What is the corporate Transparency Act (CTA)?

In an effort to strengthen the U.S. and global financial systems and to combat money laundering and corruption, Section 6403 of the Corporate Transparency Act (CTA) was enacted into law as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA).

The law requires Financial Crimes Enforcement Network (FinCEN) to promulgate regulations that would mandate reporting companies to submit to FinCEN:

1. Initial report that contains certain identifying information for the reporting company,
2. Each identified beneficial owner, and
3. Each company applicant, as well as copies of acceptable government ID number or documents for each identified beneficial owner and each company applicant.

Why is CTA Beneficial Ownership Information (BOI) Reporting necessary and what is the purpose of this law?

The United States presents significant investment opportunities to countries and citizens from all over the world and continues to be a popular jurisdiction for legal entity formation because of the ease of setting up legal entities and the minimal amount of information required to do so in most U.S. states.

According to Global Financial Integrity, more public and anonymous corporations are formed in the United States than in any other jurisdiction. Simply because most jurisdictions do not require the identification of an entity’s individual beneficial owners at the time of formation.

Due to the simple process of entity formation in the U.S, many anonymous shell companies that have no physical presence beyond a mailing address and generate little to no independent economic value are often formed without disclosing their beneficial owners. According to FINCEN and other reports, some of these anonymous shell companies are used to carry out several money laundering and criminal activities.

FINCEN believes the collection of beneficial ownership information at the time of company formation would significantly reduce the amount of time currently required to research who is behind anonymous shell companies, and at the same time, prevent the flight of assets and the destruction of evidence.

Who is authorized to access CTA BOI information and is it going to be disclosed Publicly?

The information provided to FINCEN will not be in the public domain, meaning it will be kept confidential, safeguarded, and released to authorized persons and agencies.

To re-emphasize the confidentiality of the data collected, FINCEN proposal also seem to suggest that someone searching the Secretary of State database would not have access to the BOIR information.

The proposed FINCEN regulation states that the collected information will be secured and that this non-public centralized BOI database will be accessible to law enforcement, intelligence community, certain government agencies, domestic and foreign, and to financial institutions to assist them in meeting their customer due diligence requirements.

Who is required to file the beneficial ownership information (BOI report)?

The proposed regulations identifies two(2) categories of individuals who are required to file reports with FinCEN:

1. The beneficial owners of the entity; and
2. individuals who have filed an application with specified governmental authorities to form the entity or register it to do business.

The submission to FinCEN must contain both the beneficial owner and company applicant information (together, “beneficial ownership information” or BOI).

What is a Reporting Company?

A domestic reporting company: The proposed definition of domestic reporting company would include (1) A corporation; (2) a limited liability company; or (3) other entity that are typically created by a filing with a secretary of state or similar office under the law of a state or Indian tribe, such as limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and LLCs.

A foreign reporting company: The proposed definition of foreign reporting company would include a corporation, limited liability company, or other entity formed under the law of a foreign country and that is registered to do business in any state or tribal jurisdiction.

Who is a Beneficial Owner under the CTA?

A beneficial owner would include any individual who directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

1. Exercises substantial control over a reporting company (this may capture anyone who is able to make significant decisions on behalf of the entity). or
2. Owns or controls at least 25 percent of the ownership interests of a reporting company

Who is a Company Applicant?

The reporting company must identify both the individual who submitted the report and the person who directed or controlled that activity.

In the case of a domestic reporting company, the proposed rule defines a company applicant to be the individual who files the document that forms the entity.

In the case of a foreign reporting company, a company applicant would be the individual who files the document that first registers the entity to do business in the United States.

What information should the reporting company provide with regards to the Beneficial Owner and Company Applicant?

Proposed 31 CFR 1010.380(b)(1)(ii) requires a reporting company to identify itself and report four pieces of information about individuals who own, control, and register each particular entity and(company applicants):

• Legal name,
• Date of birth,
• Current residential or business street address, and
• Either a unique identifying number from an acceptable identification document ( e.g., a passport) or a FinCEN identifier.

What is the FINCEN Identifier, and can I provide FINCEN Identifier instead of my private information?

An individual may obtain a FinCEN identifier by providing FinCEN with the information that the individual would otherwise have to provide to a reporting company if the individual were a beneficial owner or applicant of the reporting company.

An entity can also obtain a FinCEN identifier from FinCEN when it submits a filing as a reporting company or any time thereafter.

This means that an individual or legal entity must first disclose information to FinCEN, but once the individual or legal entity has a FinCEN identifier, the individual or legal entity can provide the identifier to a reporting company in lieu of the personal details described above.

Some of the primary incentives for a FinCEN identifier under the proposed rule include:

• Data security: an individual may desire not to send personal information to a reporting company but rather prefer to file that data with FinCEN directly;
• Administrative efficiency: where an individual is likely to be identified as a beneficial owner of numerous reporting companies;
• Anonymity from reporting companies: When the reporting company is not directly owned, but are indirectly owned through another entity, by the individual;
• Data security for Company applicants: where a person is responsible for registering or forming many companies with the secretary of states, they may have incentive to request a FinCEN identifier in order to limit the number of companies with access to their personal information.

Is the CTA not a duplication of efforts since the IRS already collects such information via tax and information returns?

FINCEN stated that the reporting requirement is necessary even though similar information is already collected by the IRS, However, to the extent that similar information may be reported to the IRS, the disclosure of taxpayer information is limited by statute, and the IRS generally does not have the authority to disclose such information for the purposes specified in the CTA.

FinCEN is also aware that financial institutions subject to the Customer Due Diligence(CDD Rule) are required to collect some BOI from legal entities that establish new accounts. However, the CDD Rule does not require these financial institutions to file a report of that BOI with FinCEN, and FinCEN has long viewed the CDD Rule and BOI reporting at entity formation as distinct. Furthermore, the CTA requires certain provisions within the CDD Rule to be revised.

What is the timeline or deadline for filing BOI Report under the CTA?

1. Initial report :
   • Domestic reporting companies created before the effective date of the final regulation would have one (1) year to file their initial reports.
   • Reporting companies created or registered after the effective date would have 14 days after their formation to file.
   • The same 14 days deadlines would apply to existing and newly registered foreign reporting companies.

   Once the initial reporting is completed, reporting companies are only required to subsequently update the report if there are changes or new information.

2. An updated report providing new information:
   • Reporting companies would have 30 days to update BOIR information that has changed after filing.
   • Reporting companies would file a report within 30 calendar days after the date on which the entity no longer meets any exemption criteria.
   • Proposed 31 CFR 1010.380(a)(2)(i) provides that if a reporting company becomes exempt after filing an initial report, this change will be deemed a change requiring an updated report.
3. Correcting erroneous information in a previous report: When the reporting company discover or should have discovered, becomes aware or has reason to know the reported information is inaccurate. The reporting company would have 14 days to correct inaccurate reports about:
   • any company applicant,
   • beneficial owner, and
   • the reporting company

Does the CTA provide any exceptions and exemptions to the reporting requirements?

Proposed 31 CFR 1010.380(d)(4) describes five(5) exceptions to the definition of beneficial owners that are included in the CTA. These exceptions relate to minor children, nominees or other intermediaries, employees, inheritors, and creditors.

Pursuant to proposed 31 CFR 1010.380(c)(2)(i)-(xxiii), FinCEN proposes twenty-three (23) types of entities that are exempt from submitting BOI reports,because these entities are either already generally subject to substantial Federal or state regulation under which their beneficial ownership may be known.

Are there any penalties under the CTA for failure to file or provide information?

The CTA provides that it is unlawful for any person to willfully provide, or attempt to provide, false or fraudulent BOI to FinCEN, or to willfully fail to report complete or updated BOI to FinCEN.

The CTA further provides for a civil penalty of up to $500 for each day a violation continues or has not been remedied and may be fined up to $10,000 and imprisoned for up to two years, or both, for a criminal violation.

When is the effective date for the CTA regulation?

On Sept. 29, 2022, (FinCEN) issued a final rule implementing the beneficial ownership information (BOI) reporting requirement of the Corporate Transparency Act (CTA). Read more here

On January 1, 2024, the Financial Crimes Enforcement Network (FinCEN) announced the commencement of beneficial ownership information (BOI) reporting under the Corporate Transparency Act (CTA). This vital step forward ensures greater transparency and aids in the fight against illicit financial activities. Companies established or registered in the U.S. are required to comply with these reporting standards, contributing to a more accountable corporate environment.Learn more and seek guidance here.

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