Episode 1 – Introduction
More regulatory requirements are coming from the federal government for small to mid-sized businesses. Other than tax filing requirements, such as obtaining a tax ID number or possible securities filings, the federal government has never required a federal disclosure or filing of general corporate filing information for incorporations and organizations. Information about private businesses has historically been the province of the state governments under our federal system, but that is about to change in a big way.
The following article is the first in a series about a new regulatory scheme that proposes to require small to mid-sized private entities to disclose private identification information about the owners of businesses and those who form such entities and to register such information with the U.S. Government. The requirements will fall upon these smaller sized entities, which, ironically, are the entities least prepared to meet such reporting requirements. These articles will give you the who, what, when, and why of this new legislation.
This article will introduce the Corporate Transaction Act and what it is intended to do and what its general requirements are.
The Corporate Transparency Act (“CTA“) was enacted into law on January 1, 2021 as part of the Anti-Money Laundering Act of 2020,. The CTA added a new section, 31 USC 5336, to the Bank Secrecy Act to address objectives of enhancing beneficial ownership transparency while minimizing the burden on the regulated community. The statute requires certain types of domestic and foreign entities, called “reporting companies” to submit specified “beneficial ownership information” to U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN“).
When enacted, all corporations, limited liability companies, certain trusts, and other entities that are formed or registered to do business in the United States will be required to file, and regularly amend, a beneficial ownership report with FinCEN.
Failure to comply with the CTA’s reporting requirements can lead to significant civil and criminal penalties. Civil and criminal penalties for non-compliance include per diem civil penalties of $500.00/day while a violation continues, plus six-figure criminal fines and prison time for willful failure to report or filing erroneous reports.
“The Corporate Transparency Act represents the most significant reformation of the Bank Secrecy Act and related anti-money laundering rules since the US Patriot Act.” ACTEC Fellow Travis Hayes, Glenn Fox, and Raj Malviya May 17, 2022 (Podcast of American College of Trust and Estate Counsel Foundation (“ACTEC Podcast“)).
The stated purpose of the CTA is to enhance beneficial ownership transparency in the U.S. in order to: “protect the U.S. financial system from illicit use and impede malign actors from abusing legal entities, like shell companies, to conceal proceeds of corrupt and criminal acts. Such abuses undermine U.S. national security, economic fairness, and the integrity of the U.S. financial system. An additional goal for the CTA is buried in the proposed regulations. “FinCEN also believes that requiring initial reports to be filed relatively quickly will help make the [Beneficial Ownership Information] reporting process a natural part of the formation or registration process, furthering the CTA’s objective to ‘set a clear, Federal standard for incorporation practices.'” (CTA, Section 6406 (5) (A)).
Under the CTA, “Reporting Companies,” are required to report to FinCEN certain identifying information pertaining to the entity and its “Beneficial Owners” and “Company Applicants.” These “Reporting Companies” as defined in the CTA can easily be confused with, but are not the same as, the “reporting companies” that are required to file reports periodically with the Securities and Exchange Commission under sections 12, 13 or 15(d) of the Securities Exchange Act of 1934. The “Reporting Companies” for the purposes of the CTA are those required to report to FinCEN under the CTA.
Currently, companies do not generally need to report this type of information to federal or state governmental authorities, except under FinCEN’s existing Customer Due Diligence Rule (“CDD Rule,” 31 CFR 1010.230). The CDD Rule requires covered U.S. financial institutions to collect “Beneficial Ownership Information” (“BOI“) from certain legal entities that are customers of the banks and other financial institutions in connection with opening new accounts for those customers. The CDD Rule requires these covered financial institutions to identify and verify the identity of the natural persons (known as “Beneficial Owners“) of legal entity customers who own, control, and profit from companies when those companies open accounts and requires that the financial institutions collect certain “Beneficial Ownership Information” (“BOI“) from its customers. A Beneficial Owner is a key concept to understand when analyzing the CTA.
In December 2021, FinCEN issued a notice of proposed rulemaking (the “Proposed Rule“)( to implement the beneficial ownership reporting requirements of the CTA. The requirement for Reporting Companies to submit BOI takes effect on the effective date of the regulations prescribed by the Secretary of the Treasury under 31 USC 5336.
In total, FinCEN plans to perform three waves of rulemaking regarding the CTA:
(1) regulations for the reporting of beneficial ownership data (the “Reporting Regulations”; this is the only rulemaking which is currently underway as of the date of this article);
(2) regulations for securing and accessing beneficial ownership data (the “Access Regulations,” expected in draft form in 2022); and
(3) revision of FinCEN’s existing CDD Rule. No final regulations have been released as of the date of this article. Commentators believe that the first of the final regulations may be released in late 2022.
Stay tuned for upcoming blogs which will provide more information about:
- Reporting Companies – Which entities are required to file reports?
- Exempt Entities – Which entities are exempt from filing?
- Information Required – What information is required to be reported?
- Key Reporting Persons – Whose information is required to be reported?
- Timeframe – What are the time requirements for filing reports?
- Penalties – What happens if the Reporting Company fails to file the necessary filings?
- Process Update – Where are we in this process?
Next Episode 2: Reporting Companies and Exceptions
Contact a member of our Corporate Transactions Team if you have questions about the Corporate Transparency Act.