The Corporate Transparency Act – the Good, the Bad and the Ugly

By Gisele M. Goetz – April 2023

In a wide-ranging bid to reduce money laundering, in 2020 Congress enacted the Corporate Transparency Act (codified at 31 U.S.C. 5336). The CTA will take effect on January 1, 2024. Non-exempt corporations, limited liability companies and limited partnerships are going to have to comply with the CTA by filing a beneficial ownership report. Any other entity created by filing with a state’s Secretary of State (or similar department) or a comparable Native American tribal organization is also required to comply.

With whom do you file?

You will file with the Financial Crimes Enforcement Network or FinCEN.

When do you file?

Entities created after January 1, 2024 file within 30 days of registering with the state or tribal organization. Existing entities have until the end of 2024 to file their beneficial ownership report.

Who is exempt from filing?

There are 23 separate exemptions, primarily for regulated organizations like charitable organizations, accounting firms, insurers, banks, and the big publically traded companies. The CTA targets the small entities.

Why regulate the small entities?

Money laundering generally involves small anonymous companies and not the big publically traded corporations, so that is where the CTA takes aim.

Who is “grandfathered” in?

If you (1) have more than 20 employees, and (2) filed tax returns showing more than 5 million in gross receipts, and (3) have a physical address in the U.S., then you may have initial exempt status but it is not permanent. You lose your exemption if you do not maintain all three of the threshold requirements all the time. For example, if you drop below 20 employees – you have to file within 30 days.

What do you have to do?

You must timely file your beneficial ownership report. Once you have filed your initial beneficial ownership report, you must file an amendment within 30 days of any change to any information previously submitted. The amendments are the ugly part.

What do you report?

Money laundering often uses small actors and dummy corporations, so the FinCEN wants to be able to see who set up the entity and who controls it. That means you report the company’s Applicant (the person who registered the entity and/or controlled the filing of the registration) and the company’s Beneficial Owners. Beneficial Owners include: (1) anyone who owns or controls at least 25 percent of the ownership interest of the entity, and (2) anyone who exercises substantial control over the company and its activities or decision-making. That would likely mean all senior officers, persons who control the appointment or removal of senior officers or the board, or persons who have substantial influence or control over important decisions. If challenged, it is a company specific factual inquiry.

For each “Applicant” and “Beneficial Owner” of your enterprise, you report (1) Full legal name; (2) date of birth; (3) current residential address, (4) a unique identifying number, (which can be from a U.S. passport, driver’s license, identification card, or passport of a foreign jurisdiction); and you also provide (5) a copy of the document you used to provide the unique identifying number.

What happens if you do not comply?

Daily fines can be assessed for inadvertent failure to file ($500 per day up to $10,000) and criminal sanctions for willful failures. Since this type of personal information should not be out in the public domain, there are also unauthorized disclosure or unauthorized use violations with monetary and criminal penalties. There are enhanced penalties when failure to comply is combined with other illegal activity (like, for example, money laundering).

What can you do to make sure you comply?

How do you make sure people tell you when they change their address or get a new driver’s license or passport? Make someone responsible and make sure they know what to report and when. Put compliance provisions in your initial bylaws or operating agreements or amend the existing governing documents. Require your fellow shareholders, members or partners to update the company when they move or get a new driver’s license or passport. Make sure someone knows to report new officers, board members, and shareholders who fit the criteria. Make sure you have the security in place to maintain the information or find an organization with the security in place to do it for you.

For more information see:

https://www.fincen.gov/search/node?keys=Corporate+transparency+Act

The American Law Institute Continuing Legal Education: The Corporate Transparency Act: What you Need to Know, February 10, 2023 Webcast Originally presented November 10, 2022.

Author: Gisele M. Goetz