ATTENTION ALL BUSINESS OWNERS
New Law Requires Businesses to Report Owners' Information to the Federal Government
A 2021 law will go into effect soon and be a literal game changer for small businesses. The Corporate Transparency Act, which passed Congress with bipartisan support, requires virtually every business in the country to report information about their "beneficial owners" to the federal government. Businesses that don't comply with the law could be subject to civil and criminal penalties, including fines of up to $10,000.
This requirement is separate from any reporting required under federal tax law. The Treasury Department will likely publish a form for businesses to use in complying with the CTA.
Does the Corporate Transparency Act apply to my business?
The CTA applies to "reporting businesses," which it defines as "a corporation, limited liability company, or other similar entity" which is formed under state law. This is a very broad definition, and unless it is narrowed, it will apply to almost every incorporated business in the country. FinCEN estimates that 32 million businesses will be affected.
According to FinCEN, the CTA will generally apply to all entities "created by a filing with a secretary of state or similar office," including:
- Limited liability partnerships
- Limited liability limited partnerships
- Business trusts
- Most limited partnerships
- Corporations
- LLCs
Other trusts are excluded unless they were created by filing with a secretary of state or similar office.
The law does include 23 exemptions, including "securities issuers, domestic governmental authorities, banks, domestic credit unions, depository institution holding companies, money transmitting businesses, brokers or dealers in securities, securities exchange or clearing agencies, other entities registered pursuant to the Securities Exchange Act of 1934 entities, registered investment companies and advisers, venture capital fund advisers, insurance companies, state licensed insurance producers, entities registered pursuant to the Commodity Exchange Act, accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax exempt entities, entities assisting tax exempt entities, large operating companies, subsidiaries of certain exempt entities, and inactive businesses."
The exemption for "large operating companies" generally applies to companies with more than 20 full-time employees, more than $5 million in gross receipts in previous years, and a physical presence in the U.S.
What information has to be reported?
The CTA requires businesses to report the identifying information, including the name, birthdate, address, and a unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document), for every "beneficial owner," meaning any person who owns at least 25% of the business or "exercises substantial control" over the business. You also have to report the identifying information for any "applicant," meaning any person who "files an application to form" the business.
The Treasury Department has identified three indicators of a person's "substantial control" of a company:
- Service as a senior officer of a reporting company
- Authority over the appointment or removal of any senior officer or a majority or dominant minority of the board of directors (or similar body) of a reporting company
- Direction, determination, or decision of, or substantial influence over, important matters affecting a reporting company
This is a huge change from the status quo. Most states do not require businesses to disclose their ownership, even on the documents they file when forming the business.
When do I have to make my report?
The CTA was enacted in January 2021, but its reporting requirements will not take effect until January 1, 2024. Companies formed before that date have until January 1, 2025 to file their intial reports. Companies formed after January 1, 2024 must file no more than 30 days after their registration.
Why is this necessary?
The reported information will be used by the Financial Crimes Enforcement Network (FinCEN) to create a databse of the beneficial ownership of U.S. companies. This database will be used by the federal government and financial institutions to help in the fight against criminal activity including money laundering, terrorist financing, and human trafficking. According to FinCEN's website,
Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the United States. Not only do such acts undermine U.S. national security, they also threaten U.S. economic prosperity: shell and front companies can shield beneficial owners’ identities and allow criminals to illegally access and transact in the U.S. economy, while disadvantaging small U.S. businesses who are playing by the rules. This rule will strengthen the integrity of the U.S. financial system by making it harder for illicit actors to use shell companies to launder their money or hide assets.
The CTA and its implementing regulations will provide essential information to law enforcement, national security agencies, and others to help prevent criminals, terrorists, proliferators, and corrupt oligarchs from hiding illicit money or other property in the United States:
Historically, the U.S. Government’s inability to mandate the collection of beneficial ownership information of corporate entities formed in the United States has been a vulnerability in the U.S. anti-money laundering/countering the financing of terrorism (AML/CFT) framework. As stressed in the 2022 National Strategy for Combating Terrorist and Other Illicit Financing (the ‘‘2022 Illicit Financing Strategy’’), a lack of uniform beneficial ownership information reporting requirements at the time of entity formation or ownership change hinders the ability of (1) law enforcement to swiftly investigate those entities created and used to hide ownership for illicit purposes and (2) a regulated sector to mitigate risks. This lack of transparency creates opportunities for criminals, terrorists, and other illicit actors to remain anonymous while facilitating fraud, drug trafficking, corruption, tax evasion, organized crime, or other illicit activity through legal entities created in the United States.
For more than two decades, the U.S. Government has documented the use of legal entities by criminal actors to purchase real estate, conduct wire transfers, burnish the appearance of legitimacy when dealing with counterparties (including financial institutions), and control legitimate businesses for ultimately illicit ends, and has published extensively on this topic to raise awareness. Recent geopolitical events have reinforced the threat that abuse of corporate entities, including shell or front companies, by illicit actors and corrupt officials presents to the U.S. national security and the U.S. and international financial systems. For example, Russia’s unlawful invasion of Ukraine in February 2022 further underscored that Russian elites, stateowned enterprises, and organized crime, as well as the Government of the Russian Federation have attempted to use U.S. and non-U.S. shell companies to evade sanctions imposed on Russia. Money laundering and sanctions evasion by these sanctioned Russians pose a significant threat to the national security of the United States and its partners and allies.
In a recent example of how sanctioned Russian individuals used shell companies to avoid U.S. sanctions and other applicable laws, Spanish law enforcement executed a Spanish court order in the Spring of 2022, freezing the Motor Yacht (M/Y) Tango (the ‘‘Tango’’), a 255-foot luxury yacht owned by sanctioned Russian oligarch Viktor Vekselberg. Spanish authorities acted pursuant to a request from the U.S. Department of Justice (DOJ) following the issuance of a seizure warrant, filed in the U.S. District Court for the District of Columbia, which alleged that the Tango was subject to forfeiture based on violations of U.S. bank fraud and money laundering statutes, as well as sanctions violations. The U.S. Government alleged that Vekselberg used shell companies to obfuscate his interest in the Tango to avoid bank oversight of U.S. dollar transactions related thereto.
Where can I find more information about the CTA's requirements?
The Treasury Department's final rule on CTA enforcement can be found here. If you have more questions about the CTA's impact on your business, it's a good idea to discuss it with your business's accountant or legal counsel.