The Corporate Transparency Act: What Businesses Need to Know about New Reporting Requirements

Author: John W. Campbell, Jr.

Starting January 1, 2024, millions of companies and business owners (whether domestic or foreign) that operate in the United States will need to be prepared to disclose the true owners and controllers of their companies to the Financial Crimes Enforcement Network of the Department of the Treasury (“FinCEN”). These reporting requirements are intended to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States. According to U.S. Representative Carolyn B. Maloney, the purpose of this new disclosure requirement is to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.” For some, the reporting of this information may seem familiar, as financial institutions have been collecting similar information as part of their Know Your Customer (“KYC”) protocols. However, under the new Corporate Transparency Act, a singular database is being created to help streamline and simplify the access of such information by users authorized under the Act.

Before diving into what needs to be disclosed, let’s first clear up a few things:
• Despite its name, the Corporate Transparency Act (“CTA”) applies to more than just corporations. It applies to all entities that are required to register with the Secretary of State (or similar state agency). In Illinois, that means the CTA will govern corporations, not-for-profit corporations, limited liability companies, limited partnerships, and limited liability partnerships. It will not apply to sole proprietorships, general partnerships, or trusts, as those entities do not register with the Illinois Secretary of State. Additionally, certain entities such as large operating companies and/or companies already subject to federal or state oversite, including banks, credit unions, tax-exempt entities registered with the IRS (such as 501c3 charitable organizations), public utilities, insurance companies will be exempt from reporting. Under the CTA, a company is deemed a large operating company if it: (i) “employs more than 20 employees on a full-time basis in the United States”; (ii) “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 other entities owned by the entity and through which the entity operates; and (iii) “has an operating presence at a physical office within the United States.” Companies cannot consolidate their employee headcount across affiliated entities. Certain inactive companies are also exempt, as long as they have been in existence on or before January 1, 2020, are not engaged in active business, are not owned in any manner by a foreign person, have not had a change in ownership within the last twelve months, have not sent or received any amount greater than $1,000 within the last 12 months, and have no assets or ownership interests in any entity in the U.S. or abroad.

• The term “beneficial owners” is a little misleading, as you do not need to be an owner to be a “beneficial owner.” As defined under the CTA, “beneficial owners” means any individual who, directly or indirectly, either (i) exercises substantial control over an Illinois entity required to report or (ii) owns at least 25% of the ownership interest (directly or indirectly) of such reporting entity. Examples of non-owners that have substantial control over the entity includes those that hold positions as CEO, CFO, COO, President, and General Counsel, as well LLC managers. Others holding positions of control will also likely fall under the disclosure requirements. While we are still awaiting more guidance and clarity from FINCEN as to who else may be subject to the disclosure requirements, Rule 405 under the Securities Act of 1933 defines control to mean the “possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or other¬wise.” The CTA specifically exempts a minor child from the definition of “beneficial owner” provided that the information of the minor child's parent or guardian is reported.

What information needs to be reported:
• Entity/business information: Legal name, trade names and DBAs, U.S. business addresses, the state(s) of formation/incorporation/registration, and the taxpayer identification number (“TIN”).

• Beneficial Owner information: each Beneficial Owner’s legal name, birth date, current residential street address, identifying number (e.g., nonexpired driver’s license, state identification card, passport, etc.), and a copy of the photo identification document.

• Company Applicant information. The “company applicant” is the individual(s) who filed the document that created or registered the company, also commonly known as the “Organizer(s)” in Illinois. The same information must be disclosed about the Company Applicant as is required for Beneficial Owners; however, a Company Applicant may disclose a business address in lieu of a residential address. The Company Applicant information is only required for new entities/businesses organized on or after January 1, 2024.

When must the reporting be completed:

• For entities/businesses registered with the Secretary of State prior to January 1, 2024, they must file their initial reports before January 1, 2025.

• For entities/businesses registered with the Secretary of State on or after January 1, 2024, they must file their initial reports within thirty days from the date of formation/registration.

• Additionally, entities/businesses must also periodically update the information on file with FinCEN whenever there is a change to the previously reported information about the company or beneficial owners. The updated information must be reported within thirty days from the date the change was made.

• FinCEN will not accept any reports filed before January 1, 2024.

How is the reporting done and who has access to the disclosed information:

• FinCEN will collect and store the information in a new online filing system, known as the Beneficial Ownership Secure System (“BOSS”). There will be no filing fee.

• The database is not publicly accessible. Instead, FinCEN is authorized to disclose the information: (i) to federal agencies engaged in national security, intelligence, and law enforcement activities, (ii) to state, local, and Tribal law enforcement agencies with court approval, (iii) to non-U.S. law enforcement agencies, prosecutors or judges based upon a request of a U.S. federal law enforcement agency, and (iv) to financial institutions and their regulators to conduct legally required customer due diligence, with customer consent.

• The BOSS will be secured to a Federal Information Security Management Act “High” compliance level, the highest information security protection level under the Act.

What happens for failing to comply:

• It is unlawful for “any person” to willfully (i) fail to report complete and accurate information on the report; (ii) fail to timely update the report with changes in beneficial ownership information; (iii) provide false or fraudulent beneficial ownership information; or (iv) provide a false or fraudulent photo identification required to be included with the report. Penalties include both criminal and civil monetary penalties and possible prison time, generally $500 per day the violation continues, up to $10,000, and/or imprisonment for up to two (2) years. This applies to the senior officials responsible for reporting, in addition to the reporting companies themselves.

• There is a “safe harbor” for persons who do not have any knowledge that the report contained inaccurate information and the person voluntarily files a corrected report within 90 days after the original report was filed. However, the safe harbor will not apply to any person who knowingly files false or inaccurate information.

Conclusion:

We recommend each company subject to the CTA take this time to designate the person(s) who will be responsible for reporting, familiarize themselves with the required disclosures, and update internal procedures to ensure the information reported to FinCEN is current and accurate. Information and clarifying guidance around the CTA and necessary disclosures are also continuing to evolve, as FinCEN is still in the process of developing the BOSS system. Additionally, House of Representatives Bill HR 4035 and Senate Bill S 2623, both titled “Protecting Small Business Information Act of 2023,” have been introduced to delay the effective date of the reporting requirements to allow additional time for small businesses to learn about and better understand their new reporting requirements. However, as of the date of this Newsflash, neither bill has passed yet. Lastly, FinCEN has issued a warning that it has been notified of recent fraudulent attempts to solicit information from individuals and entities who may be subject to reporting requirements under the Corporate Transparency Act.

More information about the new reporting requirement can be found on FinCEN’s website at https://www.fincen.gov/boi. If you have any questions about this information, please do not hesitate to contact John W. Campbell, Jr., Esquire at jcampbell@satclaw.com.