers to do business in the U.S., by filing a document with a secretary of state or similar office with any state or an Indian tribe ("Reporting Company") must file a report with FinCEN containing its beneficial ownership information.
What are the exceptions that exempt an entity from being a Reporting Company?
There are 23 distinct exceptions to the FinCEN reporting requirement, which include, but are not limited to: (i) broker/dealers; (ii) money transmitting businesses; (iii) publicly traded companies; (iv) certain investment vehicles; (v) companies that are nonprofits; (vi) government entities; and (vii) inactive entities with no foreign ownership. Also exempt from this reporting requirements are entities that have 20 or more full-time U.S. employees, has a physical presence in the U.S., and show $5 million or more in revenue (only from U.S. sources) for the most recent tax return filing, either alone or in the aggregate with its affiliate companies, if applicable.
2. Whose information must be disclosed in these reports?
A report may disclose information on "Beneficial Owners" and/or "Applicants."
- An Applicant is any individual who files an application to incorporate or form a domestic entity, or register a foreign entity, with a secretary of state or similar office with any state or an Indian tribe.
- There may be multiple Beneficial Owners for any given company. The term includes each individual who, directly or indirectly: (i) exercises substantial control over the company; or (ii) controls 25% or more of the ownership interests of the company; but who is not (a) a child, (b) an agent acting on someone else's behalf, (c) an employee of the company (other than a senior officer, (d) an individual whose interest in the company only comes from inheritance, or (e) a creditor of the company (unless in addition to being a creditor they are separately a Beneficial Owner).
3. What is substantial control for purposes of determining "Beneficial Ownership"?
Substantial control can exist in a number of ways and involves a fact-based analysis.
- Senior officers (and even some board members) of a company are usually considered to have substantial control over a company, because of how they can impact the direction of the business. Excluded from senior officer criteria are officer positions that are largely ministerial, such as corporate secretary or treasurer.
- Board members may also have substantial control. Some directors may actually exert substantial control over the company, and others may not.
- Any other individual having authority to appoint or remove senior officers, or a majority of board members, may also have substantial control. For example, substantial control might be held by a chairperson or a shareholder having a majority of the voting rights, depending on the company's bylaws (or analogous documents depending on entity type) and applicable laws.
- Any person having the ability to direct or determine, or who otherwise has substantial influence over, important decisions (such as business, finance, corporate structure, etc.), is also considered to exercise substantial control over a company. For example, a person who controls a limited partnership that owns a majority of the shares in a Reporting Company may have a substantial control.
4. What are ownership interests?
Ownership interests include: (i) equity, stock, voting rights, and options (after being exercised); (ii) certain trusts; (iii) interests in capital or profits of the Reporting Company; (iv) convertible notes/ instruments; and (v) similar interests establishing ownership. Careful consideration should be given to different classes of ownership, because the 25% threshold can be met even by holdings of less than 25% of the 'entire' Reporting Company. For example, a holder of more than 25% of a given class of ownership interest (e.g., an angel investor, or the sole officer/director of a venture capital firm), such as 30% of Class A Preferred Stock, could also be considered to be a Beneficial Owner.
5. What information must be in the report?
Each Reporting Company must report certain identifying information about itself, its Applicants, and its Beneficial Owners.
Beneficial Owners/Applicants*
- Full legal name
- Date of birth
- Current residential or business address as of the filing date
- Unique identifying number from an acceptable identification document (with image) OR FinCEN identifier**
Reporting Company
- Identify the company
- Full name of entity
- Any trade name or DBA
- Complete current address
- State or tribal jurisdiction of formation – or if foreign, the state or tribal jurisdiction where first registered
- IRS TIN – or if a foreign entity registered to do business in the U.S., the foreign issued Tax ID
*Only Reporting Companies created on or after Jan. 1, 2024, must report this information for Applicants.
**A FinCEN Identifier is a special number that individuals may request from FinCEN (after supplying the other information indicated above) to keep their Social Security Number, Driver's License Number, or Passport Number from appearing in these reports.
6. How often must a report be filed with FinCEN?
After the first filing described above for Reporting Companies created before, during and after calendar year 2024, additional filings will be needed only to the extent something in the original report was incorrect or incomplete, to address a change in beneficial ownership, or to address a change in the entity's status (i.e., the company no longer meets one of the exceptions and becomes a Reporting Company). Such amended reports must be filed within 30 days from the Reporting Company becoming aware that the original report was incorrect or incomplete, or from the change in beneficial ownership or status of the company.
7. What happens if the CTA is violated?
Because of the seriousness of the activity that Congress is trying to discourage, there are both civil and criminal penalties for violations of the reporting requirements under the CTA.
In the event that a person willfully: (i) provides, or attempts to provide, false or fraudulent beneficial ownership information; or (ii) fails to report complete or updated beneficial ownership information, that person shall be liable for a civil fine of up to $500 per day and criminal penalties of up to a $10,000 fine and/or two years in prison. Importantly, in the event that an Applicant is the person that provided false information, or failed to amend the beneficial ownership information, FinCEN could shift these penalties to a senior officer of the Reporting Company.
If the error or omission was made in good faith and promptly corrected (no later than 90 days after the report in question was filed), a safe harbor protection is available.
8. How will your information be protected by FinCEN?
FinCEN is obligated to maintain all the reports in a secured, private database, so that they are not publicly accessible. Large fines can be issued against anyone that discloses your information.
9. What should you do next?
Consult with an attorney who is familiar with these requirements. At Brown Rudnick, we can help you determine whether your company falls within an exception, or if it qualifies as a Reporting Company. We are also ready to perform the beneficial ownership analysis and assist in the preparation of the FinCEN report. We can also help you assess reports about FinCEN's obligations to maintain your information in confidence.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.