Beneficial Ownership Reporting Required Under the Corporate Transparency Act

The Corporate Transparency Act (CTA) became law on January 1, 2021, as part of the National Defense Authorization Act for Fiscal Year 2021 (P.L. 116-283). Effective January 1, 2024, certain U.S. and foreign entities doing business in the United States will be required to report their beneficial owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

Comment: The CTA is generally intended to increase transparency, and thus discourage the use of shell companies, which is an important step in the fight against money laundering, terrorist finance, corruption, and other criminal behavior.

The Secretary of the Treasury has issued regulations implementing these reporting requirements effective January 1, 2024. The information reported under the CTA will not be available to the general public and may only be used for law enforcement, national security, or intelligence purposes.

Entities Subject to Beneficial Ownership Reporting

All corporations, S Corporations, limited liability companies, and partnerships or other similar entities created under the law of a State or Indian Tribe, or formed under foreign law and registered to do business in the United States (reporting companies) must disclose information regarding their beneficial owners to FinCEN.

Entities Exempt from Reporting

Certain entities do not have to report beneficial ownership under the CTA. These are generally heavily regulated entities that already report such information to other federal agencies or companies with real business activities that are not perceived to be a high risk for money laundering. Exempt entities include, among others:

• Companies that employ more than 20 people, report more than $5 million of revenue on their tax returns, and have a physical presence in the United States

• Public companies

• Financial institutions such as banks, bank holding companies, and credit unions

• Insurance companies

• Investment companies

• Broker-dealers

• Pooled investments

• Tax-exempt organizations

• Information required to be reported

Reporting companies must disclose the identity of each beneficial owner of the company and each applicant with respect to the company. The reported information must include:

• Full legal name

• Date of birth

• Current residential or business street address

• Unique identifying number from an acceptable identity document (such as a driver’s license or passport) or a unique identity number generated by FinCEN.

Beneficial owner and applicant

A beneficial owner is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

1. exercises substantial control over the entity, including CEO, CFO, and COO, OR

2. owns or controls not less than 25% of the ownership interests of the entity.

The following individuals are not beneficial owners for this purpose:

1. an individual acting as a nominee, intermediary, custodian, or agent of another individual

2. an individual acting solely as an employee of the entity

3. an individual whose only interest in the entity is through a right of inheritance

4. a creditor of the entity, unless the creditor is also a beneficial owner

5. a minor child if the parent or guardian’s information is reported

An applicant with respect to a company is an individual who files an application to form an entity in the United States or to register a foreign entity to do business in the United States.

Effective date of reporting

The CTA reporting requirements take effect as of January 1, 2024. The initial report is due no later than January 1, 2025.

Entities formed or registered after January 1, 2024, must report beneficial ownership to FinCEN at the time of formation or registration. Existing entities must file a report within 30 days of any change to their beneficial ownership information.

Penalties

Failure to report or update beneficial ownership information or providing false information may result in civil penalties of up to $500 per day and criminal penalties of up to $10,000 and/or imprisonment of up to two years. An exemption may apply if an individual acting in good faith corrects any inaccurate information within 90 days of submitting the inaccurate report.

The unauthorized disclosure of reported information may also lead to a $500-per-day civil penalty and a criminal penalty of up to $250,000 and/or imprisonment of up to five years.

Contact the FMD team for more information.