Click here to read the article published in the December 2023 edition of Arizona Attorney Magazine.
Introduction
On January 1, 2021, Congress passed new anti-money laundering legislation as part of the National Defense Authorization Act, which expanded on the Anti-Money Laundering Act of 2020 (“AMLA”) and included the Corporate Transparency Act (“CTA”).[1] The CTA and the regulations promulgated thereunder by the Department of the Treasury mandate certain entity ownership reporting requirements and direct the Financial Crimes Enforcement Network (“FinCEN”) to implement and enforce such reporting requirements consistent with the AMLA.
Congress’s main objective in enacting the CTA is to prevent the use of shell entities as a tool to hide and facilitate money laundering and other financial crimes.[2] Currently, many U.S. jurisdictions do not require entities to disclose information regarding their beneficial owners. Congress viewed such lack of reporting as a deficiency in its approach to combat money laundering and financial crimes and concluded that it was necessary to federally mandate reporting of beneficial ownership for entities formed under U.S. laws.
Who must comply with the CTA?
Effective January 1, 2024, the CTA requires certain entities—predominantly smaller and otherwise unregulated companies—to file a report with FinCEN called a Report of Beneficial Ownership (“BOI Report”) disclosing information about their beneficial owners, persons who ultimately own or control the entity, and those individuals who formed the entity.[3] Reporting entities formed before that date will have a year, until January 1, 2025, to file the report. [4]
The term ‘Reporting Company” is defined as a corporation, limited liability company, or other similar entity that is “created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.”[5] The definition of a Reporting Company includes non-profit corporations and only excludes entities specifically listed on the list of exemptions.[6]
CTA Exemptions
The CTA contains the following 23 exemptions:[7]
- A public company that has securities registered with the Securities and Exchange Commission (“SEC”) or that is required to file reports with the SEC;
- A governmental agency established under the laws of the United States, an Indian Tribe, a State, a political subdivision of a State, or under an interstate compact;
- A bank;
- A Federal of State credit union;
- A bank holding company;
- A money transmitting business registered with FinCEN;
- Any entity registered with the SEC, including a broker, dealer, clearing agency, investment company, or investment adviser;
- An insurance company;
- An entity registered under the Commodity Exchange Act;
- An accounting firm registered under the Sarbanes-Oxley Act;
- A registered public utility;
- A designated market utility;
- A pooled investment vehicle that is operated or advised by an entity exempt under the CTA;
- A federally tax-exempt entity or an entity which solely assists such exempt entity;
- A large operating company, meaning an entity that employs more than 20 employees on a full-time basis in the United States; filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of (a) other entities owned by the entity; and (b) other entities through which the entity operates; and has an operating presence at a physical office within the United States;
- A subsidiary of any of the above;
- An inactive entity which has existed for more than a year, is not engaged in any business, is not owned, directly or indirectly, by a foreign person, has had no change in ownership in the previous 12 months, has not sent or received more than $1,000 in the last 12 months, and owns no assets.
Two important items to note from the list of exemptions are:
- Entities formed for estate planning purposes are not exempt if their formation involved the filing of a document with a governmental agency. For example, if practitioners rely on the use of limited liability companies or other entities for estate planning purposes, they should discuss the potential BOI Report filing requirements with their clients prior to forming such entities; Although revocable or irrevocable trusts such as those created for estate planning purposes generally are not formed by filing a document with a governmental agency and thus would not be a “Reporting Company,” their ownership interest in a Reporting Company could require disclosures by trustees, beneficiaries, and grantors as discussed below.
- With regards to the large operating company exemption, until the company has filed a tax return showing it had more than $5,000,000 in gross receipts or sales in the aggregate it will not be exempt based on the plain language of the exemption. This is an important consideration for companies which may have such amount of gross receipts or sales at formation as their first tax return may not be filed for at least a year if not longer.
Information Required
In order to comply, the following information is required:
Reporting Company: (1) full legal name, (2) any trade or “doing business as” names, (3) complete current street address of the principal place of business, (4) jurisdiction of formation, and (5) taxpayer identification number.
Beneficial Owners must provide their: (1) full legal name, (2) date of birth, (3) complete current residential street address (with exceptions for provisions address disclosures), and (4) either a copy of a current (i) U.S. passport, (ii) state or local ID document, (iii) driver’s license, or (iv) if the individual has none of those, a foreign passport.
A “beneficial owner” is defined as an individual who, directly or indirectly, either (i) exercises substantial control over the reporting company or (ii) owns or controls at least 25% of the ownership interests of the reporting company.[8] “Substantial control” means: (i) a senior officer of the company, (ii) having authority over the senior officers or majority of the board of the company, (iii) having significant influence over the company’s important decisions, or (iv) having any other type of significant control over the company.[9] Examples of important decisions are the nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company; the reorganization, dissolution, or merger of the reporting company; and major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company.[10]
“Ownership Interest” is defined as any equity interest in the entity, or any interest convertible into the same, including options, regardless of whether the interest is transferable or confers voting rights.[11] Based on such definitions, the calculation of beneficial ownership should be made assuming that all convertible interests are converted and all conditional events took place, which may result in a calculation showing an ownership exceeding 100 percent if several owners have interests which may arise in the future.
In the event a trust has an ownership interest in a Reporting Company, the CTA explicitly identifies the following as potential beneficial owners of the trust:
- A trustee of the trust or other individual (if any) with the authority to dispose of the trust assets. It is unclear who would be the individual reporting information on behalf of a corporate trustee.
- A beneficiary who is the sole permissible recipient of income and principal from the trust; or has the right to demand a distribution of or withdraw substantially all of the assets from the trust. This is usually the case in a self-settled asset trust or revocable trust during the grantor’s lifetime.
- A grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.[12]
Excluded from the definition of beneficial owner are: minor children (disclosing the parent or legal guardian’s information instead); individuals acting as nominees; custodians or agents; employees of the company acting solely as employees (not as senior officers); individuals whose only interest in a reporting company is a future interest through a right of inheritance; or creditors of a reporting company (unless the creditor meets other criteria of control).
Company Applicant and Implications for Practitioners
For entities formed after January 1, 2024, individuals covered by the definition of a “Company Applicant” must also provide some information.[13] A “Company Applicant” is defined as any individual who files, or who is primarily responsible for directing or controlling the filing of, the document creating the domestic reporting company.[14] In Arizona, the individual signing the filing, such as articles of incorporation or articles of organization, would be considered a Company Applicant. If a lawyer, paralegal, or other agent signed the filing but were directed by the client to act, the client would also still be considered a Company Applicant and required to provide information in addition to the information required of the lawyer, paralegal, or other agent as applicable.
Company Applicants must provide the same information required of beneficial owners. However, if the Company Applicant forms or registers an entity in the course of such company applicant’s business, a business address should be used rather than a personal address.[15]
Since all entities will need to comply with the CTA unless exempt, practitioners should gather all necessary information from any potential beneficial owner or Company Applicant at the time of formation of any new entity. Practitioners and their office staff should ensure that anyone in their office who does not want their information to be disclosed does not act as incorporator or organizer, as applicable, for their clients. If attorneys or their staff intend to continue acting as such, they should consider obtaining a FinCEN Identifier so that they can provide that Identifier in BOI Reports rather than their personal information (note that to obtain such Identifier, applicants will need to provide the information).
How to File and Database Access
The initial report and subsequent updates will be filed electronically with FinCEN on a system which is yet-to-be created. FinCEN will not accept reports until January 1, 2024.
Once created, the database will not be publicly accessible, including through Freedom of Information Act requests. Under the CTA, access to the database is to be limited to: federal agencies engaged in national security, intelligence, and law enforcement; state law enforcement agencies with a court order; the Treasury Department; financial institutions with the company’s consent; government regulators of financial institutions; and certain foreign authorities requesting information through a U.S. agency.
Filing Deadlines and Penalties
Initial filing is due within 30 days of forming a new entity on or after January 1, 2024, and by January 1, 2025, for entities existing as of January 1, 2024. Updates to the information are due within 30 days of the occurrence of the event triggering the update. For entities formed prior to January 1, 2024, the Company Applicant information is not required but the BOI Report must identify that it is filed for an existing company.[16]
The CTA also establishes civil and criminal penalties for entities that do not comply with the reporting requirements or knowingly provide false information.
How to Prepare
Attorneys representing entities qualifying as reporting companies should review, or establish, their clients’ compliance plan. They should request that owners begin compiling the necessary information and create internal controls and procedures for maintaining, and updating, such information. Founders and attorneys who are accustomed to a “one-time” filing form will now have to monitor and comply with the ongoing requirements imposed by this new regulation.
Both the statute and associated regulation provide that it is unlawful for any person to provide false information or to fail to provide required beneficial ownership information, directly or indirectly.[17] Attorneys should inform their clients, in writing, that the responsibility to keep accurate and current information, including the filing of amendments when applicable, is that of the client and that any actions taken by the attorneys are on the client’s behalf and request.
Attorneys should also ensure that officers, directors, shareholders, and members of client entities are required to, and informed to, comply with the CTA, for example by including language related to reporting obligations in bylaws, shareholders’ agreements, operating agreements, or other organizational documents, as applicable.
Click here to read the article in Arizona Attorney Magazine.
[1] The CTA is Title LXIV of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116–283 (Jan. 1, 2021) (the “NDAA”). Division F of the NDAA is the Anti-Money Laundering Act of 2020, which includes the CTA. Section 6403 of the CTA, among other things, amends the Bank Secrecy Act (“BSA”) by adding a new section 5336, Beneficial Ownership Information Reporting Requirements, to subchapter II of chapter 53 of title 31, United States Code.
[2] § 6402(5) and (6), Pub. L. 116-283, 134 Stat. 4604.
[3] 31 U.S.C. § 5336.
[4] 31 CFR § 1010.380(a)(1)(iii).
[5] 31 U.S.C. § 5336(a)(11)(A).
[6] 31 U.S.C. § 5336(a)(11)(B).
[7] Id. (a 24th exemption allows the Secretary of the Treasury to exempt any entity or class of entities for which it deems the policy goals of the CTA would not be furthered).
[8] 31 U.S.C. § 5336(a)(3)(A).
[9] 31 C.F.R. § 1010.380(d)(1).
[10] 31 C.F.R. § 1010.380(d)(1)(C)(1-7).
[11] 31 C.F.R. § 1010.380(d)(2)(i).
[12] 31 C.F.R. § 1010.380(d)(2)(ii)(C)(3)
[13] 31 C.F.R. § 1010.380(b)(1)(ii).
[14] 31 C.F.R. § 1010.380(e). At most two individuals will be considered Company Applicants even if more than two individuals are involved in the filing.
[15] 31 C.F.R. § 1010.380(b)(1)(ii)(C)(1).
[16] 31 C.F.R. § 1010.380(b)(2)(ii)(iv).
[17] 31 U.S.C. § 5336(h); 31 C.F.R. § 1080.380(g).