Tag: beneficial ownership information

Client Alert: New Reporting Requirements Under the Corporate Transparency Act

On January 1, 2024, the Corporate Transparency Act (CTA) took effect. This new federal anti-money laundering law obligates many corporations, limited liability companies and other business entities to report to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), certain information about the entity, the entity’s beneficial owners and the individuals who created or registered the entity to do business. This client alert summarizes the CTA’s key requirements and deadlines. For more detailed information, please review the official “Beneficial Ownership Information Reporting FAQs” and the “Small Entity Compliance Guide” published by FinCEN.

Frequently Asked Questions

WHO MUST REPORT INFORMATION UNDER THE CTA?

The following “reporting companies” are subject to the CTA’s reporting requirements: (a) any U.S. corporation, limited liability company or other entity created by the filing of a document with a state or territorial government office; and (b) any non-U.S. entity that is registered to do business in any U.S. jurisdiction.

The CTA provides for 23 types of entities that are exempt from its reporting requirements, including companies that currently report to the U.S. Securities and Exchange Commission, insurance companies and tax-exempt entities, among others. Most notably, a company does not need to comply with the CTA if it has more than $5,000,000 in gross receipts for the previous year (as reflected in filed federal tax returns), at least one physical office in the U.S. and at least 20 employees in the U.S. For a full list of exemptions, including helpful checklists, please see Chapter 1.2, “Is my company exempt from the reporting requirements?”, of the Small Entity Compliance Guide.

A subsidiary of an exempt entity also will enjoy exempt status.

WHAT INFORMATION MUST BE REPORTED?

A reporting company is required to report the following information to FinCEN, and to keep the information current with FinCEN on an ongoing basis:

  1. The reporting company’s full legal name;
  2. Any trade name or “doing business as” (DBA) name of the reporting company;
  3. The reporting company’s principal place of business;
  4. The reporting company’s jurisdiction of formation (and, for non-U.S. reporting companies, the jurisdiction where the company first registered to do business in the U.S.); and
  5. The reporting company’s Employer Identification Number (EIN).

A reporting company also is required to identify its “beneficial owners” and “company applicant.” A beneficial owner is an individual who either: (a) exercises “substantial control” over the reporting company; or (b) owns or controls at least 25 percent of the ownership interests of the reporting company. A company applicant is an individual who directly files or is primarily responsible for filing the document that creates or registers the reporting company.

A reporting company must report and keep current the following information for each beneficial owner and company applicant:

  1. Full legal name;
  2. Date of birth;
  3. Complete current address;
  4. Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
    a. U.S. passport;
    b. State driver’s license; or
    c. Identification document issued by a state, local government or tribe.

WHEN ARE REPORTS DUE?

A reporting company that was first formed or registered to do business in the United States before January 1, 2024 will need to file its initial report with FinCEN no later than January 1, 2025.

A reporting company that is first formed or registered to do business in the United States between January 1, 2024 and January 1, 2025 will need to file its initial report with FinCEN within 90 calendar days after the effective date of its formation or registration to do business.

A reporting company that is first formed or registered to do business in the United States on or after January 1, 2025 will need to file its initial report with FinCEN within 30 calendar days after the effective date of its formation or registration to do business.

HOW DOES MY COMPANY FILE REPORTS WITH FINCEN?

Reports must be filed electronically through the BOI E-Filing System. For additional instructions and other technical guidance, please see the Help & Resources page.

WHAT HAPPENS IF MY COMPANY DOES NOT COMPLY WITH THE CTA?

At the time the filing is made, a reporting company is required to certify that its report or application is true, correct, and complete. Therefore, it is the reporting company’s responsibility to identify its beneficial owners and verify the accuracy of all reported information.

A person or reporting company who willfully violates the CTA’s reporting requirements may be subject to civil penalties of up to $500 for each day that the violation continues, plus criminal penalties of up to two years’ imprisonment and a fine of up to $10,000.

In the case of an accidental violation – for instance, if an initial report inadvertently contained a typo or outdated information – the CTA provides a safe harbor for reporting companies to correct the original report within 90 days after the deadline for the original report. If this safe harbor deadline is missed, the reporting company and individuals providing inaccurate information may be subject to the CTA’s civil and criminal penalties.

OTHER THAN FILING ACCURATE REPORTS, HOW CAN MY COMPANY STAY COMPLIANT?

A reporting company should consider taking the following actions to facilitate compliance with the CTA’s reporting requirements:

  • Amending existing governing documents, such as LLC or stockholder agreements, to require beneficial owners to promptly provide required information and otherwise cooperate in the company’s compliance with the CTA;
  • Designating an officer to oversee the company’s initial and ongoing CTA reporting;
  • Maintaining, reviewing and updating records on a regular cadence to reflect equity transfers, option grants and other transactions that affect ownership interest calculations; and
  • Developing a secure process for collecting and storing a beneficial owner’s photo identification and other sensitive information for CTA reporting purposes.
© Copyright 2024 Stubbs Alderton & Markiles, LLP
For more news on CTA Reporting Requirements, visit the NLR Financial Institutions & Banking section.

New Diligence Opportunity for Financial Institutions

On Jan. 1, 2024, the Corporate Transparency Act (“CTA”) took effect. As a result, all business entities, unless expressly exempt by the CTA, must file Reports of Beneficial Ownership Information (“BOI”) with the Financial Crimes Enforcement Network (“FinCEN”), a unit of the U.S. Treasury. Under the CTA, “financial institutions,” i.e., banks and other entities that provide financings and are subject to the “Know Your Customer” and “Customer Due Diligence” regulations of FinCEN pursuant to the Bank Secrecy Act, the USA Patriot Act, and the Anti-Money Laundering Act of 2020, may access the BOI on reports filed with FinCEN.

To gain access to the BOI, the financial institution MUST:

  1. Obtain the written consent of the customer, i.e., the borrower, guarantor, or other loan party, in connection with the diligence process required before entering a business relationship with the customer, or as part of the continuing diligence required in an existing relationship. Accordingly, forms used by the financial institution to open or to continue an existing business relationship must include a clear and conspicuous provision in which the customer gives consent. This will probably require a complete review and revision of those forms;
  2. Determine that obtaining access to the BOI is reasonably necessary for the financial institution to meet its diligence obligations. That determination should be spelled out in the written request to FinCEN for access; and
  3. Acknowledge the scope of confidentiality obligations with respect to the BOI obtained, including the limited use permitted of the information, as well as safeguarding that accessed BOI from misuse.

Financial institutions should be prepared to request access to BOI as a matter of course. In any case where a customer engages in violative activity, and the BOI would have alerted the financial institution to possible risks, that institution could be exposed to sanctions by its principal prudential regulator and/or by other law enforcement agencies.

©2024 Norris McLaughlin P.A., All Rights Reserved
For more news on Financial Institutions Gaining Access to BOIs, visit the NLR Financial Institutions & Banking section.

Recent FinCEN FAQs Provide Additional Guidance on Compliance

The US Financial Crimes Enforcement Network (FinCEN) released several new FAQs this month to provide further clarity on the Corporate Transparency Act’s (CTA) provisions.
Notably, FinCEN provided guidance on who is considered “primary responsible” for directing a filing, as well as what is necessary to qualify under the subsidiary exemption, among other matters.

The CTA’s requirements went into effect on January 1, 2024. As we’ve previously detailed, reporting companies formed prior to that date will be required to file their initial reports with FinCEN no later than January 1, 2025. A reporting company created during 2024 is required to file its initial report within 90 days of its creation or registration, and one created on or after January 1, 2025, will have 30 days to file its initial report. A previously registered company will need to update its registration within 30 days of a change in its beneficial ownership or other information reported to FinCEN. For detailed overviews of the CTA, please visit our earlier posts located here, here, and here.

Company Applicants: Who is “Primarily Responsible” for Directing a Filing?
The CTA requires that reporting companies formed on or after January 1, 2024, disclose their “company applicant.” An individual is a “company applicant” if (1) they directly file the company’s formation or registration documents with a secretary of state or similar office or (2) if more than one person is involved in the filing, they are primary responsible for directing or controlling the filing. A maximum of two individuals can be reported as company applicants.

The FAQs clarify that the person who signs the formation document, such as an incorporator, is not necessarily a company applicant. Instead, the rule focuses on the person responsible for making decisions about the filing, including how the filing is managed, what contents to include, and when and where filing will occur.

FinCEN provides three scenarios to illustrate the rule. In two of the scenarios, an attorney or a paralegal instructed by that attorney completes a company creation document using information provided by a client and sends the document to a corporate service provider to be filed with a secretary of state. In this scenario, the attorney will one of the company applicants, and the employee at the corporate service provider who directly filed the document with the secretary of state will be the other company applicant. In the third scenario, the attorney’s client initiated the company creation directly with the corporate service provider — in this case, the client will be a company applicant (as will the employee at the corporate service provider who directly filed the document).

Subsidiary Exemption: Is Partial Control of a Subsidiary’s Ownership Interests By an Exempt Entity Sufficient to Qualify for the Subsidiary Exemption?
The short answer is — no.

The CTA lists 23 categories of entities that are exempt from the beneficial ownership information (BOI) reporting requirements. A subsidiary of certain categories of exempt entities will also be exempt if the subsidiary is controlled or wholly owned, whether directly or indirectly, by one or more of such exempt entities.

The FAQs clarify what happens when the exempt entity partially controls the subsidiary. Partial control is insufficient for an entity to fall within the subsidiary exemption — a subsidiary’s ownership interests must be fully, 100% owned or controlled by the exempt entity to qualify for this exemption. Thus, control of ownership interests means that one or more exempt entities entirely control all of the ownership interests in the reporting company, in the same way that an exempt entity must wholly own all of a subsidiary’s ownership interests for the exemption to apply.

Selected Additional Matters Covered by the New FAQs
Reporting Company Ownership Subject to Dispute: If ownership of a reporting company is the subject of active litigation, all individuals who own or control (or claim to own or control) at least 25% of the company’s interests are considered beneficial owners, and BOI must be submitted for each individual (in addition to BOI for all individuals who exercise substantial control over the company). If, after the legal dispute is solved, the reporting company has different beneficial owners from those initially reported, an updated BOI report must be filed within 30 calendar days after the litigation is resolved.
Third-Party Couriers or Delivery Service Employees: Third-party courier or delivery service employees who solely deliver documents to a secretary of state are not company applicants, as long as the third-party courier, the delivery service employee, and the delivery service that employs them play no other roles in the creation or registration of the reporting company.
Automated Incorporation Service: An automated incorporation service’s employees are not company applicants if the service solely provides software, online tools, or generally applicable written guidance for the creation of a reporting company and its employees are not directly involved in filing creation documents.
No Photo on Identification Document for Religious Reasons: If a beneficial owner’s or company applicant’s identification document does not include a photograph for religious reasons, the reporting company may submit an image of that identification document when submitting its report, provided that the document is otherwise an acceptable type of identification. If the individual in question obtains a FinCEN identifier, then the burden of providing the identification document to FinCEN would fall on the individual and not on the company (which would only need to report the FinCEN identifier).
No Permanent Residential Address: When a reporting company must report an individual’s residential address, but no such permanent address is available, the reporting company should report the residential address that is current at the time of filing the report. If the address later changes, the reporting company must submit an updated report within 30 days from such change. The use of a FinCEN identifier by the individual will eliminate the company’s need to submit an updated report, although the individual would be required to update his or her address with FinCEN directly.

© 2024 ArentFox Schiff LLP

by: Evgeny Magidenko of ArentFox Schiff LLP

For more news on Corporate Transparency Act Compliance, visit the NLR Corporate & Business Organizations section.

Beware of Corporate Transparency Act Scams and Fraud

The Corporate Transparency Act’s (CTA) Beneficial Ownership Information reporting requirements are set to take effect on January 1, and bad actors are already using the CTA’s requirements to solicit unauthorized access to Personally Identifiable Information. To that end, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a warning regarding such scams. FinCEN describes these efforts as follows:

“The fraudulent correspondence may be titled “Important Compliance Notice” and asks the recipient to click on a URL or to scan a QR code. Those e-mails or letters are fraudulent. FinCEN does not send unsolicited requests (emphasis added). Please do not respond to these fraudulent messages, or click on any links or scan any QR codes within them.”

© 2023 Varnum LLP
For more news on Corporate Transparency Act Scams and Fraud, visit the NLR Corporate & Business Organizations section.

The Corporate Transparency Act December 2023 Update

The Corporate Transparency Act (“CTA” or the “Act”) comes into effect on January 1, 2024. Enacted by Congress as part of the Anti-Money Laundering Act of 2020, the CTA requires certain entities, domestic and foreign, to report beneficial ownership to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

The CTA’s reporting obligations will apply to “Reporting Companies” (discussed below) currently in existence, and to those formed after January 1, 2024. However, while FinCEN estimates that the CTA will affect over 32 million entities, it will largely impact only smaller and unregulated companies. For example, companies that meet the CTA’s definition of a “large operating company,” are publicly traded or regulated, or are a subsidiary of certain exempt entities are not required to submit beneficial ownership information to FinCEN. Accordingly, while all companies should take note of the CTA and the significant change in the law for corporate reporting obligations, an equally vast number of entities will likely find themselves exempt from these requirements.

With the CTA’s effective date fast approaching, companies should consider its potential impact to their compliance obligations and, if appropriate, implement appropriate policies and procedures for handling reporting.

WHAT DOES THE CTA REQUIRE?

The CTA will require Reporting Companies to file reports electronically with FinCEN identifying their beneficial owners, in addition to certain other information. For Reporting Companies formed prior to 2024, these reports require information about the Reporting Company and its beneficial owners. Reporting Companies formed prior to 2024 will have until January 1, 2025, to file an initial report.

For Reporting Companies formed on or after January 1, 2024, reports will require information about the Reporting Company and its beneficial owners, as well as its company applicants (i.e., individuals involved in the company’s formation filing). Reporting Companies formed after January 1, 2024, will have 30 days from formation to file their initial reports, although FinCEN recently issued a final rule extending this reporting period to 90 days for companies created or registered in 2024.

WHO MUST REPORT?

Reporting Companies are defined as legal entities that are formed through a filing in a state secretary of state’s office or similar office under the law of a state or Indian tribe. Reporting Companies can be domestic or foreign and include, but are not limited to, corporations, limited liability companies, certain partnerships and certain trusts. A foreign Reporting Company is an entity formed under foreign law that registers to do business in any state or Indian tribe. Certain entities outside of the CTA’s scope include sole proprietorships, most general partnerships, common law trusts, unincorporated
associations, and foreign entities not registered to do business in a state or tribal jurisdiction. These entities are likely to have no reporting obligations under the CTA.

EXEMPT ENTITIES

The CTA provides 23 exemptions for Reporting Companies that would otherwise be required to report beneficial ownership information under the Act. These exemptions are predominantly for large or heavily regulated companies, including:

  • securities reporting issuers, banks, credit unions, depository institution holding companies, money services businesses, brokers-dealers, securities exchange or clearing agencies, pooled investment vehicles, regulated investment companies and investment advisors, insurance companies and state-licensed insurance providers, and accounting firms;
  • “large operating companies” who have more than 20 full-time employees in the U.S., an operating presence at a physical office within the United States, and more than $5 million in gross receipts or sales on their previous years’ U.S. tax returns;
  • U.S. publicly traded companies;
  • governmental authorities and tax-exempt entities; and
  • inactive entities who have been in existence prior to January 1, 2020, are not engaged in active business, are not owned in any manner by a foreign person, have not had a change in ownership within the last 12 months, have not sent or received any amount greater than $1,000 within the last 12 months, and have no assets or ownership interests in any entity in the United States or abroad.

The CTA also exempts subsidiaries of certain exempt entities if those exempt entities own or control the subsidiary.

WHAT MUST BE REPORTED?

Reporting Companies are required to report to FinCEN:

  • basic company information, including full legal name, trade names, business address, state of incorporation or business registration, and employer identification number;
  • information of Beneficial Owners, including full legal name, date of birth, residential street address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document (e.g., driver’s
    license, passport, state-issued ID, etc.), and image of ID document from which unique ID number was obtained;
  • information of Company Applicants, including full legal name, date of birth, business address, unique ID number from individual’s identification document and issuing jurisdiction of acceptable ID document, and image of ID document from which unique ID number was obtained. A “Company Applicant” is defined as the individual who directly files a document with the state secretary of state’s office to create the entity or register it to do business in the state, and the individual who is primarily responsible for directing or controlling the filing.

There is no cap on the number of beneficial owners a Reporting Company is required to report. In contrast, a Reporting Company cannot have more than two reportable company applicants. Additionally, the CTA only requires Reporting Companies formed on or after January 1, 2024, to report company applicants in their initial reports. There is no requirement to report company applicants for entities formed prior to January 1, 2024.

WHO IS A BENEFICIAL OWNER?

A beneficial owner is defined as any individual who, directly or indirectly, either exercises substantial control over a Reporting Company or owns or controls at least 25% of the ownership interests of such Reporting Company.

An individual may exert substantial control by (i) serving as a senior officer (e.g., company’s president, CEO, COO, CFO or general counsel, or any officer who performs a similar function), (ii) having authority to appoint or remove certain officers or a majority of directors (or similar governing body) of the Reporting Company or (iii) having “substantial influence” over important matters at the company, regardless of their title or role.

Ownership interests in a company generally refer to any arrangement that establishes ownership rights in the Reporting Company, such as stock, capital or profit interests, convertible interests, options to buy or sell any of the above-named interests, or contracts, relationships or other understandings. Option interests must be treated as exercised for purposes of the analysis. Additionally, a beneficial owner may own or control such interest directly or indirectly, jointly with another person or through an agent, custodian, trust or intermediary entity.

The CTA identifies five instances where an individual who would otherwise be a beneficial owner under the Act qualifies for an exception. In these cases, the Reporting Company does not have to report the individual’s information to FinCEN. These exceptions are as follows:

  • a minor child;
  • a nominee, intermediary, custodian or agent;
  • an employee (excluding senior officers);
  • an inheritor, whose only interest in the company is a future interest through a right of inheritance; and
  • a creditor.

HOW TO REPORT

No filings are due prior to the Act’s effective date. While FinCEN has published draft forms for filing by a Reporting Company for comment, they are not yet finalized. FinCEN is also in the process of setting up the beneficial owner reporting infrastructure, the Beneficial Ownership Secure System (“BOSS”), which has not yet been finalized.

If beneficial owners or company applicants do not want to provide their personal data to a Reporting Company, individuals have the option of applying directly to FinCEN for a “FinCEN identifier” (a “FinCEN ID”). The individual will need to provide directly to FinCEN all of the same data that he or she would need to submit to the Reporting Company, but then would only need to provide his or her FinCEN ID to the Reporting Company for inclusion on its reporting.

Individuals who receive FinCEN IDs have the burden of keeping their data updated with FinCEN, whereas a Reporting Company has the burden of keeping the individual’s data current if the individual reports such data directly to the Reporting Company.

WHEN TO REPORT

For non-exempt Reporting Companies in existence as of January 1, 2024, they will have until January 1, 2025, to make their initial beneficial ownership report.

For non-exempt Reporting Companies formed on or after January 1, 2024, they will need to file their first beneficial ownership report within 30 calendar days after the date of formation. On November 29, 2023, FinCEN issued a final rule extending this deadline to 90 days for companies formed or registered in 2024. The time of formation is the earlier of (i) a company receiving actual notice of its registration from the state secretary of state or (ii) a company receiving notice of its registration becoming publicly available.

In addition to filing initial reports, Reporting Companies are also obligated to make reports within 30 days of a change to any data that FinCEN requires to be reported for the company and its beneficial owners.

PENALTIES FOR NONCOMPLIANCE

Congress included steep penalties for non-compliance with the CTA’s reporting requirements. Specifically, the CTA provides that willfully reporting or attempting to report false or fraudulent beneficial ownership, or willfully failing to make updates, shall be punishable with a civil penalty up to $500 per day while such violation continues, with a possible criminal fine up to $10,000 and up to two years in prison. If a reporting violation is found to be “willful,” the CTA provides that responsible parties can include individuals that cause the failure, or are senior officers of the Reporting Company at the
time of the failure. The CTA also enhances criminal penalties when a Reporting Company’s failure to file is combined with other illegal activity.

Additionally, it is also unlawful to knowingly disclose or knowingly use beneficial ownership information obtained by the person for an unauthorized purposes. Violations are punishable with a mandatory civil penalty of $500 per day while the violation continues, plus a possible criminal fine of up to $250,000, five years in prison, or both.

HOW YOU CAN PREPARE

The CTA will alter the ways entities organize and govern themselves and it will impose substantial and continuing reporting obligations. In the weeks leading up to the CTA’s implementation, entities should be developing internal policies and procedures to assess their reporting obligations, identify beneficial owners, and identify company applicants on a go-forward basis.

Reporting Companies may wish to consider adopting a CTA compliance policy. Such a policy can educate managers and senior officers on obligations under the CTA, address procedures for reporting to FinCEN and monitoring changes to a company’s reporting status and beneficial ownership, and address the application of the CTA to potential future affiliates of the Reporting Company.

Reporting Companies may also wish to consider how the CTA may implicate its constituent documents and evaluate amending existing operating agreements to incorporate provisions addressing compliance with the CTA. Similarly, some entities may wish to consider their organizational structures and corporate governance in light of the obligation to collect and report personally identifiable information. Additionally, Reporting Companies should consider how the CTA will impact future material transactions, such as mergers and acquisitions.

© 2023 Vedder Price
by: Joel R. Thielen of Vedder Price
For more news on Corporate Transparency Act Updates, visit the NLR Financial Institutions & Banking section.