The U.S. Corporate Transparency Act (“CTA”) was enacted on January 1, 2021. On December 8, 2021, the Financial Crimes Enforcement Network (FinCEN) issued proposed regulations. Public comments on these proposed regulations are due February 6, 2022. Until FinCEN issues final regulations, we do not know with certainty the specific requirements. However, it is useful to review some of the basic components included in the proposed regulations to ensure you are prepared.
Who Must File a Report?
FinCEN explains in its summary to the proposed regulations the “CTA reporting requirements target generally smaller, more lightly regulated entities that may not be subject to any other [beneficial ownership information (BOI)] reporting requirements. In contrast, the CTA exempts certain more heavily regulated entities from its reporting requirements, including to avoid imposing duplicative requirements.”
The new reporting regime will capture certain domestic and foreign entities. A domestic reporting company includes:
Any corporation, limited liability company or other entity that is 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.
A foreign reporting company includes:
Any corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian Tribe.
Certain of the following types of organizations may be exempt from reporting:
Domestic governmental authorities
Domestic credit unions
Depository institution holding companies
Money transmitting businesses
Brokers or dealers in securities
Securities exchange or clearing agencies
Other Securities Exchange Act of 1934 entities
Registered investment companies and advisers
Venture capital fund advisers
State licensed insurance producers
Commodity Exchange Act registered entities
Financial market utilities
Pooled investment vehicles
Tax exempt entities
Entities assisting tax exempt entities
Large operating companies which
Employ more than 20 employees on a full-time basis in the U.S.;
Filed federal income tax returns in the U.S. in the previous year demonstrating more than five million dollars in gross receipts or sales in the aggregate; and
Have an operating presence at a physical office within the U.S.
the physical office must be owned or leased by the entity, cannot be a residence, and cannot be shared space (beyond being shared with affiliated entities)
Subsidiaries of certain exempt entities and inactive businesses.
What Is Company Applicant Reporting?
An additional category of entity which must report is the “Company Applicant.” In the case of a domestic reporting company, the Company Applicant is the person who files the document that forms the domestic reporting company. With respect to a foreign reporting company, the Company Applicant is the person who files the document that first registers the entity to do business in the U.S. The Company Applicant also "includes anyone who directs or controls the filing of the document by another."
What Is Beneficial Ownership?
Beneficial ownership in the context of FinCEN CTA reporting is defined as "any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise 1) exercises substantial control over the entity; or 2) owns or controls not less than 25 percent of the ownership interests of the entity."
Excluded from the definition of beneficial ownership are the following:
Minor children (reporting company must provide information of a parent or legal guardian
individuals acting as nominees).
Employees acting solely as employees and not as senior officers.
Individuals whose only interest in a reporting company is a future interest through the right of inheritance.
Creditors of a reporting company (but not if there is an equity kicker).
What information must be reported?
The beneficial owner and Company Applicant must submit the following information:
Full legal name.
Date of birth.
Current residential or business street address.
Unique identifying number from an acceptable identification document or FinCEN identifier.
A domestic or foreign reporting company must submit the following information:
Name and any alternative names.
Business street address.
Jurisdiction of formation or registration.
Unique identification number.
What Is the Reporting Deadline?
FinCEN has proposed that an entity that is subject to CTA reporting which was formed before the effective date of the final regulations submit its BOI "not later than one year after the effective date of the regulation.” If an entity was formed or registered on or after the effective date of the final regulations, FinCEN has proposed the following:
Foreign Reporting Company: within 14 calendar days of the date it first became a foreign reporting company.
Domestic Reporting Company: within 14 calendar days of the date the company was formed as specified by a secretary of state or similar office.
A previously exempt company that no longer meets any exemption criteria would be required to submit its report within 30 calendar days after the date on which the entity no longer meets any exemption criteria.
An entity seeking to correct a previously submitted report containing inaccurate information would be required to file a corrected report within 14 calendar days after the date on which the company becomes aware or has reason to know that any required information contained in any report was inaccurate.
Any updates to previously filed correct information would need to be submitted within 30 calendar days "after the date on which there is any change."
Who can see the data?
The BOI will be contained in a non-public data base. FinCEN can disclose the information to certain government agencies, domestic and foreign, for certain purposes specified in the CTA. The agency can also disclose information to financial institutions to assist them in meeting their customer due diligence requirements. More specifically, FinCEN anticipates sharing BOI in the following scenarios:
Federal agencies: when acting in furtherance of national security, intelligence, or law enforcement activity.
State, local, and Tribal law enforcement agencies: after receiving authorization from a court of competent jurisdiction as part of a criminal or civil investigation.
Foreign government: foreign law enforcement agencies, prosecutors, and judges in specified circumstances.
Financial institutions: to facilitate compliance with customer due diligence requirements under applicable law, with the consent of the reporting company.
Financial institution’s regulator: BOI that has been provided to a regulated financial institution for the purpose of performing regulatory oversight that is specific to that financial institution.
Coming in the future
FinCEN plans three stages of rulemaking to implement the CTA:
Implement the BOI reporting requirements.
Implement the CTA’s protocols for access to and disclosure of BOI.
Revise the existing Customer Due Diligence (CDD) Rule.