The Corporate Transparency Act (“CTA”) was enacted on January 1, 2021 as part of the Anti-Money Laundering Act of 2020 within the National Defense Authorization Act for Fiscal Year 2021. 

FinCEN has proposed regulations that will likely require all business entities (described below) formed or registered to do business in the United States to report beneficial ownership information (“BOI”) to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Failure to report could result in civil and criminal penalties, as set forth below. These proposed reporting requirements will cast an intentionally broad net – and many companies will be required to disclose BOI.

What is the purpose of the proposed reporting requirements?
The CTA will collect BOI to enable FinCEN, law enforcement, financial institutions, and other authorized users to uncover and combat illegal economic activity (e.g., corruption, money laundering, terrorist financing, tax fraud, etc.).

Which entities are required to report BOI?
The proposed rule sets forth two types of “reporting companies.”  A “domestic reporting company” is any corporation, limited liability company, or other entity created by filing a document with the secretary of state or similar office.  A “foreign reporting company” is a corporation, limited liability company, or other entity formed under the laws of a foreign country that is registered to do business in the United States by filing a document with the secretary of state or similar office.

Which entities are exempt from the BOI reporting requirements?
The proposed regulations set forth 23 exempt entities including: (1) most financial services institutions, including those that already report to the SEC, FDIC, etc.; (2) “large operating companies” with (i) more than 20 full-time employees, (ii) more than $5 million in annual revenue, and (iii) a physical location in the United States; (3) Non-profit organizations, e.g., churches, charities, charitable trusts, etc.; (4) public utility companies; and (5) dormant companies in existence for more than 1 year, not engaged in “active business”, and not owned directly or indirectly by a non-U.S. individual.

What BOI must be reported?   
Each beneficial owner’s (1) name and any alternative names; (2) business address; (3) date of birth; and (4) a unique identifying number (e.g., current driver’s license number or passport number).  Once the BOI is provided to FinCEN, the individual will receive a “FinCEN identifier”, which can then be provided to FinCEN in lieu of the BOI already provided.

Who is a “beneficial owner”? 
Individuals who, directly or indirectly, through contract, understanding, arrangement, relationship or otherwise, exercise substantial control or own or control at least 25% of the ownership interests in the entity. 
Individuals exercising “substantial control” includes those (i) serving as senior officers of the reporting company; (ii) who may authorize the appointment or removal of any office or dominate majority of the board of directors (or similar body) of a reporting company; or (iii) with substantial influence over a reporting company’s important matters, e.g., entering or terminating significant contracts, decisions related to significant expenditures or investments of the company, the sale of the company’s principal asset(s), and/or any other form of substantial control.

How is BOI reported?
FinCEN is developing an information technology system to which BOI may be submitted.

When must the BOI be reported?
If the reporting company is formed after the effective date of the regulations, within 14 days of the company’s formation.  If the reporting company was formed before the effective date of the final regulations, it must report the beneficial owners’ information within 1 year of the effective date.  If a beneficial owner’s information changes, the updated information must be reported within 30 days after the date of the change.  If a reporting company inadvertently reports inaccurate BOI, it must file a corrected report within 14 days after the inaccuracies were discovered, or should have been discovered.

What happens if I don’t comply with the BOI reporting requirements?
Lack of compliance may result in substantial fines and criminal penalties.  Failure to report required information can result in civil penalties of up to $500 for each day the violation continues.  Individuals who willfully provide or attempt to provide fraudulent information may face criminal penalties including a $10,000 fine and possible imprisonment for up to 2 years.  

When will the regulation become effective?
The final regulations are expected to become effective sometime in 2022.

The information presented in this article is for general informational purposes and should not be construed or relied upon as legal advice. You should consult with an attorney if specific legal advice or information is desired.