The Corporate Transparency Act
I. What is it, why it was Enacted, and Who Should Take Note
The Corporate Transparency Act (“CTA” or “Act”) was enacted as part of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”). The CTA requires specific types of domestic and foreign entities, i.e., “reporting companies” as defined by the Act, to submit detailed beneficial ownership information (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”). According to FinCEN, the CTA is meant to crack down on “illicit actors” who frequently use corporate structures (such as shell and front companies) to conceal their identities and to launder fraudulent gains. Therefore, starting January 1, 2024, each reporting company must file detailed reports providing information about the entity itself and its beneficial owners. Company Applicants likewise must submit this information. These requirements are intended to assist in the prevention of money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, all while minimizing the burden on entities transacting business in the United States.
While its enforcement is more than a year away, it is important for reporting companies, beneficial owners, and company applicants to understand their obligations and to begin compiling the necessary information.
II. Who Must Report: Reporting Companies, Beneficial Owners, and Company Applicants
Reporting Companies
Under the Act, there are two types of “reporting companies”: a domestic reporting company and a foreign reporting company. A domestic reporting company is any entity that is a corporation, limited liability company, or is created by the filing of a document with the Secretary of State or similar office under the law of the state or Indian tribe. Similarly, a foreign reporting company is any corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe.
While this definition seems all encompassing, the CTA exempts twenty-three categories from this definition and empowers FinCEN to create new exemptions. Exempt entities include the following:
Large operating companies: any company with twenty or more full-time U.S. employees, more than $5 million in U.S. sourced revenue, and a physical operating presence in the U.S,
Issuers registered with the Securities and Exchange Commission
Banks, bank holding companies, savings and loan holding companies, credit unions, financial market utility entities, and money services.
Registered Commodity Exchange Act entities, registered investment companies or investment advisers, broker-dealers, and registered venture capital fund advisers.
Insurance companies or state-licensed insurance producers
Accounting firms
Public utilities
Certain pooled investment vehicles
Tax-exempt entities or certain entities that assist tax-exempt entities
Inactive companies
What Information is Required to be Submitted
Each reporting company must submit the following information:
The entity’s full legal name,
Any trade or “doing business as” names,
A complete current address consisting of,
i. In the case of a reporting company with a place of business in the US, the street address of the principal place of business, and
ii. In all other cases, the street address of the primary location in the US where the reporting company conducts business.
The state, tribal, or foreign jurisdiction of formation,
For a foreign reporting company, the state or tribal jurisdiction where the company first registers, and
The IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number) or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction and the name of that jurisdiction.
What about Beneficial Owners?
The CTA defines a beneficial owner as an individual who, directly or indirectly, either (1) exercises substantial control or (2) owns or controls at least 25% of the ownership interests of the reporting company. According to the Act, substantial control is indicated by the following criteria: (1) service as a senior officer of the reporting company; (2) authority over the appointment or removal of any senior officer or a majority of the board or analogous body; and (3) direction, determination, or decision of, or substantial influence over, important matters affecting the reporting company. Additionally, there is a catchall provision for individuals that exercise “any other form of substantial control over the reporting company.”
Of course, there are exceptions to the beneficial owner definition. For purposes of the Act, a beneficial owner does not include: (1) minors (as defined by the jurisdiction of formation); (2) individuals acting as nominees, intermediaries, custodians, or agents on behalf of another; and (3) employees who are not senior officers and whose substantial control or economic benefits are derived solely from their status as an employee.
For each beneficial owner and each individual who files an application to form a domestic entity or register a foreign entity to do business in the United States (a “company applicant”), the CTA requires the following information:
1. Full legal name.
2. Date of birth.
3. Complete current address consisting of:
i. In the case of a company applicant who forms or registers an entity in the course of the company applicant’s business, the street address of the business, or
ii. In any other case, the individual’s residential street address.
4. Unique identifying number and the issuing jurisdiction from one of the following documents:
i. A non-expired passport issued to the individual by the United States government,
ii. A non-expired identification document issued to the individual by a State, local government, or Indian tribe for the purpose of identifying the individual,
iii. A non-expired driver’s license issued to the individual by a State, or
iv. A non-expired passport issued by a foreign government to the individual, if the individual does not possess any of the other documents described, and
5. An image of the document from which the unique identifying number was obtained.
Time Frame for Reporting
Any domestic reporting company created on or after January 1, 2024, must file a report within 30 calendar days of either receiving actual notice that its creation has become effective or the Secretary of State or similar office first providing public notice it’s been created, such as through a publicly accessible registry, whichever occurs first.
Any entity that becomes a foreign reporting company on or after January 1, 2024, must file a report within 30 calendar days of either receiving actual notie that it has been registered to do business or the Secretary of State of similar office first providing public notice it’s been registered, such as through a publicly accessible registry, whichever occurs first provides public notice, such as through a publicly accessible registry, that the foreign reporting company has been registered to do business.
A domestic reporting company created before January 1, 2024, and an entity that became a foreign reporting company before January 1, 2024, must file a report not later than January 1, 2025.
III. When must you update reports? What about inaccurate reports?
Upon any change with respect to the required information previously submitted to FinCEN concerning a reporting company or its beneficial owners, including any changes with respect to who is a beneficial owner, the reporting company must file an updated report within 30 calendar days after the date on which the change occurs.
Upon the death of a beneficial owner, an updated report identifying new beneficial owners must be filed within 30 calendar days of the settlement of the beneficial owner’s estate.
If a previously filed report was inaccurate when filed and remains inaccurate, the reporting company must file a corrected report within 30 calendar days after the date on which the reporting company becomes aware or has reason to know of the inaccuracy.
IV. Will your information be released to the public?
Understandably, individuals may be concerned that their personal information will be released to the public. However, the CTA imposes strict confidentiality, security, and access restrictions on all of the data FinCEN collects. FinCEN is authorized to disclose reported BOI in limited circumstances to statutorily defined group of governmental authorities and financial institutions. For example, federal agencies may only obtain access to BOI when it will be used in furtherance of a national security, intelligence, or law enforcement activity. State, local, and Tribal law enforcement agencies, as well as “a court of competent jurisdiction” must authorize the agency to seek BOI as part of a criminal or civil investigation.
If the reporting company consents, FinCEN may also disclose BOI to financial institutions to help them comply with customer due diligence requirements under applicable law.
Lastly, a financial institution’s regulator can obtain BOI that has been provided to a financial institution it regulates for the purpose of performing regulatory oversight that is specific to that financial institution.
IV. Next Steps
Currently, FinCEN has yet to publish the steps that need to be taken to submit the required information, but rules are expected to come within the next few years. The next publication will cover how to access the Beneficial Ownership Secure System (BOSS) where all data is to be received and maintained. In the meantime, reporting companies, beneficial owners, and company applicants should start compiling the aforementioned information.