US Corporate Transparency Act: complying with newly-enacted beneficial ownership rules

April 2024 | EXPERT BRIEFING | RISK MANAGEMENT

financierworldwide.com

On 1 January 2024, the US Corporate Transparency Act (CTA) went into effect. It imposes new reporting obligations that require entities (including limited liability companies (LLCs), corporations and partnerships) formed in or doing business in the US to report their beneficial ownership information (BOI) to the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

The principal purpose of the CTA is to facilitate enforcement of laws intended, if possible, to help prevent money laundering, terrorist financing, corruption and tax fraud, and otherwise to identify and sanction those engaged in money laundering either as an objective or a tool to facilitate other unlawful activity.

Reporting obligations apply to all US and non-US entities that are ‘reporting companies’, unless an exemption applies. ‘Reporting company’ means any entity (whether a corporation, LLC or other entity) that is formed by the filing of a document with a secretary of state or similar office under the laws of any US state, commonwealth, territory or tribal jurisdiction, or formed under the laws of a foreign country and registered to do business in the US by the filing of a document with a secretary of state or any similar office. Sole proprietorships that do not use a single-member LLC are not considered to be a ‘reporting company’.

There are 23 types of entities that are exempt from the reporting requirements, many of which are already subject to substantial federal reporting requirements. Exempt entities include, for example, publicly traded companies and other entities that file reports with the Securities and Exchange Commission (SEC), banks, credit unions, money services businesses, securities brokers and dealers, tax-exempt entities, political organisations, charitable trusts, insurance companies, state-licensed insurance companies, certain pooled investment vehicles, registered investment advisers, public utilities, accounting firms, inactive entities and any entity whose ownership interests are controlled or wholly owned, directly or indirectly, by certain exempt entities.

‘Large operating companies’ are also exempt, provided that they: (i) employ more than 20 full time employees in the US; (ii) have an operating presence in a physical office within the US; and (iii) filed a federal income tax or information return in the US for the previous year reflecting more than $5m in gross receipts or sales from US sources.

Each reporting company is required to submit BOI reports to FinCEN. BOI reports must disclose certain information about the reporting company and its beneficial owners and company applicants. Specifically, a reporting company is required to provide its legal name, trade name or ‘doing business as’ name, its principal place of business in the US and its taxpayer identification number.

In addition, each beneficial owner must provide its legal name, date of birth, residential street address, a unique identifying number from an accepted form of government-issued identification (including passports and drivers licences, by way of example), the name of the state or jurisdiction that issued such identification, and an image of such identification.

For the purposes of the CTA, a beneficial owner is defined as an individual who, directly or indirectly, either exercises ‘substantial control’ over a reporting company or owns or controls at least 25 percent of the ownership interests of a reporting company. An ownership interest for purposes of determining beneficial ownership under the CTA is broadly construed to include any stock or other equity interest (whether such interest confers voting rights or not), any capital or profit interest, any instrument convertible into an ownership interest, any option to purchase or sell ownership interests, or any other instrument, contract, arrangement, understanding, relationship or mechanism used to establish ownership.

An individual is deemed to exercise ‘substantial control’ over a reporting company if they: (i) serve as a senior officer of such reporting company; (ii) have authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of such reporting company; (iii) direct, determine or have substantial influence over important decisions made by such reporting company; or (iv) have any other type of substantial control over such reporting company.

The following types of individuals are not considered beneficial owners of a reporting company. First, a minor child (however, a reporting company must report information regarding a minor child’s parent or legal guardian). Second, an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual, Third, an employee, acting solely as an employee and who is not a senior officer, whose substantial control over or economic benefits from such reporting company are derived solely from the employment status of the employee. Fourth, an individual whose only interest in a reporting company is a future interest through a right of inheritance. And lastly, a creditor of the reporting company unless it exercises substantial control over, or has at least a 25 percent ownership interest in, the reporting company.

A company applicant is defined as the individual who directly files the document that creates the reporting company or, in the case of a foreign reporting company, the document that first registers the entity to do business in the US. This also includes the individual primarily responsible for directing or controlling the filing of such document by another. A reporting company that existed or was registered to do business in the US before 1 January 2024 does not need to identify and report its company applicants to FinCEN.

In order to protect the confidentiality of any BOI, FinCEN promulgated the Access Rule to prescribe the circumstances under which BOI reported to FinCEN may be disclosed to other recipients and how it must be protected. The Access Rule provides that BOI submitted to FinCEN may only be disclosed to: (i) US federal agencies engaged in national security, intelligence or law enforcement activity; (ii) US state, local and tribal law enforcement agencies with prior court authorisation; (iii) certain foreign persons upon their requests therefor; (iv) financial institutions subject to customer due diligence requirements; (v) federal functional regulators and other regulatory agencies acting in a supervisory capacity assessing financial institutions for compliance with customer due diligence requirements; and (vi) US Department of the Treasury officers and employees who require such information in the ordinary course of their employment. Each category of authorised recipient is subject to security and confidentiality protocols.

For any reporting company that existed prior to 1 January 2024, BOI will need to be reported to FinCEN prior to 1 January 2025. For US reporting companies formed or registered in 2024, reporting is required within 90 days of the acceptance of the reporting company’s formation or registration filing. Foreign reporting companies formed or registered in 2024 must file BOI with FinCEN within 90 days of either receiving actual notice that it has been registered to do business in the US or the secretary of state (or similar office) first provides public notice that it has been registered, whichever occurs first. For reporting companies formed or registered on or after 1 January 2025, BOI reporting is required within 30 days of the acceptance of the company’s formation or registration filing.

Notably, the BOI report must only be filed once for any reporting company unless there are updates, corrections or changes in eligibility in respect of the reporting company. Updates to a BOI report, including any change to the information reported for the reporting company, any change in beneficial owners or a change the information reported for a beneficial owner, such as their name, address or unique identifying number, must be submitted to FinCEN within 30 calendar days after the change occurs.

Similarly, if previously reported information was inaccurate in a BOI report when filed and remains inaccurate, a reporting company must submit a corrected BOI report no later than 30 calendar days after the reporting company becomes aware or has reason to know of such inaccuracy. There are no penalties for filing an inaccurate BOI report provided it is corrected within 90 calendar days of when it was filed.

Finally, if a reporting company subsequently becomes eligible for an exemption from the reporting requirement after the filing of its initial report, the reporting company must submit a corrected BOI report to FinCEN to disclose such exemption. The initial BOI report and all updates and corrections are to be filed electronically with FinCEN through the Beneficial Ownership Secure System available via FinCEN’s website. There is no filing fee.

The CTA authorises both civil and criminal penalties for non-compliance by companies required to file by beneficial owners and by the company applicant. The CTA provides for both civil and criminal penalties (including a daily $500 fine up to a maximum fine of $10,000 and two-years’ imprisonment) against a company for wilfully providing false information, failing to provide complete information or failing to update information in FinCEN reports. An individual may be held liable under the CTA if such individual’s actions caused such failures or if such individual was a senior officer at the time of such failures.

All companies should take steps to first determine to what extent the CTA is applicable to it, and then to establish compliance protocols for its new CTA obligations, to the extent any exist or may arise in the future. It is strongly advisable to consult with US corporate counsel if a company has any questions about the CTA, its applicability or preparing and filing BOI reports.

Natalie S. Lederman and William C. Hanson are partners and Ida J. Vanto is an associate at Sullivan & Worcester LLP. Ms Lederman can be contacted on +1 (212) 660 3039 or by email: nlederman@sullivanlaw.com. Mr Hanson can be contacted on +1 (617) 338 2983 or by email: whanson@sullivanlaw.com. Ms Vanto can be contacted on +1 (212) 660 3045 or by email: vanto@sullivanlaw.com.

Natalie S. Lederman, William C. Hanson and Ida J. Vanto

Sullivan & Worcester LLP