In 2021, as part of efforts to enhance national security and further prevent multiple types of illicit activity, Congress passed new anti-money laundering legislation in the form of the Corporate Transparency Act (CTA). The CTA imposes significant new beneficial ownership disclosure and reporting requirements on a wide range of companies that are slated to go into effect in January 2024. The government’s estimates indicate that over 30,000,000 existing entities will be impacted, along with 5,000,000 new entities each year thereafter. Many businesses will need to invest in significant efforts to ensure compliance, particularly those with complex entity and/or ownership structures. The CTA is just around the corner and businesses need to begin preparing now to ensure they are ready.
What is the CTA? The CTA, enacted on January 1, 2021 as part of the National Defense Authorization Act (NDAA), is a new directive to the Financial Crimes Enforcement Network (FinCEN), a part of the U.S. Treasury Department. Notably, the CTA directs FinCEN to develop a standardized process for reporting beneficial ownership information by businesses deemed to be “reporting companies.” Since its enactment, FinCEN has moved forward with implementation of this directive in anticipation of the reporting requirements currently planned to go into effect on January 1, 2024.
Who must report? Both new and existing domestic and foreign companies may be subject to the CTA as “reporting companies.” Under the CTA, the definition of reporting companies is broad. They include any corporation, limited liability company, or other similar entity created by filing a document with a secretary of state or similar office under the law of any particular state (or territory or tribe). Reporting companies also include any corporation, limited liability company, or other similar entity formed under the law of a foreign country and registered to do business in the United States (or territory or tribe). In addition, the CTA includes a host of reporting exemptions, including for categories of entities that already make similar beneficial ownership disclosures—such as large operating companies and publicly-traded companies (as those categories are defined within the CTA).
What must be reported? First, a reporting company must disclose information regarding the company itself. This includes its legal name, any other names under which it does business, its address, the jurisdiction in which it was created or registered, and its identification number (such as tax ID). Second, reporting companies must disclose their “beneficial ownership.” Beneficial owners include any individual that directly or indirectly (a) exercises “substantial control” over a reporting company or (b) owns or controls 25% or more of the ownership interests of a reporting company. Third, reporting companies formed after the CTA enters into force must disclose information regarding their “company applicants.” Company applicants are the individuals who were involved with filing the document creating the reporting company or registering it to do business in a U.S. jurisdiction. With respect to beneficial ownership and company applicants, reporting companies will be required to disclose information such as the individual’s full legal name, date of birth, residential or business address, and a unique identification number.
For many businesses, CTA compliance will require careful evaluation of their ownership and management structures in order to accurately report beneficial ownership. For example, a minority investor in a company may still be a beneficial owner if he, she, or it exercises some degree of control over the operations of the company. Additionally, an individual who has not even made an equity investment in a company could still be considered to be a beneficial owner if he or she has the right to direct the management of a company.
When do reporting requirements come into effect? When the CTA’s reporting requirements come into effect as currently planned on January 1, 2024, any newly-formed entity will have only 30 days to file reports. Any entity existing prior to the effective date of the CTA will have a year to file reports. Additionally, companies are under a continuing obligation to report changes or errors in previously-reported information to FinCEN.
Who can access the information? While the information reported to FinCEN will not be publicly-accessible, FinCEN is authorized under the CTA to disclose the information to multiple parties. In addition to authorizing disclosure to U.S. government agencies, some foreign government agencies, and other parties, FinCEN can disclose reporting information to financial institutions for purposes of certain know-your-customer (KYC) due diligence efforts.
What are the penalties? Penalties for CTA non-compliance can be severe. Failure to comply with the CTA in a timely manner can subject parties to civil penalties, criminal fines, and even potential imprisonment.
How can MMM help you prepare? For many businesses, significant efforts will be required to comply with the CTA—including evaluating how it applies to your organization and establishing a process for ongoing reporting compliance. Accordingly, business owners and in-house legal and compliance leaders should engage with experienced counsel now to help them navigate the new and significant requirements of the CTA. Recognizing this need, MMM has created a dedicated CTA Task Force that leverages our attorneys’ significant compliance, corporate governance, and government enforcement experience to assist clients.
If you have any questions about how MMM can help you prepare for the CTA, please reach out to your regular MMM contact or the authors, Matt Peurach or Ryan Bullard.