On September 27, 2023, the Financial Crimes Enforcement Network issued a Notice of Proposed Rulemaking. This notice proposes an extension of the deadline for "Reporting Companies" formed in 2024 to file their Initial Beneficial Ownership Information Reports. If finalized, the deadline will be extended from 30 days to 90 days. The primary goal of this proposed extension is to reduce compliance burdens on Reporting Companies. However, there is still much uncertainty regarding the actual burden that will be placed on these companies and the responsible parties involved.
Let's summarize where we currently stand. The Corporate Transparency Act (CTA) was enacted on January 1, 2021, and it introduces new requirements for beneficial ownership reporting for both US and foreign companies. The aim of the CTA is to combat terrorist financing, money laundering and other illicit activities. It achieves this by mandating that corporations, limited liability companies, and other filing entities register and disclose information about their owners, officers, and controlling persons to the Financial Crimes Enforcement Network (FinCEN).
Starting January 1, 2024, the CTA will require all new companies formed or qualified to do business in the United States (and by January 1, 2025, all companies formed or qualified to do business in the US prior to January 1, 2024) to report Beneficial Ownership Information (BOI) to FinCEN. It is crucial for companies to carefully review the CTA to determine if they fall under the category of "reporting companies" and assess their potential obligations under the forthcoming regulations.
Entities that meet the definition of a "Reporting Company" (unless exempted) are subject to the CTA and should take appropriate action. Broadly speaking, a Reporting Company refers to any domestic or foreign corporation, limited liability company, limited partnership, or similar entity formed or registered to do business within any US state or tribal jurisdiction by filing a document. There are more than 20 types of businesses that are exempt from reporting under the CTA, including publicly traded companies, banks, and insurance companies. Notably, large operating companies with a US office that employ over 20 full-time employees in the US and have over $5,000,000 in gross receipts or sales will also be exempt from CTA compliance. This exemption will also apply to subsidiaries of large operating companies.
To effectively prepare for the Corporate Transparency Act (CTA), firms must take immediate action to educate themselves and their clients. This proactive approach will allow them to capitalize on the significant opportunities the CTA presents and mitigate any potential liabilities arising from non-compliance with the rules and regulations. Professionals should implement the following actions to ensure their clients are well-prepared for this transformative change:
- Develop a streamlined process to assist clients in securely and confidentially gathering the necessary information, particularly regarding beneficial ownership details.
- Engage in proactive communication with clients to raise awareness about the CTA and the filing requirements for Beneficial Ownership Information (BOI).
- Thoroughly review the CTA to determine if clients fall under the definition of "reporting companies" and assess their obligations under the forthcoming regulations.
- Establish a comprehensive compliance plan that addresses privacy concerns, outlines necessary processes and agreements, identifies potential "red flags" for regulatory changes, ensures compatibility and compliance with the CTA through the review of existing and new documentation, and provides education to beneficial owners and senior officers regarding the potential penalties for non-compliance.
This does not only affect firms focused on business or accounting services, it also has an impact on estate planning firms and corporate fiduciaries as well. Although trusts are specifically exempt from the reporting requirements, they may still be required to report BOI on beneficiaries. Individuals who hold at least 25% ownership in a reporting company through a trust are also considered beneficial owners. This includes individual trustees who control a minimum of 25% ownership interests; individuals with authority to dispose of trust assets; beneficiaries who are the sole recipients of income and principal; beneficiaries with the right to demand a distribution or withdrawal of a significant portion of the trust's assets; and, grantors with the ability to revoke the trust or withdraw trust assets.
Additionally, irrespective of the percentage of ownership held by the trust, the following individuals are also considered beneficial owners:
- Trustees with a majority of voting power;
- Individuals who control a majority of the voting power or voting rights;
- Individuals who direct important company decisions or have the power to amend the trust; and
- Those who hold the right to remove and replace a majority of the board of directors or senior officers.
It is crucial to note that when calculating the 25% threshold, all ownership interests of an individual must be considered. For example, if a sole beneficiary individually owns 10% of the company and is also a beneficiary of a trust that owns 15% of the company, the 25% threshold is met by combining all the beneficiary's interests. Also it will require an analysis of the trusts to determine whether there is sufficient control in the hands of a trustee or beneficiary to warrant reporting.
In intake forms, it may be necessary to inquire about ownership of closely held companies outside of the trust, if the trust holds an interest in such a company.
Non-compliance with the CTA comes with severe civil and criminal penalties, serving as a strong incentive for reporting companies to meet the requirements and provide complete information to law enforcement and regulatory agencies. The penalties for non-compliance include:
Civil Penalties:
- A fine of up to $500 per day for each ongoing violation; and
- A fine of up to $10,000 per violation.
Criminal Penalties:
- Willful failure to report on time can result in felony charges, with fines and imprisonment;
- Fines of up to $250,000 or imprisonment of up to five years, or both;
- Forfeiture of proceeds derived from violations; and
- Suspension or debarring from access to the beneficial ownership IT system.
Enhanced criminal penalties, including fines of up to $500,000 and imprisonment of up to 10 years, apply if a person commits a violation while violating another US law or engaging in a pattern of illegal activity involving more than $100,000 within a 12-month period, and the loss of business assets acquired through non-compliance.
The criminal penalties primarily target willful violations of the reporting obligations outlined in the act. Therefore, it is crucial for businesses to understand their role as applicants, report Beneficial Ownership Information accurately, and stay updated on deadlines to avoid penalties.
In conclusion, the CTA mandates corporations, limited liability companies, limited partnerships and similar entities to disclose Beneficial Ownership Information (BOI) to FinCEN. The reporting requirements are set to commence on January 1, 2024. Firms must proactively prepare by advising their clients and handling the new reporting and filing requirements dictated by the CTA's BOI. Professionals should take action to help clients gather necessary information, maintain proactive communication, review the CTA and devise a compliance plan.
Matthew Erskine is managing partner at Erskine & Erskine.