The New Corporate Transparency Act

Dear clients,

Due to a current upcoming legislative amendment to Title 31 Section 1010 of the Code of Federal Regulations, we would like to draw your attention to the most important changes and the imminent need for action.

On 1/1/2024, the Corporate Transparency Act (CTA) enters into force. The rule requires companies to submit an annual report of beneficial ownership information (BOI) to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). The information collected is stored in a private database maintained by FinCEN, which can only be accessed by federal agencies, state agencies with a court order, and financial institutions with the company’s consent.

I. Background

The primary purpose of the new rule is to protect the financial system of the United States from illegal activities such as money laundering, terrorist financing, tax fraud and other acts of foreign corruption that harm national security interests. The disclosure of ownership is intended to create transparency for law enforcement authorities in order to combat such illegal activities effectively and sustainably.

II. Companies subject to the reporting requirement

The duty to report applies to domestic (U.S.) and foreign companies. Any corporation, LLC, or similar company created by filing a document with the Secretary of State or a similar office under the laws of a U.S. state or territory or created under the laws of another country and registered by filing a document with the Secretary of State or a similar office under the laws of a U.S. state or territory for business in the United States is subject to the reporting requirement.

III. Exemptions from the reporting requirement

The rule provides for 23 exemptions. In general, companies that are already subject to strict federal supervision or are otherwise strictly regulated, i.e., whose beneficial ownership is already known, such as the Securities and Exchange Commission, banks, certain securities brokers, insurance companies, public utilities and tax-exempt companies, are exempt from the duty to report.

IV. Information to be reported

The BOI report to be submitted must include the following details:

1. Information about the reporting company

• Full legal name of the reporting company
• Any trade or company names (‘doing business as’ names) under which the company does business, whether formally registered or not
• Current street address of the company’s principal place of business
• Jurisdiction (federal state, province) of creation or registration
• Tax identification number (TIN) under the U.S. Internal Revenue Service, including an employer identification number) or, if a foreign company has not been assigned a TIN, tax identification number issued by the respective foreign state stating the name of that state

2. Personal information about all beneficial owners

• Full legal name
• Date of birth
• Current home address
• Unique identifying number and issuing authority for any of the following non-expired documents:
  – Passport
  – State ID document
  – State-issued driver’s license
• Copy of the identification document showing the unique identifying number

3. For companies created or registered on or after 1/1/2024:

• Personal information (see item 2) of all beneficial owners
• Personal information (see item 2) of the applicants at the reporting company

V. Definition of beneficial ownership

A beneficial owner is defined as a natural person who, whether directly or
indirectly,

• exercises substantial control over the reporting company by
  contract, agreement, arrangement or otherwise; or
• owns or controls at least 25% of the ownership interest in the reporting company.

A natural person exercises significant control over a reporting company
where said person

• is a senior executive,
• holds the power to appoint or remove officers or a majority of the board of directors or any similar body, or
• directs, determines or materially influences important decisions made by the reporting company, such as
  – the nature, scope and characteristics of its business, including the sale, lease, pledge or other transfer of material assets;
  – restructuring, dissolution or merger;
  – major expenses or investments, issuance of equity, assumption of significant debt or approval of the operating budget;
  – selection or termination of business units or undertakings;
  – executive compensation plans and incentive plans;
  – conclusion or termination, or fulfillment or non-fulfillment, of essential contracts; or
  – changes to key corporate governance documents;

or

• holds some other form of significant control over the reporting company.

The rule excludes the following from the definition of a beneficial owner:

a minor child if the information of the parent or guardian is reported;

a natural person acting as nominee, intermediary, trustee or agent of another natural person;

a natural person whose sole interest in the reporting company is based upon succession right; and

a creditor of a reporting company, unless the creditor otherwise meets the definition of beneficial owner.

VI. Definition of the applicant (company applicant)

An applicant is any individual who files an application for the creation of a corporation, LLC, or similar entity (in the case of a domestic (U.S.) reporting company) or who, in the case of a foreign reporting company, initially registers or files an application for registration of a foreign entity in the United States.
With respect to both a domestic and a foreign reporting company, the applicant is also the person primarily responsible for directing or controlling the filing if more than one person is involved in the filing of the document. No more than two individuals can be applicants.

VII. Deadlines for filing

Reporting companies already in existence or registered in the United States when the CTA comes into force on 1/1/2024 have until January 1, 2025, to submit their initial report. These companies are obligated to submit information solely concerning the reporting company and its beneficial ownership. Submission of information about an applicant is not required (see above). In this respect, all already-existing companies must submit their initial report no later than January 1, 2025.

Reporting companies created or registered on or after the effective date of the CTA on 1/1/2024 must file their report within 30 calendar days of receiving notice of the creation or registration of their company.

VIII. Changes to or correction of THE submitted information

If any information previously submitted to FinCEN about a reporting company or its beneficial ownership changes, the reporting company must submit an updated report within 30 calendar days of the occurrence of the change. There is no obligation to update changes regarding the company applicant.

If any of this information was imprecise/inaccurate at the time the report was filed and is still imprecise/inaccurate, the reporting company must file a corrected report within 30 calendar days of the date on which it becomes aware or has reason to know of the imprecise/inaccurate information.

If a reporting company subsequently qualifies for exemption from reporting after filing an initial report, this is regarded as a change to the information previously submitted to FinCEN requiring the company to file an updated report. In such a case, the updated report must indicate that the reporting company is no longer obligated to submit a report. Similarly, any company that was exempt from the reporting requirement but no longer meets the criteria for an exemption must file a BOI report within 30 calendar days of the date on which it no longer meets the criteria for an exemption.

IX. Penalties for reporting violations

It is unlawful for anyone to intentionally fail to report complete or updated beneficial ownership information to FinCEN or to intentionally provide or attempt to provide false or fraudulent details. These include submission of a false photograph or document for identification purposes. Violations are punishable by a civil penalty of up to $500 for each day the violation continues, and a criminal fine of up to $10,000, imprisonment of up to two years, or both. The CTA also provides for penalties for unauthorized disclosure of information.

X. More in-depth information 

The final regulations can be found in the Federal Register, 87 FR 59498, and can be accessed here: https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements.