Beginning January 1, 2024, the Corporate Transparency Act (“CTA”) will impose certain reporting requirements on “reporting companies” to file reports with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (“FinCEN”) containing personal information about the company’s beneficial owners and persons with control.

Companies Required to Report

The CTA was enacted in connection to create a federal database with FinCEN of beneficial ownership of “reporting companies.” Included are (i) domestic corporations, limited liability companies limited partnerships or similar entities created by filing a document with any U.S. state, territory or Indian tribe, and (ii) foreign reporting companies that register to do business with any U.S. state, territory or Indian tribe. Trusts are generally not reporting companies.

The CTA requires those individuals having a 25% or greater ownership interest of a reporting company and individuals exercising substantial control to report various personal information, including an image of a passport or driver's license or similar identification. Attached in Appendix A is the definition of “substantial control.” The personal information required includes full legal name, date of birth, and current residential or business address. Reporting companies may in certain instances report a “FinCEN identifier” instead of the information for an individual beneficial owner or company applicant. A FinCEN identifier is a unique identifying number that FinCEN will issue to individuals or entities upon request. A FinCEN identifier could facilitate easier reporting for reporting companies and additional privacy/protection for individuals.

The personal information required by the CTA is not available to the general public. Nonetheless, “authorized recipients” described in Appendix B may access the information in certain circumstances.

Important Dates

Entities formed before January 1, 2024, must report by January 1, 2025. Entities formed after January 1, 2024, must report within 90 days of formation. Reporting is also required within 30 days if there are changes in the entity such as a transfer of ownership or a change of name.

Exemptions

There are 23 types of entities that are exempt from the CTA reporting requirements, including, Governmental entities, publicly traded companies, banks and certain other financial institutions, registered broker-dealers, investment advisers and investment companies. Large operating companies are also exempt. These are generally defined in the regulations as companies that (i) have more than 20 full-time employees in the U.S., (ii) have an operating presence at a physical office within the U.S., and (iii) have filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5.0 million in gross receipts or sales per year. Meeting the 20 full-time employees requirement is tested on a per-entity basis, but the gross receipts or sales reported on the tax return requirement can be measured based on the reported gross receipts or sales of a consolidated group filing a consolidated tax return.

It is our general view that the majority of our private clients will not qualify for an exemption and, therefore, will be required to file a report.

Penalties

Noncompliance with the CTA and/or willfully providing false or misleading information as a part of a report can result in civil penalties up to $500 per day (with a maximum fine of $10,000) and/or criminal penalties including imprisonment for up to two years. Individual employees who prepare and submit reporting information may be held personally liable for false reports.

Recommendation

We recommend that clients begin the process of identifying entities that may need to file a report. Consideration can then be given to determining whether an exemption to filing applies. If there is no exemption, beneficial owners of each entity should be identified, and the relevant reporting information collected.

Further information is available here.

Feel free to contact Simon Prisk to discuss how the new rules described above apply to entities owned or controlled by you.

This note is presented for informational purposes only and should not be construed as legal advice.

Appendix A: Substantial Control

An individual exercises substantial control if he or she serves as a senior officer; has authority over the appointment or removal of senior officers or a majority of the board; directs, determines, or has substantial influence over important company decisions (including those regarding business operations; reorganization, dissolution, or mergers; major expenditures or investments; issuance of equity or debt; budgetary concerns; compensation for senior officers; significant contracts; and amendments to governing documents); or has any other form of substantial control. Substantial control can also be exercised indirectly through board representation, majority ownership or control, rights associated with financing arrangements or interests, control over entities that substantially control the reporting company, and any type of formal or informal arrangement or relationship.

Appendix B: Authorized Recipients

Authorized Recipients that may access the information:

Government agencies requesting information for specified purposes (including court-authorized disclosures)
Foreign government requesters
Financial institutions using the information as part of their due-diligence obligations
Regulatory authorities assessing financial institutions’ due-diligence compliance
The Department of the Treasury