The Final Rule recently issued under the Corporate Transparency Act (“CTA”) represents a significant update to federal anti-money laundering laws and is estimated to affect millions of business entities by imposing new disclosure requirements on business owners. Here is a quick summary of the reporting requirements and a few tips to help you comply with these new requirements when they officially go into effect on January 1, 2024.

What is the CTA Final Rule?

On September 29, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued its Final Rule implementing the CTA’s requirements to report beneficial ownership information. The CTA itself became law in January 2021 and FinCEN issued a proposed rule in December 2021. The CTA’s primary purpose is to strengthen our nation’s anti-money laundering regime by increasing transparency, primarily by requiring businesses to report ownership data for the first time. Although the Rule includes a variety of exemptions from these new reporting obligations, FinCEN estimates that the CTA and the Rule will affect over 32 million business entities. Failure to comply with the CTA’s reporting requirements can have serious consequences—civilly and criminally—including a maximum civil penalty of $500 per day (up to $10,000) and up to two years in prison.

Who Must Report?

The Rule requires reporting by “reporting companies,” which includes existing and future domestic companies, subject to certain exemptions.  For purposes of the Rule, a domestic “reporting company” is any corporation, limited liability company (“LLC”), or any other entity created by filing a document with a secretary of state or similar state office.  This definition will also likely include a variety of non-corporate entities such as limited liability partnerships, limited liability limited partnerships, business trusts, and limited partnerships.

What Information Must be Reported?

An initial report will require the following information about the reporting company:

  • Full name and address
  • Trade or fictitious names used
  • Jurisdiction of formation
  • Taxpayer Identification Number or, if not yet issued, the reporting company’s Dun & Bradstreet Data Universal Numbering System number

An initial report will require the following information with respect to each beneficial owner and each company applicant:

  • Full legal name
  • Date of birth
  • Current address
  • A unique identifying number from a non-expired passport, driver’s license, government-issued ID, or identification document issued by a State, local government or tribe
  • An image of the document containing the unique identifying number used and photograph

Who is Exempt from the Reporting Requirements?

The CTA exempts 23 categories of entities from the definition of “reporting company”.  Exempted entities include the following:

  1. Large Operating Companies.  Companies with 20 or more full-time U.S. employees, more than $5 million in U.S.-sourced revenue, AND a physical operating presence in the U.S.;
  2. SEC-Registered companies.  Companies registered with the Securities and Exchange Commission;
  3. Financial Institutions.  Banks, bank holding companies, savings and loan holding companies, credit unions, financial market utility entities, and money services businesses registered with FinCEN;
  4. Securities and Insurance-Related Entities. Registered Commodity Exchange Act entities, registered investment companies or investment advisers, broker-dealers, and registered venture capital fund advisers, insurance companies or state-licensed insurance producers;
  5. Accounting firms;
  6. Public utilities;
  7. Certain pooled investment vehicles;
  8. Tax-exempt entities or certain entities that assist tax-exempt entities; and
  9. Inactive Companies.  An “inactive company” is any business entity in existence on or before January 1, 2020 that has no foreign ownership, no assets (including interests in other entities), no change in ownership during the last 12 months, and has not sent or received funds in excess of $1,000 in the last 12 months.

The Rule also provides a reporting exemption for subsidiaries that are controlled or wholly owned, directly or indirectly, by one or more exempt entities. This exemption does not extend to subsidiaries of money services business, pooled investment vehicles, or entities assisting a tax-exempt entity. According to FinCEN, it limited this exemption to wholly-owned subsidiaries to prevent “entities that are only partially owned by exempt entities from shielding all of their beneficial owners.”

Who is Considered a Beneficial Owner?

Under the Rule, a beneficial owners is defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” An individual can exercise substantial control over a reporting company if they serve as a senior officer in the reporting company, have authority over the appointment or removal of senior officers or a majority of the board, have “substantial influence over important decisions” of the reporting company, or have any other form of substantial control over a reporting company. The broad definition could be deemed to include third parties under certain circumstances.

There are a few limited exceptions to the definition of a “beneficial owner”. Under the Rule, minor children (provided a parent or legal guardian is reported as a beneficial owner), nominees, employees (excluding senior officers), future inheritors, and creditors do not count as beneficial owners.

When is the Deadline to Report?

The Rule takes effect on January 1, 2024. Any reporting company existing or registered before January 1, 2024, must file its initial report with FinCEN by January 1, 2025. Any reporting company created or registered after January 1, 2024, must file its initial report within 30 calendar days after creation or registration. And if any reporting company no longer meets the criteria for a reporting exemption, the company must file its initial report within 30 calendar days of losing its exemption status. After filing an initial report, any reporting company that has a change in its beneficial ownership information must file an updated report within 30 days of the change. In addition, if a reporting company meets the criteria for an exemption after filing its initial report, it must file an updated report, notifying FinCEN of the change, within 30 days.

How do I Report?

FinCEN is in the process of creating the forms by which reporting companies will report beneficial ownership information to FinCEN. FinCEN is expected to publish the proposed reporting forms for public comment in the coming months.

When it does come time to report, reporting companies’ initial reports to FinCEN must contain information on the reporting company itself, its beneficial owners, and for reporting companies created or registered after January 1, 2024, its company applicants. The Rule describes in detail the report contents and requirements.

Note, however, if an individual is a beneficial owner of a reporting company exclusively through their ownership of another company that is exempt from reporting, the reporting company does not have to report that individual’s beneficial ownership. Rather, the reporting company must provide only the names of the exempt entities in lieu of providing information on the beneficial owners who meet this criteria.

Also notable, reporting companies created or registered after January 1, 2024, must provide information about their company applicants. The information required is the same information as a beneficial owner. A company applicant is any individual who files the document that creates a company, as well as any individual who is primarily responsible for directing or controlling the filing. As an example, for Virginia limited liability companies, a company applicant would be the organizer who prepares and files Articles of Organization with the State Corporation Commission to form the LLC.  Accordingly, a reporting company may have more than one applicant. A reporting company does not have to provide updates on the company applicants after including such information in its initial report to FinCEN.

A Few Compliance Tips

The CTA and the Final Rule present a major update to the U.S. anti-money laundering laws. According to FinCEN, the vast majority of the 32 million companies estimated to fall under the Rule will be small businesses, single-owner LLCs, or other types of reporting companies with four or fewer beneficial owners. FinCEN further estimates the cost of compliance will exceed $20 billion for the first year and over $5 billion per year thereafter.

Although many companies will clearly fall within an exemption, complicated beneficial ownership information reporting situations will still arise. For instance, a corporation that does not qualify as a large operating company may have four or more beneficial owners, four beneficial owners with substantial control (e.g., C-suite officers), and members of an outside consultant as the company applicant. As another example, certain private funds or portfolio companies may have to report, even if the portfolio company wholly owns a large operating company that is itself exempt from the reporting portfolio company. The definitions and exemptions are detailed, and sizable penalties should encourage careful examination before making any decision whether or not to report.

To prepare for compliance with the Rule, companies should develop internal policies and procedures to assess their reporting obligations, identify beneficial owners, and identify company applicants, which could include third parties such as attorneys, accountants, and other advisors. Further, companies will need to develop policies and procedures to monitor changes to their reporting status or beneficial ownership on an ongoing basis to avoid potential penalties.

For any companies involved in merger and acquisition activity, it will be important to ensure target companies have fulfilled these new reporting obligations during the due diligence phase of business transactions.

Companies should expect law enforcement agencies to utilize innovative data mining approaches to identify suspicious activity among the data collected by FinCEN. This introduces a heightened risk that companies inadvertently will be swept into anti-money laundering or other corruption investigations. This increased risk amplifies the need for companies to carefully vet their vendors and customers.

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