Corporate Transparency Act Guidance – Corporate and Company Law

Background

The Corporate Transparency Act (the CTA) is a new federal law
that creates significant federal reporting requirements for most US
companies, including corporations, partnerships, and LLCs. On
January 1, 2021, Congress enacted the CTA as part of the Anti-Money
Laundering Act of 2020.¹ On September 30, 2022, the
Department of the Treasury’s Financial Crimes Enforcement
Network (FinCEN) finalized the reporting requirements to implement
the CTA² and published guidance on the
final regulations.³

The CTA and reporting requirements aim to combat money
laundering, tax fraud, and other corrupt activity by using
corporate structures to obfuscate the perpetrators’
identities.⁴ The rules will become effective
on January 1, 2024 for new companies and January 1, 2025 for
existing companies.

This alert (1) provides a basic overview of the CTA and its
implementing regulations as they exist today and (2) raises various
issues, questions, and nuances regarding the real world application
of the CTA in real estate, corporate, tax, private client, finance,
and other transactional practices.

Overview of CTA

Who is required to report? “Reporting
companies” (i.e., any domestic entity created by, or any
foreign entity registered to do business in any state by, the
filing of a document with the secretary of state or similar office)
are required to directly file reports with FinCEN reporting basic
information detailed below,⁵ including information about
their (1) “beneficial owners” (i.e., any individual
who directly or indirectly (a) exercises substantial control of a
reporting company or (b) owns or controls at least 25 percent of
the ownership interest in a reporting company)⁶
and (2) “company applicants” (i.e., certain
individuals who file or help to prepare the document that creates
the reporting company or qualifies it to do business).⁷

What information is required to be reported? A
reporting company must report: (a) its full legal name, (b) any
trade name, (c) its current street address, (d) its jurisdiction,
and (e) its IRS taxpayer identification number.⁸ In addition,
reporting companies must report the following information about
their beneficial owners and company applicants: (a) their full
legal name, (b) date of birth, (c) current residential address, (d)
a non-expired US identification document or, if not available, a
foreign passport, and (e) an image of the document used in (d).⁹

Are there exemptions? The rules identify quite
a few¹⁰ types of entities that are
exempted from the reporting requirements, primarily entities that
are already subject to regulation, including, for example, publicly
traded companies that have certain other reporting requirements.
Also exempted from reporting requirements are “large operating
companies” that employ more than 20 employees on a full-time
basis in the US, have an operating presence at a physical office in
the US, and generate more than $5 million in annual gross receipts
or sales. While the list of exemptions is broad, it will capture a
relatively small portion of US companies, and most will be required
to adhere to the CTA’s requirements.

When to file initial reports? For reporting
companies created on or after January 1, 2024, reports must be
filed within 30 days of (i) receipt of notice that the entity is
effective or registered to do business or (ii) when the secretary
of state or similar office provides public notice that the
reporting company was created or registered to do business,
whichever is earlier.¹¹ For reporting companies
created before January 1, 2024, reports must be filed by January 1,
2025.¹²

When to update initial reports? Updates must be
made within 30 days after (a) there is a change to previously
reported information or (b) a reporting company becomes aware that
previously reported information is inaccurate.¹³

Who is liable for willfully providing false beneficial
ownership information or a failure to report? Reporting
companies, beneficial owners, and company applicants are all
potentially liable for willfully providing false beneficial
ownership information. The regulations include intentionally broad
language that states “any person” who causes the
reporting company to fail to report, or is a senior officer of the
reporting company at the time of the failure to report, may be
personally liable for reporting violations.¹⁴

What are the penalties for failing to report or
inaccurate reporting? Civil penalties include a fine of
$500 per day for each day a violation is outstanding, up to a
maximum of $10,000. Criminal penalties include a maximum of two
years imprisonment.¹⁵

Practice Issues and Questions To Consider

Although the CTA and the applicable rules appear comprehensive,
implementing the rules will require reporting companies to grapple
with many currently unclear nuances under those rules as well as to
implement procedures to insure proper compliance. The following are
just a few of the questions and issues to consider:

• If a single purpose entity (an SPE) is directly or indirectly
  controlled or wholly owned by an exempt entity, such as a
  “large operating company,” will the SPE qualify as a
  “subsidiary” of an exempt entity and, as such, qualify
  for its own exemption from reporting requirements?
  

  • Does joint venture ownership change this analysis where only
    one of the upstream venturers is an exempt entity?

  
  

  • Does it matter if the analysis is done under a control vs.
    ownership test?




• In determining the identity of all beneficial owners, what is
  the impact of a preferred return or promote style economic
  waterfall? Similarly, what is the impact of other typical business
  structures such as (i) options to crystallize promote, (ii)
  buy/sell rights, and/or (iii) rights of first refusal?




• What new provisions should joint venture agreements include so
  that the manager has sufficient information to comply with the
  CTA’s reporting requirements?




• Is there a hidden risk to the appointment of certain types of
  officers (such as a “president”) at lower-tier entities,
  given the potential liability of senior officers?




• Could atypical loan covenants or other lender conditions
  disqualify a mortgage lender or mezzanine lender from the
  “creditor” exemption and thus make such lender(s) a
  beneficial owner of their borrower for purposes of the CTA?

Privacy, Security, and Authorized Access to Reported
Information

FinCEN has acknowledged public concerns regarding access to and
protection of disclosed beneficial owner information. As discussed
in a prior Advisory, on December 16, 2022, FinCEN
proposed regulations governing the storage of reported information
in secure non-public databases maintained by FinCEN.¹⁶
The proposed regulations also address the accessibility of these
databases by certain governmental authorities and authorized
financial institutions.

Next Steps

In preparation for the effectiveness of the CTA, companies
should start now to (i) familiarize themselves with the
applicability and requirements of the CTA and (ii) assess and
establish internal protocols for determining the identity of
beneficial owners and for regularly collecting and updating the
required reporting information.

Footnotes

1. See 31 U.S.C. § 5336.

2. See 31 C.F.R. § 1010.380 (2022).

3. See Beneficial Ownership Information
Reporting Requirements, 87 Fed. Reg. 59498 (Sept. 30, 2022).

4. Id.

5. See 31 C.F.R. § 1010.380(c)(1) (2022).

6. See id. § 1010.380(d).

7. See id. § 1010.380(e).

8. See id. § 1010.380(b)(1)(i).

9. See id. § 1010.380(b)(1)(ii).

10. Specifically, the CTA identifies 23 excluded entities
that do not need to report to FinCEN, see id. 31 C.F.R.
§ 1010.380(c)(2)(i)-(xxiii).

11. See id. § 1010.380(a)(1).

12. See id. § 1010.380(a)(1)(iii).

13. See id. § 1010.380(a)(2).

14. See 31 U.S.C. 5336(h)(1); see also
31 U.S.C. 5336(g)(4).

15. See 31 U.S.C. 5336(h)(1).

16. See Vol. 87, No. 241 of the Federal
Register.