As of January 1, 2024, the Corporate Transparency Act (CTA) is effective, impacting millions of entities. On September 30, 2022, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) published a final rule to implement the beneficial ownership information (BOI) reporting provisions of the CTA, which was enacted as part of the Anti-Money Laundering Act of 2020 within the National Defense Authorization Act for Fiscal Year 2021.  Note that since the final rule was published, which was the subject of a prior blog post, FinCEN has made several modifications.

The CTA is intended to protect US national security and the US financial system by preventing and combatting fraud, corruption, money laundering, and terrorist financing, among other illicit activities, by parties seeking to hide money and other assets in the United States via shell companies and other opaque legal structures. The law aims to provide essential information to national security, intelligence, and law enforcement agencies by requiring certain business organizations and entities to report information to FinCEN about the beneficial owners and controllers of such organizations and the individuals who have filed an application with specified government authorities to form the entity or register it to do business. The FinCEN rule implementing the CTA’s BOI reporting provisions describes who must file a beneficial ownership information report, what information must be reported, and when a report is due.

The CTA has widespread application, and it is expected that an estimated 33 million entities are now subject to the new BOI disclosure rule.

Despite the fact that Treasury touts the modest cost of preparing and submitting an initial BOI report, it seems certain that the cost of compliance will increase substantially for many companies required to file BOI reports due to the parameters of the law’s enforcement mechanisms, which target individuals with potential civil and criminal penalties for willful failures to report. This includes “senior officers”, a very broadly defined category of company officers not limited by official title, even if such persons lack any specific knowledge of the reporting failure.

“Reporting Companies”

With respect to US-organized entities, “reporting company” is defined to mean a corporation, limited liability company (LLC), or any other entity created by filing a document with the secretary of state of any state or a similar office of a state or tribal authority. Subject to the applicability of specific exemptions, reporting companies include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and LLCs.  The preamble to the FinCEN rule states that general partnerships, sole proprietorships, and certain types of trusts which are not created through the filing of a document with a secretary of state would not be reporting companies.

Foreign reporting companies include corporations, LLCs, and other entities formed under the laws of a foreign country that are registered to do business in any US state or tribal jurisdiction by filing a document with the secretary of state of any state or a similar office.

In line with the exemptions prescribed in the CTA, twenty-three types of entities are exempt from the reporting rules, including publicly traded companies; larger private companies meeting certain requirements with respect to number of employees, revenue, and physical presence in the United States; and tax-exempt entities.  Many types of financial institutions already subject to FinCEN regulation are also exempt from the requirements.

Note that if an entity previously qualified for an exemption but no longer qualifies, then a BOI report must be filed within 30 days of the date on which such entity stopped qualifying for the exemption.

“Beneficial Owners”

Reporting companies must report “beneficial owners,” which includes any individual who directly or indirectly either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company.

A reporting company may be structured such that multiple individuals exercise essentially equal authority over the entity’s decisions. Exercising substantial control or owning ownership interests through intermediate entities, conferring special rights in connection with a financial arrangement, issuing puts, call, straddles, or other options, and other circumstances may result in a multitude of individuals who may need to be reported as beneficial owners.

Individuals with “substantial control” are defined broadly to include: (1) senior officers of the reporting company (which includes the president, CFO, general counsel, CEO, COO, and any other officer who performs similar functions regardless of title); (2) individuals with authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); (3) individuals able to direct, determine, or have substantial influence over important decisions made by the reporting company; and (4) individuals with any other form of substantial control over the reporting company. 

The CTA provides standards and mechanisms for determining whether an individual owns or controls 25 percent of the ownership interests of a reporting company, including rules for aggregating all of an individual’s different types of ownership interests. The law captures equity in the reporting company as well as other types of interests, such as capital or profits interests and convertible interests, warrants, rights, or other options or privileges to acquire equity, capital, or other interests.  Direct and indirect interests include joint ownership interests, interests held through another individual acting as nominee, custodian, or agent, and interests held through ownership or control of intermediary entities.

With respect to trusts, reportable ownership interests include those of a trustee or any other individual with authority to control or dispose of trust assets; a beneficiary who is the sole permissible recipient of the trust’s income and principal or has a right to withdraw substantially all of the assets from the trust; and a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.

The law exempts certain individuals, including minor children (provided the information of the child’s parent or guardian is reported) until they reach the age of majority; individuals whose only interest is through a right of future inheritance; a creditor of the reporting company (unless perhaps if the rights of the creditor amount to an equity interest); an individual acting as nominee, intermediary, custodian, or agent on behalf of another individual (such as a tax lawyer doing work for a reporting company, including when such work is conducted under the authority of a power of attorney); and employees (other than senior officers) who exercise substantial control solely due to their employment status.

“Company Applicants”

Reporting companies created or registered on or after January 1, 2024, must also report “company applicants,” which is defined to include (1) the individual who files the document that forms the entity (or in the case of a foreign reporting company, the individual who files the document that first registers the entity to do business in the United States) and (2) the individual who is primarily responsible for directing or controlling the filing of the formation/registration document by another individual.

Reporting companies existing or registered prior to January 1, 2024, are not required to identify and report company applicants, but must still identify and report beneficial owners.

Information to Be Reported

In addition to identifying information of the reporting company itself, the reporting company must provide, for each beneficial owner and company applicant required to be identified and reported, the (1) name, (2) birthdate, (3) address (in most cases, a residential street address), (4) a unique identifying number and issuing jurisdiction from an acceptable identification document (such as a non-expired passport or a US driver’s license or other state issued identification card), and (5) an image of such identification document.

Reporting companies and individuals may obtain “FinCEN identifiers” by submitting an application to FinCEN containing the information that a company would otherwise be required to provide. Individuals and entities with FinCEN identifiers may use that number for future FinCEN BOI reports, rather than providing the full suite of required information in each report.

When Must Reports be Filed?

A reporting company created or registered before January 1, 2024, will have until January 1, 2025, to file its initial report, while a reporting company created or registered between January 1, 2024, and January 1, 2025, must submit its initial report no later than 90 days after the date it receives actual notice that its creation or registration has become effective (or, if earlier, the date on which a secretary of state or similar office first provides public notice of the reporting company’s formation or registration).  Starting on January 1, 2025, a reporting company will be required to submit its initial report no later than 30 days after the date it receives notice that its creation or registration has become effective.

Once the initial report has been filed, both existing and new reporting companies will have to submit updates within 30 days of a change in the required information previously submitted to FinCEN concerning the reporting company or its beneficial owners.  (Changes to previously reported information concerning a company applicant do not trigger the obligation to file an updated report.)  Errors in reports filed must be remedied by filing a corrected report within 30 days of becoming aware or having reason to know of inaccuracies in earlier reports.

Penalties for Reporting Violations

Per the framework set out by the CTA, willful reporting violations – namely, providing false or fraudulent BOI to FinCEN or failing to report complete or updated BOI to FinCEN as required under the law – carry potential civil penalties of up to $500 per day that the violation continues or has not been remedied and criminal penalties of up to a $10,000 fine and up to 2 years in prison.

The CTA provides that penalties for reporting violations fall principally on individuals, not the reporting companies. Notably, in the case of failures to report complete or updated BOI for a reporting entity, this covers “senior officers” of the entity – a very broadly defined category of company officers, which includes the president, CFO, general counsel, CEO, COO, and any other officer who performs similar functions regardless of title – even if such persons lack any specific knowledge of the reporting failure. Such a penalty regime, coupled with the certifications on the reports and the continuing obligation to update the reporting promptly upon any change of relevant facts (such as a change in ownership or change in officer/board make-up or a reorganization of the company) constitutes a substantial new regulatory enforcement risk.

Individuals who provide false or fraudulent information to FinCEN indirectly, such as by providing such information to a reporting company for inclusion in a BOI report to FinCEN, can also be held liable for reporting violations.

The manner in which FinCEN and DOJ elect to pursue reporting violations, and the ultimate penalties assessed, will warrant careful monitoring. The preamble to the CTA states that the assessment of potential violations will depend on all the facts and circumstances, but “as a general matter, FinCEN does not expect that an inadvertent mistake by a reporting company acting in good faith after diligent inquiry would constitute a willfully false or fraudulent violation.”

How to File

Steptoe can help.  We can advise you as to whether an entity is a “reporting company” or exempt from the BOI reporting requirements and what information should be included in a BOI report.  We can also advise you on the preparation and filing of initial, corrected, or updated BOI reports.  FinCEN expects the vast majority of filings to be done electronically through the BOI E-Filing System found on the FinCEN website launched on January 1, 2024.  Third-party vendors offer filing services, which prompt you to compile the necessary information and submit the report to FinCEN.  It is important to note, however, that the initial and ongoing reporting obligations rest with each reporting company, regardless of any assistance received in the formation of the entity by Steptoe or any other firm.