Key Takeaways:
- New reporting requirements for companies, beneficial owners, and business applicants came into effect on January 1, 2024. Failing to meet these requirements may lead to penalties.
- Businesses that were established or registered before January 1, 2024, will have one year to file their initial reports. Meanwhile, businesses that are created or registered on or after January 1, 2024, will have 90 days from their creation or registration to file the report.
- For Reporting Companies that are created or registered on or after January 1, 2025, the initial report is due within 30 calendar days of the entity’s creation or registration.
Starting January 1, 2024, most new and many existing businesses, including limited partnerships, corporations, and limited liability companies, must file a Beneficial Ownership Information (BOI) Report with the United States’ (U.S.) Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) under the Corporate Transparency Act (CTA). Regulations were adopted on September 29, 2022, and were published in 31 CFR Part 1010 (the “Final Rule”).
The CTA and the Final Rule create new reporting obligations for certain entities (defined as “Reporting Companies”) to FinCEN. These obligations pertain to their company applicants, beneficial owners, control persons, entity structures (as defined in the CTA and related regulations), and certain associated individuals.
Consequently, lawyers representing Reporting Companies should be aware of the requirements of the CTA and related regulations. They should also be prepared to advise their clients on the often intricate reporting requirements that many will face. Below, we answer some of the most frequently asked questions about the CTA in detail.
Glossary of Key Terms
Before delving into the questions, let’s first look at the definitions of a few key terms:
- Beneficial Owner: For purposes of the CTA, an individual qualifies as a beneficial owner if they have a significant ownership stake in a company, either directly or indirectly. This means that the person has a major influence on the reporting company’s decisions or operations, owns at least 25% of the company’s shares, or has a similar level of control over the company’s equity.
- Beneficial Ownership Information (BOI): Identifying information about the individuals who directly or indirectly own or control a company.
- Company Applicants: A company applicant is the person who directly files the document to establish a domestic reporting company. For a foreign reporting company, this is the person who directly files the document to register the company for doing business in the United States. For both domestic and foreign Reporting Companies, it is the person primarily responsible for directing or controlling the filing if more than one individual is involved in the process.
- Domestic Reporting Company: Any entity that is a corporation, a limited liability company, or has been created by filing a document with a Secretary of State or a similar office, under the laws of a state or Indian tribe and does not qualify for an exemption.
- FinCEN Identifier: A FinCEN identifier number is a unique number issued to individuals and Reporting Companies who apply by providing all the necessary information required in the initial report. Instead of including each piece of identifying information, a reporting company can report an individual’s FinCEN identifier number (if available).
- Ownership Interest: An arrangement that establishes ownership rights in the reporting company, such as shares of equity, stock, voting rights, or any other mechanism used to establish ownership.
- Substantial Control: An individual can exercise substantial control over a reporting company by being a senior officer, having authority to appoint or remove certain officers or a majority of directors or similar body, being an important decision-maker, or having any other form of substantial control.
What is the Purpose of the CTA?
The CTA, a part of the Anti-Money Laundering Act of 2020, which is part of the broader National Defense Authorization Act for Fiscal Year 2021 (the “NDAA”), came into effect on January 1, 2024.
The CTA is a significant step in Congress’ efforts to crack down on bad actors who seek to conceal their ownership of business entities using shell companies to carry out illegal activities, such as:
- money laundering;
- financing terrorism;
- human and drug trafficking; and
- securities fraud.
It does this by increasing the United States financial crimes monitoring systems, filling some of the gaps left by state laws, which generally do not require companies to disclose their owners or those in control.
The most significant provision in the CTA is the creation of a non-public, secure central registry to be administered by FinCEN to track the beneficial ownership of entities formed in or registered in the United States. Filings will be made electronically once the required registry and additional new regulations are in place.
Who Needs to Comply with the CTA?
According to the Anti-Money Laundering Act of 2020, the CTA applies to domestic and foreign companies that are corporations, LLCs, LPs, or similar entities:
- created by submitting a document with the Secretary of State or any similar office in a state or Indian tribe or;
- formed under a foreign country’s laws and registered to do business in any state in the country by filing a document with the Secretary of State or any similar office.
However, the CTA also created specific exemptions. These exemptions and the entities covered by each are listed below:
1. Accounting Firm Exemption: Any public accounting firm registered in accordance with Section 102 of the Sarbanes-Oxley Act.
2. Bank Exemption: Any bank, as defined in Section 3 of the Federal Deposit Insurance Act, Section 2(a) of the Investment Company Act, or Section 202(a) of the Investment Advisers Act.
3. Broker-Dealer Exemption: Any broker or dealer registered under the Securities Exchange Act of 1934.
4. Commodity Exchange Act Registered Entity Exemption: Any entity considered under the Commodity Exchange Act as:
a) A registered entity as defined in Section 1a;
b) A futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, each as defined in Section 1a;
c) A retail foreign exchange dealer as described in Section 2(c)(2)(B); or
d) Registered with the Commodity Futures Trading Commission under the Commodity Exchange Act.
5. Credit Union Exemption: Any Federal credit union or State credit union as defined in Section 101 of the Federal Credit Union Act.
6. Depository Institution Holding Company Exemption: Any bank holding company, as defined in Section 2 of the Bank Holding Company Act, or any savings and loan holding company, as defined in Section 10(a) of the Home Owners’ Loan Act.
7. Entity Assisting a Tax-Exempt Entity Exemption: Any entity that operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in paragraph (c)(2)(xix) or is a United States person and is beneficially owned or controlled exclusively by one or more United States persons who are United States citizens or lawfully admitted for permanent residence. This definition also includes any entity that derives at least a majority of its funding or revenue from one or more United States persons who are United States citizens or lawfully admitted for permanent residence.
8. Financial Market Utility Exemption: Any financial market utility designated by the Financial Stability Oversight Council under Section 804 of the Payment, Clearing, and Settlement Supervision Act.
9. Governmental Authority Exemption: Any entity established under the laws of the United States, an Indian tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States, and that exercises governmental authority on behalf of the United States or any Indian tribe, State, or political subdivision.
10. Inactive Entity Exemption: Any entity that was in existence on or before January 1, 2020, is not engaged in active business, is not owned by a foreign person, whether directly or indirectly, wholly or partially, and has not experienced any change in ownership in the preceding twelve-month period.
11. Insurance Company Exemption: Any insurance company as defined in section 2 of the Investment Company Act.
12. Large Operating Company Exemption: Any entity that satisfies each of the following criteria: (a) employs more than 20 full-time employees, (b) has an operating presence at a physical office in the United States, and (c) filed a federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales.
13. Money Services Business Exemption: Any money transmitting business registered with FinCEN under 31 U.S.C. 5330, and any money services business registered with FinCEN under 31 CFR 1022.380.
14. Other Exchange Act Registered Entity Exemption: Any entity other than those described under the following exemptions: Securities reporting issuer, broker or dealer in securities, or securities exchange or clearing agency and that is registered with the SEC under the Securities Exchange Act.
15. Pooled Investment Vehicle Exemption: Any “pooled investment vehicle” that is operated or advised by an RIA or Venture Capital Fund Adviser. For purposes of this exemption, a “pooled investment vehicle” is an entity that (a) is exempt from the requirement to register as an investment company in reliance on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, and (b) is identified by its legal name on the adviser’s Form ADV, or will be so identified on the next annual updating amendment.
16. Public Utility Exemption: Any entity that is a regulated public utility as defined in 26 U.S.C. 7701(a)(33)(A) that provides telecommunications services, electrical power, natural gas, or water and sewer services within the United States.
17. RIA Exemption: Any investment adviser registered (RIA) with the U.S. Securities and Exchange Commission (SEC).
18. Securities Exchange or Clearing Agency Exemption: Any exchange or clearing agency as defined in Section 3 of the Securities Exchange Act that is registered under Sections 6 or 17A of that Act.
19. Securities Reporting Issuer Exemption: Any issuer of securities that is an issuer of a class of securities registered under Section 12 of the Securities Exchange Act or required to file supplementary and periodic information under Section 15(d) of this Act.
20. State-Licensed Insurance Producer Exemption: An insurance producer authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State, and that has a physical office operating within the United States.
21. Subsidiary Exemption: Any entity whose ownership interests are controlled[1] or wholly owned, directly or indirectly, by certain – but not all – types of exempt entities. The subsidiary exemption is available to subsidiaries of RIAs, Venture Capital Fund Advisers, registered broker-dealers and large operating companies (but notably is not presumptively available to subsidiaries of pooled investment vehicles). Application of the Subsidiary Exemption is complicated. The analysis of whether a company qualifies for the subsidiary exemption does not end upon identifying a single exempt entity that controls or owns the company’s ownership interests. For example, if a company were to be controlled by more than one entity, one of which was not exempt, the subsidiary exemption may not be available.
22. Tax-Exempt Entity Exemption: An organization described in section 501(c) of the Internal Revenue Code (determined without regard to Section 508(a) of the Code) and exempt from tax under Section 501(a) of the Code. However, if an organization that is described in Section 501(c) and is exempt from tax under Section 501(a) loses its tax-exempt status, it will still be considered as being described in this paragraph (c)(1)(xix) for a period of 180 days from the date of such loss. This includes a political organization, as defined in Section 527(e)(1) of the Code, which is exempt from tax under Section 527(a) of the Code or a trust described in paragraph (1) or (2) of Section 4947(a) of the Code.
23. Venture Capital Fund Adviser Exemption: Any investment adviser that is exempt from the requirement to register with the SEC pursuant to Section 203(l) of the Investment Advisers Act because it solely advises venture capital funds and files the required reports on Form ADV with the SEC (Venture Capital Fund Advisers).
Business entities that are neither publicly traded nor qualify as a regulated exempt entity will be exempt from the CTA reporting requirements if they meet all three of the following requirements. The entity has:
(a) more than 20 full-time employees in the United States;
(b) filed, in the previous year, a federal tax return reporting more than $5 million in gross receipts; and
(c) an operating physical location in the United States.
Because a newly formed entity will be unable to satisfy the requirement in (b) above, at least initially, it will be a Reporting Company, notwithstanding its revenues or its number of employees.
Holding companies of business entities meeting the three-prong test above which do not have their own employees will not qualify for an exemption. Companies directly or indirectly owning real estate, without employees, likely will be Reporting Companies.
What Does the CTA Require Reporting Companies to Report, and When Must They Do So?
The CTA requires Reporting Companies to file a BOI Report with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), providing details identifying individuals who are associated with the reporting company. The BOI report must include the following information about the entity:
(i) full legal name;
(ii) trade names or d/b/a names;
(iii) address of the entity;
(iv) the jurisdiction of formation or registration; and
(v) the federal taxpayer identification number.
Additionally, for each beneficial owner, the reporting company must provide the following:
(i) full legal name;
(ii) birthdate;
(iii) home address;
(iv) an identifying number from a driver’s license, passport, or other approved documents; and
(v) an image of the approved document containing the identifying number.
Alternatively, an individual can apply for a FinCEN identifier number and use it for subsequent filings instead of (iv) and (v).
If the reporting company is set up on or after January 1, 2024, details about the person responsible for filing the documents that establish or register the company must also be filed. This individual, known as the company applicant, plays a key role in overseeing and directing the filing process, either by personally handling it or through delegation to someone else. If both (i) and (ii) are the same person, they are solely the company applicant. The same information must be provided for the company applicant.
The CTA sets different compliance deadlines for affected businesses based on their creation or registration dates. Here are the key deadlines:
- Existing Companies: Reporting Companies created or registered to do business in the United States before January 1, 2024, must file by January 1, 2025.
- Companies Formed Between January 1, 2024, and December 31, 2024: These companies must file their initial BOI report with FinCEN within 90 days, whichever is earlier, of their company’s creation or registration.
- Companies Formed on or After January 1, 2025: Reporting Companies created on or after this date must comply within 30 days after their date of formation (i.e., the filing date of their Articles or Certificate).
These deadlines are important for affected businesses to ensure compliance with the CTA.
Where Will the Reported Information Be Stored, and Who Will Have Access to It?
Reported information will be stored in a secure and non-public database known as the Beneficial Ownership Secure System (BOSS), which FinCEN maintains. FinCEN may disclose the reported information in response to authorized requests, following strict protocols to ensure the security and confidentiality of the information. The recipients of this disclosed information include:
- U.S. federal agencies involved in national security, intelligence, or law enforcement activities, to advance those activities;
- State, local, or tribal law enforcement agencies, if authorized by a court to seek the information for a criminal or civil investigation;
- Federal agencies acting on behalf of non-U.S. law enforcement, a foreign prosecutor, or judge;
- Financial institutions that require the information to comply with KYC requirements under applicable law, with the consent of the reporting company;
- Federal and state regulators assessing the compliance of financial institutions with legally required customer due diligence obligations; and
- Officers and employees of the Treasury Department for tax administration purposes.
The BOSS database will not be accessible to the general public. Unauthorized disclosure or misuse of the information carries penalties, including a civil penalty of up to $500 per day of violation, a fine of up to $250,000 and imprisonment for up to 5 years (or $500,000 and 10 years imprisonment if other U.S. laws are also violated or if part of a pattern of illegal activity involving more than $100,000 within a 12-month period).
While FinCEN is implementing robust security measures to protect the BOSS database, data privacy experts have expressed concerns about potential hacking or breaches.
What Are the Penalties for Not Adhering to the CTA?
Failure to follow the CTA or giving FinCEN false info can result in fines and penalties. These include facing fines that can range from $500 to $10,000 for each violation and the possibility of imprisonment. Non-compliance can also harm your reputation, disrupt your operations, and invite closer scrutiny, making it harder to attract investors or partners and potentially impacting your future business prospects.
Law firms may also be held responsible if they are found to have assisted in non-compliance or failed to report suspicious activity. The CTA aims to eliminate the U.S.’s status as a safe haven for “shell” companies involved in certain illegal activities. Compliance with this law is both mandatory and strongly advised.
How FinCEN’s Regulations Impact Private Investment Funds and their Advisers
Some entities within the structures of private investment funds and their advisers clearly will be exempt from BOI reporting obligations. However, while FinCEN exempts a broad range of companies from BOI reporting obligations, we anticipate that most investment advisers, whether or not registered with the SEC, will have one or more entities within their organizational structures, or the organizational structures of the private funds they advise, that will be required to file BOI reports. The types of entities that may have technical difficulty relying upon a BOI exemption include the following:
- Investment advisers that are not RIAs or Venture Capital Fund Advisers (e.g., Private Fund Advisers);
- The parent company of an investment adviser (regardless of whether the investment adviser is an RIA, Venture Capital Fund Adviser, or Private Fund Adviser);
- General partners to private investment funds, unless the general partner was formed by an RIA;
- Ultimate general partner entities of private investment fund general partners (regardless of whether the entity was formed by an RIA, Venture Capital Fund Adviser, or Private Fund Adviser);
- Investment funds that rely upon the registration exemption under Section 3(c)(5) of the Investment Company Act (funds that invest primarily in real assets);
- Joint ventures that are directly or indirectly controlled by one or more persons that are not exempt entities; and
- Entities between a private investment fund and a portfolio company, such as blockers, splitters, aggregators, and holding companies.
Final Thoughts
It is essential for individuals and entities to have a clear understanding of the CTA to fulfill their legal duties and avoid penalties by meeting the reporting requirements. Please bookmark the FinCEN website (https://www.fincen.gov/boi) and pay attention to further interpretative guidance and frequently asked questions.
You must understand the specific information to disclose. Additionally, you should also explore options like FinCEN Identifiers. These measures are crucial for maintaining transparency in companies and to protect personal and organizational privacy.
Disclaimer: This article is made available by Sterlington for informational purposes only. It is not intended to provide specific legal advice and should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Using this website does not establish any attorney-client relationship between Sterlington and yourself.
