FinCEN Implements Reporting Requirements of the Corporate Transparency Act (CTA)

In an effort to combat transactions or activities conducted through corporate structures designed to evade detection across various jurisdictions, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) on September 29, 2022 issued final regulations, implementing reporting requirement of the Corporate Transparency Act (CTA), which was passed by Congress on December 11, 2020, as part of the National Defense Authorization Act for Fiscal Year 2021.

The CTA requires “reporting companies” to report information about their “beneficial owners” as well as “company applicants” - persons who are primarily responsible for directing or controlling the filing of the formation documents. FinCEN must maintain the reported beneficial ownership information in a confidential, secure, and non-public database.

Reporting Company

Under the final rules, a “reporting company” generally includes corporations, limited liabilities companies, or other entities that are:

(1) formed under the laws of a State in the United States; or

(2) formed under the laws of a foreign country that are registered to do business in a State in the United States.

Importantly, there are numerous and various significant exclusions from the definition of a “reporting company” including, but not limited to, the following:

• banks;
• public companies;
• brokers and dealers;
• investment advisers registered with the SEC;
• pooled investment vehicles operated or advised by advisers registered with the SEC;
• Section 501(c) organizations, political organizations, and charitable or split interest trusts;
• dormant companies; and
• entities that employ more than 20 employees on a full time basis in the United States that have filed previous year federal income tax returns of more than $5 million in gross receipts or sales.

Additionally, pooled investment vehicles operated or advised by registered investment advisers that are formed under the laws of a foreign country are required to report information of any individual who exercises substantial control over such pooled investment entity.

Beneficial Owner

For these purposes, beneficial owners include individuals who, directly or indirectly, own or control not less than 25 percent of the ownership interests of the entity or exercise substantial control over the entity.

Under the final rules, an individual exercises substantial control over a reporting company if the individual:

• serves as a senior officer of the reporting company;
• has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the reporting company;
• directs, determines or has substantial influence over important matters of the reporting company, including, for example, the reorganization, dissolution or merger of the reporting company, the selection or termination of business lines or ventures of the reporting company and the amendment of any governance documents of the reporting company, or
• has any other form of substantial control over the reporting company.

An “ownership interest” is defined as any instrument, contract, arrangement, understanding or mechanism used to establish ownership, such as any equity, stock, capital or profit interest. In turn, an individual may directly or indirectly own or control an ownership interest of a reporting company through any contract, arrangement, understanding or relationship, including, for example, joint ownership, certain trust arrangements and acting as an intermediary, custodian or agent on behalf of another.

The definition of “beneficial owner” does not include 1) minor children, 2) individuals acting as nominees, intermediaries, custodians or agents, 3) employees acting solely as employees and not as senior officers, 4) individuals whose only interest in a reporting company is a future interest through a right of inheritance, and 5) creditors of a reporting company.

Effective Date

The final rules will go into effect on Jan. 1, 2024. Reporting companies created or registered before Jan. 1, 2024, will have one year (until Jan. 1, 2025) to file their initial reports, while reporting companies created or registered after Jan. 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.

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