Corporate Transparency Act: Executive Summary

Feb 06, 2024   
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The Corporate Transparency Act became law in the United States on January 1, 2021 and required compliance beginning on January 1, 2024. For more information about the background of the statute, please read our prior articles available here and here. In short, the Corporate Transparency Act was part of a larger effort by Congress to improve corporate transparency and strengthen anti-money laundering protections in the United States, namely by compelling a wide variety of entities to disclose their beneficial owners to FinCEN. More recently, FinCEN promulgated a series of rules designed to clarify the Corporate Transparency Act, with the most recent published on December 21, 2023.

Corporate Transparency Act compliance is now mandatory. The following are some answers to some of the frequently asked questions we have been receiving as our clients have learned more about the new law:

  1. Does my company need to comply with the Corporate Transparency Act?

It depends on the company. The Corporate Transparency Act includes a definition of “reporting company” broad enough to include any company formed in the U.S., but then a list of 24 exclusions. Generally speaking, large and highly regulated companies are excluded from the definition – including banks, money transmitting businesses, various SEC-regulated businesses, and companies with (a) at least 21 full time employees, with (b) at least $5M in gross receipts as reflected on its tax returns, and (c) a physical presence in the U.S. See 31 U.S.C. § 5336(a)(11)(B).

  1. When is my compliance deadline?

It depends on when your company was formed. If your company was formed before January 1, 2024, you have until January 1, 2025 to file your report. If you form your company in 2024 you will have ninety (90) days to file your report. Companies formed on or after January 1, 2025 will have thirty (30) days to file. Going forward, business owners should keep Corporate Transparency Act compliance on their to-do lists for most new companies they create.

  1. What do reporting companies need to report?

The Corporate Transparency Act requires reporting companies to disclose their “beneficial owners” to FinCEN, and defines “beneficial owner” as any individual who “directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise…(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” The statute also excludes 5 categories of persons from the definition of “beneficial owner,” including without limitation minor children, nominees, and employees.  See 31 U.S.C. § 5336(a)(3).

Additionally, reporting companies should be prepare to provide FinCEN with the following for each of their beneficial owners: i) name; ii) date of birth; iii) residential address; iv) passport or drivers license number; and v) image of identification form used for (iv).

  1. What does “substantial control” over a reporting company mean?

The Corporate Transparency Act broadly defines the categories of persons who exercise “substantial control.” They include, without limitation, each of the reporting company’s senior officers, persons with authority to remove officers, important decisionmakers, and any other person exercising control over the company. FinCEN describes in its Small Entity Compliance Guide that “there is no limit to the number of individuals who can be reported for exercising substantial control.”

  1. I own more than 25% of a reporting company through another company. What should I do?

There may be dual requirements – meaning the main company and the holding company may have separate obligations to report you as their beneficial owner. For instance, if Bill Smith owns 100% of Bill Smith LLC which is the 33% owner of Smith Properties, LLC, Mr. Smith should be sure that both LLCs report to FinCEN that Mr. Smith is their respective beneficial owner.

  1. I own more than 25% of a reporting company through a trust. What should I do?

It depends on the trust, but you should assume that your trust has a filing requirement. Most trusts are domestic entities – meaning that they were formed upon the filing of a document with a secretary of state. Therefore, unless another exception applies, both the trust and the company will be required to disclose you as their beneficial owner.

  1. What if I don’t want to file with FinCEN?

Willfully failing to file the beneficial ownership information required by the Corporate Transparency Act, and likewise willfully providing false or fraudulent information to FinCEN, can trigger serious consequences. The penalties available under the statute must be understood in both substance and form.

In terms of substance, persons who willfully violate the Corporate Transparency Act may be subject to a civil penalty of $500.00 per day of non-compliance, a $10,000 fine, and a 2-year prison term.

As significant as the penalties are on their own terms, the form of these consequences – meaning, the fact that they exist in the first place – is perhaps even more significant. Willful violations of the Corporate Transparency Act are a “bet-the-company” proposition because they can be investigated criminally by the United States, including with subpoenas, search warrants and grand juries. Due to the inevitably expansive nature of federal criminal investigations, investigations into reporting violations under the Corporate Transparency Act may also reveal unrelated areas of noncompliance resulting in even further penalties.

  1. I run an exempt company and we just created a subsidiary. Does the subsidiary need to file with FinCEN?

Probably not. FinCEN’s FAQs explain that if an entity is a subsidiary because its interests are controlled or wholly owned by exempt entity, the subsidiary will likewise be exempt.

  1. I own a non-U.S. company. Can it be a reporting company?

It can. If a foreign company registers to do business in a state in the United States, the foreign company must report its beneficial owners to FinCEN in a timely manner along with a tax identification number issued by a foreign jurisdiction.

  1. Who has access to the information we disclose to FinCEN?

Under certain circumstances articulated in FinCEN’s December 22, 2023 Final Rule, FinCEN can produce beneficial ownership information to each of the following categories of recipients:

  • Federal agencies engaged in national security, intelligence, or law enforcement activity, including both civil and criminal investigations and actions.
  • State, local and tribal law enforcement with a court order.
  • Foreign law enforcement agencies pursuant to, inter alia, an international treaty with the United States.
  • U.S. financial institutions performing anti-money laundering due diligence, but only upon the consent of the reporting company.
  • U.S. financial regulators performing reviews on financial institution compliance with the Corporate Transparency Act.
  • U.S. Treasury Department personnel.

In each such instance, parties requesting beneficial ownership information from FinCEN must articulate a cognizable basis for receiving the information and satisfy security and confidentiality requirements set forth in FinCEN’s rules. This is no small matter: banks and other authorized requesters will spend millions of dollars on compliance improvements in order to obtain access to beneficial ownership information, which is not available to most private parties.

  1. I am considering helping clients with their Corporate Transparency Act compliance obligations. What do you think?

Professionals, including attorneys and accountants, can certainly prepare and submit Corporate Transparency Act reports for clients. However, when doing so, the following factors should be kept in mind:

  • The attorney-client privilege may not protect communications intended to allow the attorney to prepare and file a Corporate Transparency Act report on behalf of the client, particularly if the information reported by the attorney is false.
  • The Corporate Transparency Act criminalizes the willful submission of false beneficial ownership information to FinCEN. Thus, if a professional submits a report to FinCEN that the professional knows to be false, the professional could suffer the same consequences as the client.
  • Reporting companies formed after January 1, 2024 must also report their “company applicants,” meaning the person who formed or registered the company.

Please feel free to contact us with any other questions you may have about the Corporate Transparency Act or your compliance obligations.