Congress passed the Corporate Transparency Act, or CTA, in 2021 as part of a global effort to prevent individuals from using legal entities to shield their identities. For many years, the United States has been viewed as a significant holdout where individuals could hide behind entities, thereby facilitating money laundering and other financial crimes. The CTA is intended to prevent this by requiring many entities to file information about the individuals who are their “beneficial owners.” (If you are a securities lawyer or play one on TV, you should be aware that the definition of “beneficial owner” under the CTA is not the same as under the federal securities laws, as discussed below.)
The effective date of the CTA – January 1, 2024 – is fast approaching. Accordingly, companies and their counsel should be aware of the CTA and what needs to be done to comply with it. (There are rumblings that the effective date will be moved back, and there is litigation seeking to hold the CTA invalid. However, at this point it seems unwise to assume that either one or both of those things will happen.)
The following is a very high-level summary of the CTA and its requirements. In reading it, please bear in mind that (1) the CTA and the related rules promulgated and enforced by the Financial Crimes Enforcement Network (“FinCEN”) are very broad and complex, and this short communication cannot address all of the particulars; and (2) there are many unresolved issues under the CTA and the FinCEN rules. Hopefully, these issues will be addressed in future rulemaking, FAQs, or other interpretations, but so far that has not happened.
What entities are required to report?
Subject to some exceptions (discussed below), the CTA requires all US legal entities created by the filing of a document with a secretary of state or similar official (such as corporations, limited liability companies, and limited partnerships) (“reporting companies”) to report beneficial ownership information to FinCEN. Non-US legal entities that are qualified or licensed to do business in the US may also be subject to the CTA. Exceptions include, but are not limited to, SEC reporting companies, banks and credit unions, securities broker and dealers, large operating businesses, and tax-exempt entities. However, some of these exemptions are not what they seem, so it’s important to review them very carefully before relying on them.
What information must be reported?
Each reporting company must report its name (including any trade names or DBAs), address, jurisdiction of organization, and tax ID number (“EIN”). Notably, an EIN must be obtained prior to filing the CTA report. In addition, each “beneficial owner” must report either (1) his or her full legal name, date of birth, and address and must supply a copy of a government-issued photo ID or (2) his or her “FinCEN Identifier,” a code that can be used by the individual for all filings under the CTA. Beneficial owners are the human beings who exercise “substantial control” over the reporting company or who own or control 25% of the ownership interests of the reporting company, in both cases after looking through trusts or other entities that own interests in the entity. As noted above, beneficial ownership under the CTA is not beneficial ownership under the securities laws. Moreover, the CTA and the related FinCEN rules leave a number of questions open. For example, a principal executive officer is deemed to be a beneficial owner because she exercises control over the entity, but it is not clear whether a member of the board that can remove the officer from her position also exercises substantial control.
When must the reports be submitted?
Reporting companies formed on or after January 1, 2024 must file initial reports within 30 days of their formation. Reporting companies that were formed before January 1, 2024 must file initial reports before January 1, 2025, regardless of how long ago they may have been formed.
Any time a reporting company experiences a change in beneficial ownership, it must file an update to its CTA report within 30 days of that change. For example, an update is required when a beneficial owner dies or when someone who was exempt from reporting because she was a minor reaches the age of 18. Similarly, any errors in a CTA report must be corrected within 30 days after the error comes to the attention of the reporting company.
What are the penalties for violating the CTA?
Anyone who willfully provides false or fraudulent information or fails to report complete or updated information is subject to civil and/or criminal penalties, which may include imprisonment. Note that the penalties may extend to persons in positions to make the report or who do make the report.
In conclusion
The overarching regulatory framework of the CTA is relatively straightforward, but – as always – the devil is in the details, and there are lots of details.
Gunster has formed a working group to address the challenges posed by the CTA, including the following attorneys: Craig Behrenfeld, Alexandra Gabel, Bob Lamm, and Matt Scheer. Please direct any questions or observations to the working group at CorporateTransparencyAct@gunster.com.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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