The Corporate Transparency Act (“CTA”) was established as part of the Anti-Money Laundering Act of 2020 and is focused on combatting corporate secrecy as it relates to the advancement of criminal enterprise. The CTA is intended to minimize and eliminate the usage of corporate ‘shell’ identities that are becoming an increasingly common tool for individuals laundering money in connection with tax evasion, terrorism, sex trafficking, malware attacks, and other illicit activities. While the goals of the CTA are admirable, its stringent reporting requirements are placing a serious burden upon investors, owners, and enforcement personnel alike. Thanks in part to a final rule issued by the Financial Crimes Enforcement Network (“FinCEN”), the reporting of required information pursuant to the CTA begins January 1, 2024, bringing with it a host of questions, concerns, and issues for those set to be affected.

Under the terms of the CTA, all Reporting Companies registered to do business in the United States after January 1, 2024, must report their Beneficial Ownership Information, Company Applicant Information and Reporting Company Information to FinCEN within thirty (30) days of the respective entity’s effective registration[1].

All Reporting Companies registered to do business in the United States before January 1, 2024, shall have until January 1, 2025, to report their Beneficial Ownership Information and Reporting Company Information to FinCEN.

[1] As of November 30, 2023, FinCEN has extended the deadline for Reporting Companies created after January 1, 2024 but before January 1, 2025, from thirty (30) days to ninety (90) days.

 

Reporting Company – Definition and Filing Requirements

What is a Reporting Company?

The CTA defines a Reporting Company as a corporation, limited liability company, or other similar entity that is – (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a documents with a secretary of state or a similar office under the laws of a State or Indian Tribe.

Enumerated Exemptions – Reporting Company

The CTA is designed to require compliance with FinCEN reporting for all entities registered with a State or Indian Tribe, however, the CTA carves out the following set of enumerated exemptions copied below:

1. Certain securities issuers that are regulated under the Securities Exchange Act of 1934;
2. Entities exercising governmental authority on behalf of the United States or any such Indian Tribe, State or political subdivision;
3. Banks;
4. Federal or State credit unions;
5. Bank holding companies;
6. Monetary transmitting businesses registered with the Secretary of the Treasury under Section 5330;
7. Brokers or Dealers as defined by the Securities Exchange Act of 1934;
8. Exchanges or Clearing Agencies as defined by the Securities Exchange Act of 1934;
9. Any other entity not previously listed that is registered under the Securities Exchange Act of 1934;
10. Investment companies as defined by the Investment Company Act of 1940, and registered with the Securities and Exchange Commission;
11. Investment advisers as defined by the Investment Advisers Act of 1940, and registered with the Securities and Exchange Commission;
12. Insurance companies;
13. State licensed insurance producer;
14. Entities registered under the Commodity Exchange Act;
15. Accounting firms;
16. Public utilities;
17. Financial market utilities;
18. Pooled investment companies operated or advised by any person described under exemptions (3), (4), (7), (10) and/or (11);
19. Any organization described under 501(c) of the Internal Revenue Code (“IRC”) that is exempt from tax pursuant to IRC 501(a), any political organization as described under IRC 527(e)(1) and exempt from tax under IRC 527(a), and any charitable or split-interest trust;
20. Any limited liability company, corporation or similar entity that operates exclusively to provide financial assistance to or hold governance rights over an organization described by exemption (19);
21. Any entity with more than 20 full-time employees, more than $5,000,000 in gross receipts or sales in the aggregate and with an operating presence in a physical location located in the United States;
22. Subsidiaries of entities exempt under exemptions (1-5), (7-17), (19) and/or (21);
23. Any inactive entity; and
24. Any entity or class of entities that the Secretary of Treasury, with the concurrence of the Attorney General and Secretary of Homeland Security exempts at a later date.

Required Reporting Company Information

When submitting its required report to FinCEN, a Reporting Company must include the following information regarding the entity, itself:

1. Full legal name of the entity;
2. Any trade names or d/b/a;
3. A complete, current address for the entity’s principal place of business (if located in the United States) or the entity’s primary location within the United States (if the entity has its principal place of business located outside the United States);
4. The entity’s State, Tribal, or foreign jurisdiction of formation/registration; and
5. The entity’s IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number).

 

Company Applicants and Beneficial Owners – Definitions and Filing Requirements

Who is a Company Applicant?

A Company Applicant is any individual who: (i) files an application to form a Reporting Company under the laws of a State or Tribe (ii) registers a Reporting Company of a foreign jurisdiction to do business in the United States under the laws of a State or Tribe; or (iii) files an application to register a Reporting Company of a foreign jurisdiction to do business in the United States under the laws of a State or Tribe. Any individual who is primarily responsible for directing or controlling the above-stated filing/registration shall also be considered a Company Applicant

Who is a Beneficial Owner?

The CTA defines a Beneficial Owner as any individual who: (i) directly or indirectly, exercises substantial control over a Reporting Company; or (ii) owns or controls at least twenty-five percent (25%) of the ownership interests of a Reporting Company. FinCEN, further clarified this definition under its issued final rule.

What is “Substantial Control”? The final rule issued by FinCEN provides that the following activities constitute “Substantial Control”:

1. Holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function at the Reporting Company (“Senior Officer”);
2. Having authority to appoint or remove any Senior Officer or a majority of the board of directors (or similar body);
3. Directing, determining, or having substantial influence over important decisions made by the Reporting Company, including decisions related to:
   • The nature, scope, and attributes of the business, such as the sale, lease, mortgage, or other transfer of any principal assets;
   • Reorganization, dissolution, or merger;
   • Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget;
   • Selection or termination of business lines, ventures or geographic focus;
   • Compensation schemes and incentive programs for Senior Officers;
   • Significant contracts;
   • Amendments to governing documents, policies or procedures; or
   • Any other form of substantial control (includes a note from FinCEN that this last provision is meant to capture all other forms of entities which may require different indicators of substantial control).

With respect to “direct or indirect exercise” of such “substantial control”, the final rule issued by FinCEN states that an individual may exercise control, even as a trustee of a trust or similar arrangement, through:

1. Board representation;
2. Ownership or control of a majority of the voting power or voting rights;
3. Rights associated with any financing arrangement or interest in a company;
4. Control over intermediary entities that individually or collectively exercise ‘substantial control’;
5. Formal or informal arrangements or relationships with individuals or entities acting as nominees; or
6. Any other contract, arrangement, understanding, relationship, or otherwise.

What is an “ownership interest”? FinCEN’s final rules defines an “ownership interest” as:

1. Any equity, stock, or similar instrument; preorganization certificate or subscription; or transferable share of, or voting trust certificate or certificate of deposit for, an equity security, interest in a joint venture, or certificate of interest in a business trust; in each such case, without regard to whether any such instrument is transferable, is classified as stock or anything similar, or confers voting power or voting rights;
2. Any capital or profit interest in an entity;
3. Any instrument convertible, with or without consideration, into any share or instrument described in the preceding two clauses, any future on any such instrument, or any warrant or right to purchase, sell, or subscribe to a share or interest described in the preceding two clauses, regardless of whether characterized as debt;
4. Any put, call, straddle, or other option or privilege of buying or selling any of the items described in the preceding three clauses (unless such option or privilege is created and held by a third party without the knowledge or involvement of the reporting company); or
5. Any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.

Furthermore, FinCEN’s final rule defined the mechanics for calculating the twenty-five (25%) ownership interest threshold, stating:

1. For entities that issue capital and profit interests (including entities treated as partnerships for tax purposes), the individual’s total capital and profit interests are compared to the total outstanding capital and profit interests of the Reporting Company.
2. For corporations, entities taxed as corporations, and other entities that issue shares of stock, the applicable ownership percentage is calculated based on a “vote or value” approach, under which an individual’s percentage of ownership interests is the greater of:
   • The total combined voting power of all classes of ownership interests of the individual as a percentage of total outstanding voting power of all classes of ownership interests entitled to vote;
   • The total combined value of the ownership interests of the individual as a percentage of the total outstanding value of all classes of ownership interests; and

The final rule from FinCEN was not without a ‘catch-all’, adding the following language to absorb any outliers:

“[a]ll ownership interests of the individual shall be calculated at the present time, and any options or similar interests of the individual shall be treated as exercised”

“If the facts and circumstances do not permit the calculations described in either paragraph (d)(2)(iii)(B) or (C) to be performed with reasonable certainty, any individual who owns or controls 25 percent or more of any class or type of ownership interest of a reporting company shall be deemed to own or control 25 percent or more of the ownership interests of the reporting company.”

 Enumerated Exemptions – Beneficial Owner

The CTA’s expansive definitions for both Reporting Companies and Beneficial Owners casts a wide net over the number of enterprises and individuals needing to report to FinCEN. However, the Act’s text provides a set list of exemptions from the definition of “Beneficial Owner”, all of which are copied below:

1. Minor children (as defined under state law or Indian tribe laws where the Reporting Company is formed or first registered; provided the Reporting Company reports the required information regarding a parent or legal guardian of the minor child);
2. Individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
3. Individuals acting solely as an employee of a Reporting Company (excluding Senior Officers);
4. Individuals whose only interest in a Reporting Company is a future interest through a right of inheritance; and
5. Creditors of a Reporting Company.

Required Company Applicant/Beneficial Owner Information

With respect to Beneficial Owner and Company Applicants, the following information must be provided to FinCEN:

1. Full legal name of the individual;
2. Date of birth;
3. Current residential address (P.O. Boxes NOT allowed);
4. Unique identifying number from the individual’s passport, state identification or driver’s license; and
5. Scanned image of the individual’s passport, state identification or driver’s license.

 

Additional Considerations

Where is the information regarding Beneficial Owners and Company Applicants sent? Is it secure?

All Beneficial Ownership Information, Company Applicant Information and Reporting Company Information is to be submitted and stored with FinCEN. Specifically, FinCEN was supposed to create the Beneficial Ownership Secure System (BOSS) for the purposes of receiving and securing all information related to Beneficial Owners. Despite this, BOSS is still not active and FinCEN has not yet released clear guidelines for where Beneficial Ownership Information should be submitted in the meantime.

As to the security of such information, while FinCEN ensures that such private data will be safe on its servers, the CTA does allow FinCEN to provide Reporting Company Information, Beneficial Ownership Information and Company Applicant Information to federal agencies engaged in national security, intelligence and enforcement, state and local law enforcement, foreign law enforcement, financial regulators and, subject to a Reporting Company’s consent, to financial institutions for purposes of customer due diligence.

What if I need to revise my report?

Due to the volume and specificity of information regarding Beneficial Owners that is required by Reporting Companies, any change in ownership, directors, officers or even addresses of existing Beneficial Owners, may spur the need for a revision. The timeline for a Reporting Company to revise its report, regardless of the reason for such revision, is thirty (30) days.

What is a FinCEN Identifier?

A FinCEN Identifier is a unique, identifying number provided by FinCEN, upon request, to an individual or entity. For individuals to receive a FinCEN Identifier, they must submit the same information as is required for a Beneficial Owner or Company Applicant. For a Reporting Company, a FinCEN Identifier can be requested upon or after the entity’s initial filing with FinCEN. Once issued, the entity or individual may submit such FinCEN Identifier instead of Beneficial Ownership Information, when applicable.

 

Final Comments

The CTA, with its all-encompassing definitions, limited exceptions and sensitive information requests, is set to change the world of financial reporting compliance in the United States forever. The sheer amount of data that is required to be submitted to FinCEN, combined with the number of revisions needed to keep Beneficial Ownership Information accurate, is set to birth an entire industry of businesses whose sole focus is to keep Reporting Companies in compliance with the CTA. By way of example, if an individual files for divorce, their address may change, they may lose Beneficial Owner status, they may gain Beneficial Owner status, any one of these changes requires a revision to FinCEN filings and the thirty (30) day deadline for revisions begins tolling as soon as the divorce is finalized. This is in an optimistic scenario, in which the Beneficial Owner has even informed the Reporting Company they are getting a divorce.

While it is clear, the CTA intended to set lofty goals for itself in terms of compliance and depth of information, applying such regulations will not be without its challenges. FinCEN has already been forced to extend the filing deadline for entities created in the first year of the CTA’s effect, and BOSS is still not ready to receive submissions. Similar to SB-4D, Florida’s Condominium and HOA Safety Bill, the first year of the CTA will likely result in a number of revisions to the Act’s application as regulators begin to grasp the challenges that come with its compliance. For both FinCEN and the individuals and entities affected by the CTA, 2024 will be a year of growing pains, as all parties work to overcomes the struggles in becoming compliant.

Many individuals and entities, rightfully so, carry serious skepticism as to the safety of the CTA’s compliance measures as massive amounts of sensitive, personal data is being transmitted electronically and centrally stored in a government database. Given recent successful cyberattacks on certain lending institutions which resulted in a vast private date breach, there is genuine concern as to whether the federal government has the capability to keep all this sensitive information secure. Ironically, the CTA was introduced to combat the thriving black-market economy of cyberattacks, but in doing so may have incidentally set the stage for the largest private data breach in U.S. history.

However, despite the flaws, challenges and skepticism surrounding the CTA, the federal government clearly views this legislation as a step in the right direction towards curbing the influx of illicit shadow economies operating in the United States. With an enhanced database of ownership information, government agencies will expand their ability to track and identify individuals involved in tax evasion, cybercrime, sex trafficking, drug dealing and a host of other criminal enterprises. Accordingly, Reporting Companies, Beneficial Owners, as well as the tax advisors, attorneys and other professionals who counsel them, must make every effort possible to achieve compliance with the CTA in its current state.

At Haber Law, we have experience navigating the ins-and-outs of new legislation and the struggles that come with their compliance. The CTA brings with it a plethora of novel compliances issues that our team is well-equipped to discuss and resolve with clients on a case-by-case basis. However, it is important to note, that the burden and responsibility for compliance currently lies with the Reporting Company and the Beneficial Owners therein. Unless engaged for such purposes, general representation law firms, tax advisors and/or management companies are not responsible for ensuring compliance. If you have further questions about the CTA and how it applies to you or your entities, please reach out to our office for a consultation.

 

DISCLAIMER

THE INFORMATION CONTAINED IN THIS BLOG POST, IS PROVIDED AS A PROFESSIONAL COURTESY, AND IS NOT INTENDED TO BE A COMPLETE ANALYSIS OF ALL RELATED ISSUES. IT HAS BEEN PREPARED FOR INFORMATIONAL PURPOSES AND GENERAL GUIDANCE ONLY AND DOES NOT CONSTITUTE PROFESSIONAL ADVICE, NOR IS IT SUFFICIENT TO AVOID TAX-RELATED PENALTIES. NO REPRESENTATION OR WARRANTY (EXPRESS OR IMPLIED) IS MADE AS TO THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN, AND HABER LAW, P.A., ITS STOCKHOLDERS, EMPLOYEES AND AGENTS ACCEPT NO LIABILITY, AND DISCLAIM ALL RESPONSIBILITY, FOR THE CONSEQUENCES OF YOU OR ANYONE ELSE ACTING, OR REFRAINING TO ACT, IN RELIANCE ON THE INFORMATION CONTAINED HEREIN OR FOR ANY DECISION BASED ON IT. ANY LEGAL ADVICE REGARDING REPORTING OBLIGATIONS OR APPLICATION OF THE CTA PROVIDED BY THE FIRM WILL REQUIRE A NEW ENGAGEMENT WITH THE FIRM. YOU SHOULD NOT ACT UPON THE INFORMATION CONTAINED IN THIS BLOG POST WITHOUT OBTAINING SPECIFIC PROFESSIONAL ADVICE.