Corporate Transparency Act Regulations and the Final Rule

The Corporate Transparency Act (CTA) was enacted as part of the National Defense Authorization Act for Fiscal Year 2021. Its primary purpose is to prevent and combat illicit activities such as money laundering, terrorist financing, corruption, tax fraud, and others. The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury, is responsible for implementing the CTA and has issued a final rule that requires certain entities to file reports identifying two categories of individuals: the beneficial owners of the entity, and individuals who have filed an application with specified governmental authorities to create the entity or register it to do business. These rules are effective from January 1, 2024.

The CTA Final Rule

The final rule issued by FinCEN is designed to prevent illicit actors from using corporate structures to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system. It requires entities to report beneficial ownership information (BOI), which includes details about the individuals who actually own or control an entity. This rule is intended to help prevent and combat illicit activities, while minimizing the burden on entities doing business in the United States.

BOI plays a crucial role in preventing illicit activities. Illicit actors often use corporate structures to hide their identities and launder their proceeds of illicit activities. This lack of transparency creates opportunities for criminals, terrorists, and other illicit actors to remain anonymous while facilitating fraud, drug trafficking, corruption, tax evasion, organized crime, or other illicit activity through legal entities created in the United States.

CTA Requirements You Need to Know

The CTA requires entities to report their BOI to FinCEN. This includes information about the beneficial owners of the entity and individuals who have filed an application with specified governmental authorities to create the entity or register it to do business. The regulations detail who must file a report, what information must be provided, and when a report is due.

Entities are required to comply with the CTA by providing accurate and complete BOI to FinCEN. Failure to comply with these requirements can result in penalties. The regulations are designed to minimize the burden on reporting companies, particularly small businesses, and to ensure that the information collected is accurate, complete, and highly useful.

The Impact on Small Businesses

The CTA and its final rule have significant implications for small businesses. Every corporation, LLC, or other entity created by the filing of a document with a Secretary of State or similar office under the law of a state or Indian tribe is required to file a BOI report unless it qualifies for an exemption. Those entities created in the United States and not exempt, and therefore required to file a BOI report, are called “domestic reporting companies”. Certain entities created in foreign countries and registered to do business in the United States are also required to file a BOI report and are called “foreign reporting companies.”

There are 23 categories of entities that are exempt. Most exemptions are for entities that are already subject to substantial federal or state regulation. Exempt entities include, for example, publicly traded companies and other entities that file reports with the SEC, banks, credit unions, money services businesses, securities brokers and dealers, tax-exempt entities, insurance companies, state-licensed insurance producers, pooled investment vehicles, public utilities, and accounting firms.

There is also an exemption for what’s called a “large operating company”. A “large operating company” is an entity that (1) employs more than 20 full-time employees in the United States, (2) has an operating presence at a physical office within the United States, and (3) has filed a federalincome tax or information return in the United States for the previous year demonstrating more than $5 million in gross receipts or sales.

Reporting Requirements for Domestic Companies

A domestic reporting company created before January 1, 2024, has to provide information about the company and about its beneficial owners. A domestic reporting company created on or after January 1, 2024, has to provide information about the company, its beneficial owners, and its company applicants.

The report must set forth the reporting company’s (1) full legal name, (2) any trade or “doing business as” names, (3) complete current street address of the principal place of business, (4) jurisdiction of formation, and (5) taxpayer identification number.

Reporting Requirements for Beneficial Owners and Applicants

The report must set forth their (1) full legal name, (2) date of birth, (3) complete current residential street address (except in the case of a company applicant who forms or registers an entity in the course of the company applicant’s business, who has to provide the street address of the business), (4) unique identifying number and the issuing jurisdiction from either a current (i) U.S. passport, (ii) state or local ID document, (iii) driver’s license, or (iv) if the individual has none of those, a foreign passport, and (5) an image of the document from which the unique identifying number was obtained.

A beneficial owner is an individual who, directly or indirectly, either exercises substantial control over the reporting company or owns or controls at least 25 percent of its ownership interests. A company applicant is the individual who directly files the document that creates the domestic reporting company and the individual who is primarily responsible for directing or controlling the filing if more than one individual is involved in the filing of the document.

Filing Deadlines and Updates

A domestic reporting company created before January 1, 2024, must file its initial BOI report not later than January 1, 2025. A domestic reporting company created on or after January 1, 2024, must file a report within 30 calendar days of the date on which it receives actual or public notice that its creation has become effective.

If there is any change in the information reported about the reporting company or its beneficial owners, the reporting company must file an updated report within 30 calendar days after the date on which the change occurs. This includes a change in who the beneficial owners are and if the reporting company becomes eligible for an exemption. There is no requirement for a reporting company to update information about the company applicant.

If a report was inaccurate when filed, a corrected report must be filed within 30 calendar days after the reporting company becomes aware of or has reason to know of the inaccuracy.

Access to Information

Reports filed with FinCEN will not be accessible to the public and are not subject to requests under the Freedom of Information Act. The following government agencies will have access to the information:

  • Federal agencies engaged in national security, intelligence, and civil and criminal law enforcement
  • The Department of the Treasury in connection with its official duties, including tax administration
  • State and local law enforcement agencies in connection with criminal or civil investigations

If the reporting company consents, FinCEN may also disclose information to financial institutions to assist in their anti-money laundering compliance activities.

Navigating the Future Regulations: Embracing Transparency and Compliance

The CTA and its final rule represent a significant step towards increasing transparency in the U.S. financial system and strengthening the U.S. anti-money laundering/countering the financing of terrorism (AML/CFT) framework. By requiring entities to report their BOI, the CTA makes it more difficult for illicit actors to conceal their identities and activities, thereby protecting the U.S. economyand national security. The owners and managers of small businesses should determine now whether their business is a reporting company and therefore will be subject to the CTA’s BOI reporting requirement. If so, they should decide when they want to file their initial BOI report. They should gather the required information and make sure it is current at the time they fill out their initial report. They should also implement a system to keep track of the reported information so that they know when updates have to be filed.