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New Regulations Imposed Under CTA
What Is CTA?
The CTA is The Corporate Transparency Act and is a component of the Anti-Money Laundering Act of 2020. It was enacted to prevent money laundering, terrorist financing, and other illicit activities. By increasing the information reported on business entities, the CTA aims to prevent the exploitation of U.S. corporations and LLCs for criminal gain and assist law enforcement in detecting criminal activity.
The CTA takes effect on January 1, 2024. At the start of the new year, all applicable entities will have a limited timeframe to file information with the Financial Crimes Enforcement Network (“FinCEN”), which is a division of the U.S. Department of the Treasury.
The CTA applies to US entities and to foreign entities doing business in the United States. It imposes new reporting burdens on such entities and requires a fact specific analysis for each entity’s unique circumstances.
It was designed to combat the use of shell corporations and other entities to facilitate money laundering and other illicit activities, it requires domestic and foreign “Reporting Companies” to report certain identifying information about their beneficial owners to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). FinCEN estimates 32.6 million Reporting Companies will be subject to these reporting rules when they go into effect and an additional 5 million entities will become Reporting Companies each year thereafter.
Who Is Subject to Reporting? Definition of A “Reporting Company”
A “Reporting Company” is a domestic or foreign corporation, limited liability company, or similar entity that was either formed or registered to do business in any state or jurisdiction by filing a document with a secretary of state or other similar office and which does not qualify for an exemption.
There are 23 types of entities that are exempt from the reporting requirements. Most of the exemptions apply to entities that are already subject to substantial federal reporting requirements, such as public companies, banks, securities brokers and dealers, insurance companies, registered investment companies and advisors, and pooled investment companies, among others. Also exempt are “large operating companies” (defined as a company with more than 20 full time employees, an operating presence in a physical office within the United States, and a filed Federal income tax or information return in the United States for the previous year demonstrating more than $5 million (US) in gross receipts or sales from US sources), 5 tax-exempt entities, wholly owned subsidiaries of certain exempt entities, and inactive entities.
Identifying Beneficial Owners
For reporting purposes, a beneficial owner is any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise either exercises substantial control over the reporting company or owns or controls at least 25% of the ownership interests of the reporting company. A Reporting Company will always have at least one owner with substantial control and possibly several owners with such control, even if no individual holds a 25% ownership interest.
Exercising Substantial Control
Substantial control generally means control over important decisions of the Reporting Company. Under the regulations, an individual exercises substantial control over a Reporting Company if the individual:
Serves as a senior officer of the Reporting Company, defined as a CEO, CFO, COO, and general counsel, or any other officer who performs a similar function (the roles of secretary and treasurer are excluded because their functions are viewed as ministerial, with little control over the company);
Has authority over the appointment or removal of any senior officer or a majority of the board of directors;
Directs, determines, or has substantial influence over important decisions made by the Reporting Company (such decisions include those addressing the nature, scope, and attributes of the business, 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, the incurrence of any significant debt, or approval of the operating budget of the Reporting Company among others); or
Has any other form of substantial control over the Reporting Company.
Owns or Controls Ownership Interests
An ownership interest for purposes of determining beneficial ownership under the CTA is defined broadly and takes into account a variety of arrangements and ownership interests. In addition to stock and other equity interests, capital interest, and profits interests, put, call, and straddles may also be taken into account, as well as debt instruments with equity like features, in determining whether the 25% threshold is met. For these purposes, the total ownership interests that an individual owns or controls, directly or indirectly, is calculated as a percentage of the total outstanding ownership interests of the Reporting Company, and assumes all options are exercised.
For Reporting Companies that issue capital or profit interests, an individual’s ownership interests are the capital and profit interests in the entity, calculated as a percentage of the total outstanding capital and profit interests in such entity. For Reporting Companies that issue shares of stock, the threshold is measured as a percentage of the greater of either the total voting power of all ownership interests entitled to vote or the total outstanding value of all classes of ownership interests. However, if the percentage of an ownership interest cannot be determined with “reasonable certainty” using this method, any individual owning or controlling 25% of any class or type of ownership interest of a Reporting Company will be deemed to own or control 25% of all ownership interests in the Reporting Company.
Identifying Company Applicant
A “Company Applicant” is the individual who directly files the document that creates the Reporting Company or registers the company to do business in the United States, and the individual who is primarily responsible for directing or controlling such filing. There can be more than one Company Applicant.
The Reporting Company will be required to provide identification information about itself, its beneficial owners, and Company Applicants. Information required about the Reporting Company itself includes:
The full legal name and any trade name or “doing business as” name of the Reporting Company.
A complete current address.
The State, Tribal, or foreign jurisdiction of formation or registration of the Reporting Company.
The IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number) of the Reporting Company.
5. For each beneficial owner and Company Applicant, the applicable Reporting Company must submit to FinCEN the individual’s full legal name, date of birth, complete current address (in the case of a Company Applicant, a business address may be used, in all other cases a residential address must be used), and a unique identifying number from an acceptable identification document, as well as copies of such documents. In lieu of acceptable identification documentation, an individual or company who is required to provide information to a Reporting Company, may provide a unique identifier assigned by FinCEN (FinCEN Identifier). FinCEN will store BOI for no fewer than five years after the date on which the Reporting Company terminates.
Violation Penalties
Failure to meet the reporting requirements or unauthorized disclosure of BOI can result in civil or criminal actions. Willful failure to file a complete initial or updated report with FinCEN is subject to a US$500-per-day fine (up to US$10,000) and imprisonment for up to two years. An individual who knowingly discloses BOI, without authorization, is subject to a US$500-per-day penalty (up to US$250,000) and up to five years’ imprisonment.
Conclusions
The CTA is likely to have significant implications for almost all domestic and foreign businesses and will impose new burdens on entities formed or operating in the United States. Determining reporting obligations and exemption eligibility is a fact specific analysis that will need to be done with respect to each entity’s unique circumstances. Moreover, monitoring of an entity’s operation and ownership will be ongoing as a change in operations or up-stream ownership may change reporting status. Most if not all US small businesses should be prepared to assess potential risks!
Another risk-based consideration that entities should have in mind as they gather information to report BOI is that they should be attentive to new information that may inform their compliance with other regulatory regimes such as the Treasury Department’s enforcement of sanctions through the Office of Foreign Assets Control (OFAC), which involves not only persons listed on the Specially Designated National (SDN) list but also in some instances entities owned 50% or more by an SDN or blocked person.
Contact The Farano Law Group for additional information