Starting on January 1, 2024, the Corporate Transparency Act will mandate all “reporting companies” to provide personal information on its “beneficial owners” and “company applicants” to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The Corporate Transparency Act is aimed at enhancing corporate transparency and combatting illicit activities such as money laundering and terrorism financing. The Act also looks to create a registry of beneficial ownership information to assist law enforcement agencies in their efforts to prevent financial crimes. Failure to comply with the reporting requirements can lead to a civil penalty of not more than $500 for each day that the violation continues, a fine of up to $10,000, and up to two years of jail time.
So who exactly is subject to the Corporate Transparency Act and what are they required to report?
A Reporting Company is required to disclose beneficial ownership information to FinCEN pursuant to the Corporate Transparency Act. Reporting companies are divided into two categories:
- Domestic Reporting Company – corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or any similar office in the United States
- Foreign Reporting Company – entities (including corporations and limited liability companies) formed under the law of a foreign country that are registered to do business in the United States by the filing of a document with a secretary of state or any similar office
There are 23 exemptions to the reporting requirements under the Corporate Transparency Act, many of which apply to companies that belong to highly regulated industries, including public companies, banks, insurance companies, broker-dealers and investment advisers. One significant exemption is the “large operating company” exemption, which applies to an entity that has a physical location in the United States, employs more than 20 full-time employees, and had gross receipts or sales of more than $5 million, as demonstrated on its prior year’s federal income tax return.
Reporting companies are required to report information on their “beneficial owners” and, for entities formed on or after January 1, 2024, their “company applicant”.
- A Beneficial Owner is any individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company. An individual is deemed to exercise substantial control over a reporting company if the individual (i) is a senior officer (e.g., CEO, CFO, COO, General Counsel or other officer who performs a similar function), (ii) has authority over the appointment or removal of a senior officer or a majority of the board of directors (or similar governing body), (iii) directs, determines or has substantial influence over important decisions, or (iv) has any other form of substantial control over the reporting company.
- A Company Applicant includes both the individual who directly files the documents to create or register the reporting company and an individual who is primarily responsible for directing or controlling such filing. This includes an attorney, paralegal or other advisor who forms the entity on behalf of a client.
A reporting company must disclose the following information for each of its beneficial owners and, for entities formed or registered on or after January 1, 2024, its company applicants: (1) full legal name; (2) date of birth; (3) residential street address (for beneficial owners) or business address (for company applicants who form entities in the course of their business); (4) an identifying number from an acceptable identification document such as a passport or U.S. driver’s license; and (5) an image of the identification document.
Reporting companies formed prior to January 1, 2024 are required to submit their beneficial ownership information to FinCEN no later than January 1, 2025. Reporting companies formed or registered on or after January 1, 2024, but before January 1, 2025, are required to submit their beneficial ownership and company applicant information within 90 days of formation or registration. Reporting companies formed or registered after January 1, 2025 will have 30 days from formation or registration to submit this same information. Reporting companies are also required to report updates to their beneficial ownership information within 30 days of such change occurring.
Considering all the personally identifiable information that needs to be submitted as part of reporting process, many experts are concerned about potential exposure of sensitive information during not only the process of collection, but also if the information becomes publicly accessible. Potential exploitation of this data is also another huge risk as this sensitive information could be misused if it falls into the wrong hands. As it currently stands, FinCEN is planning to store all this personal data in a secure database that is not accessible to the public. However, this information can be obtained by governmental authorities and financial institutions if they submit a request to access a reporting company’s report for purposes related to law enforcement or national security. FinCEN is still developing rules to control how beneficial ownership information will be handled internally when this data is requested by third parties.
Due to the lack of clear guidance and regulations, there are still potential gaps in reporting procedures that need to be addressed prior to January 1, 2024. Just as there is still ongoing rulemaking to tackle remaining issues such as data handling and security, there are several other open items that are being determined by FinCEN. In particular, FinCEN’s Beneficial Ownership Secure System (BOSS), through which reporting companies will be required to submit their reports, is not yet active. Although the system is expected to be up and running by January 1, 2024, it puts those who are preparing to have their materials ready at the beginning of next year at a disadvantage. Further, the lack of clear guidance also impedes the government from being able to prepare for the influx of reports that they will have to process beginning January 1, 2024.
Regular updates and refinements will likely be made to the regulations to address these issues and improve the effectiveness of the Corporate Transparency Act. However, companies should take steps now to prepare for the upcoming reporting obligations. Nemphos Braue attorneys will continue to monitor the changing regulatory framework very closely over the next few months in order to assist clients with navigating through the requirements of the Corporate Transparency Act.