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Corporate Transparency Act Reporting Obligation Set to Take Effect on January 1, 2024

Dan Collins

  585.231.1322

  dcollins@hselaw.com

As part of the National Defense Authorization Act, the United States Congress previously enacted the Corporate Transparency Act (the “CTA”). The purpose of the CTA is to combat illicit financial activities such as money laundering, terrorist financing, corruption, and tax fraud which are often conducted through legitimate companies. Currently, many of these companies are formed anonymously which makes it nearly impossible to identify individuals behind the illicit financial activity. The CTA focuses on transparency of company and beneficial owner information and the Financial Crimes Enforcement Network (“FinCEN”) has been tasked with developing rules concerning the collection of such information. The final FinCEN rules become effective on January 1, 2024 and will create new reporting requirements for both new and existing companies.

What companies must file reports?

The CTA covers both “domestic reporting companies” and “foreign reporting companies.” A “domestic reporting company” is a company that is formed by filing a document with the secretary of state or other similar office of a jurisdiction within the United States. This typically covers all corporations, professional service corporations, limited liability companies, professional service limited liability companies, limited partnerships, and limited liability partnerships. A “foreign reporting company” is a company that is formed under the laws of a foreign jurisdiction and is registered to do business within the United States.

Are there any exemptions that would cause a reporting company to not have to file a report?

Congress included twenty-three (23) statutory exemptions in the CTA that exclude otherwise covered reporting companies from the reporting requirement. The CTA also allows the Secretary of the Treasury (with the consent of the Attorney General and the Secretary of Homeland Security) to include additional exemptions by way of regulation, but no additional exemptions have been proposed at this time. The current exemptions include:

  • Securities reporting issuers  
  • Governmental authorities
  • Banks
  • Credit unions
  • Depository institution holding companies
  • Money services businesses
  • Brokers or dealers in securities
  • Securities exchange or clearing agencies
  • Other Exchange Act registered entities
  • Investment companies or investment advisers
  • Venture capital fund advisers
  • Insurance companies
  • State-licensed insurance producers
  • Commodity Exchange Act registered entities
  • Accounting firms
  • Public utilities
  • Financial market utilities
  • Pooled investment vehicles
  • Tax exempt entities
  • Entities assisting a tax-exempt entity
  • Large operating companies
  • Subsidiaries of certain exempt entities
  • Inactive entities
 

Generally speaking, the exemptions apply to larger, more heavily regulated companies, meaning smaller, less regulated companies are likely subject to the reporting requirement. Many of the exemptions contain detailed elements that must be satisfied in order to qualify for the exemption. A company’s exempt status may also change over time. Under the CTA framework, a company that files a report but later qualifies for an exemption (for example, by growing and becoming a “large operating company”) must file an updated report indicating that it is no longer a reporting company. On the other hand, if a previously exempt entity no longer qualifies for an exemption and becomes a reporting company (for example, by losing its tax-exempt status) it must file a report.

When must the report be filed?

The timing of the initial filing depends on when the company was formed (or, in the case of foreign reporting companies, the date on which it registered to do business in the United States). Companies formed or registered before January 1, 2024 have until January 1, 2025 to file their initial report. Companies formed or registered on or after January 1, 2024 must file their initial report within thirty (30) calendar days of formation or registration. Any changes to the disclosed information must also be reported within thirty (30) calendar days. Examples of changes that would require an updated report include adopting new trade names and certain changes in ownership of the reporting company. All reports will be submitted electronically through a secure filing system on FinCEN’s website, and there will be no fee for submitting the reports.

What information is contained in the report?

Though the reporting form has not yet been released by FinCEN as of the writing of this article, the CTA and final FinCEN rules do provide the types of information that must be contained in the report. Each reporting company will have to report information on the company itself, including:

  • its legal name
  • trade names
  • principal place of business in he United States,
  • jurisdiction of formation,
  • and tax identification number
 

Each reporting company will also have to report information on its “beneficial owners” and “applicants.” The final FinCEN rule defines a “beneficial owner” as any individual who either (1) exercises substantial control over the reporting company or (2) owns or controls at least twenty-five (25) percent of the ownership interest of the reporting company. “Applicants” are the individuals that, in the case of a domestic reporting company, file the documents with the secretary of state to form the company or, in the case of a foreign reporting company, file the application that registers the entity to do business in the United States. The information that must be reported on beneficial owners and applicants includes:

  • their full legal name
  • their date of birth
  • a complete current address (For an applicant, this may be a business address. For a beneficial owner, this must be a residential address).
  • a unique identifying number and issuing jurisdiction from a passport, identification issued by a State or local government or Indian tribe, driver’s license.

 

Will the reports be made public?

The reports, and the information contained therein, will not be made publicly available. The CTA requires that the information collected in the reports be stored in a non-public database. The information will only be made available to law enforcement and certain other government agencies. The information may also be disclosed to a financial institution to facilitate compliance with “know your consumer” laws with the consent of the reporting company.

What are the penalties for not filing the report?

Violations of the reporting requirement include both civil and criminal penalties. The CTA provides for fines up to $10,000 and imprisonment for not more than two (2) years, or both.

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