Included as part of the National Defense Authorization Act (NDAA) enacted on January 1, 2021, the Anti-Money Laundering Act of 2020 (AMLA) represents the most significant amendments to the U.S. anti-money laundering (AML) regime in more than two decades. The primary goal of AML laws is to prevent nefarious actors from exploiting the financial system to further their illicit acts. Corporate structures can be a part of this problem by enabling bad actors to conceal illegal sources of funds and launder money through legitimate financial institutions. One of the most significant new additions to the AMLA, the Corporate Transparency Act (CTA) seeks to detect and prevent money laundering by requiring greater transparency in the chain of corporate ownership. In enacting the law, Congress noted that “most or all States do not require information about the beneficial owners of the corporations, limited liability companies, or other similar entities formed under the laws of the State” [NDAA section 6402(2)].

The CTA seeks to fill those gaps by creating a new system for reporting beneficial ownership information (BOI), to be implemented through regulations created by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). On September 30, 2022, FinCEN issued a final rule governing the beneficial ownership reporting system, although some aspects of the CTA’s mandate will be issued in future rules. [Other rulemakings will “(1) establish rules for who may access BOI, for what purposes, and what safeguards will be required to ensure that the information is secured and protected; and (2) revise FinCEN’s customer due diligence rule following the promulgation of the BOI reporting final rule.” FinCEN, “Beneficial Ownership Information Reporting Rule Fact Sheet,” Sep. 29, 2022, https://www.fincen.gov/beneficial-ownership-information-reporting-rule-fact-sheet.]

The BOI reporting scheme has sparked anxiety among business owners and advisors with its complex and far-reaching requirements, which will impact millions of companies when the rule goes into effect on January 1, 2024. This article will provide a brief overview of the main provisions of the CTA, to better enable companies to prepare to meet its requirements in the coming months.

Reporting Companies

The CTA requires “reporting companies” to submit reports of their beneficial ownership to FinCEN. Under the law, a domestic reporting company is: “(A) A corporation; (B) A limited liability company; or (C) Created by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe” [31 CFR section 1010.380(c)(1)(i)]. A foreign reporting company is: “(A) A corporation, limited liability company, or other entity; (B) Formed under the law of a foreign country; and (C) Registered to do business in any State or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a State or Indian tribe” [31 CFR section 1010.380(c)(1)(ii)].

Although these definitions are very broad and initially seem to apply to most companies doing business within the United States, there are 23 exceptions that significantly narrow the subset of entities required to file beneficial owner reports. This article will not go into detail on each exception, but among the larger carve-outs are those for: 1) issuers of securities regulated by the SEC; 2) government authorities; 3) regulated financial services and investment companies; 4) tax-exempt entities; 5) large operating companies; and 6) inactive companies [31 CFR section 1010.380(c)(2)]. The exceptions for large operating companies and inactive companies are discussed below.

A primary theme among many of these exceptions is that entities which are already regulated by other government bodies need not be subject to additional reporting requirements under the CTA. By creating such exceptions, Congress appears to have decided that existing regulatory regimes are sufficient to prevent money laundering without beneficial ownership reports. But one significant exception falling outside this rationale is that large operating companies are also exempted from the reporting requirement. A large operating company is defined as an entity that: 1) employs more than 20 full-time employees in the United States; 2) files federal income tax returns reporting more than $5 million in gross receipts or sales; and 3) has a physical office in the United States [31 CFR section 1010.380(c)(2)(xxi)]. In effect, this exception means that the CTA is largely a law geared towards small businesses.

One other large and important exception is that inactive companies are also excluded from the definition of reporting companies. Although this may seem obvious, the requirements to qualify as an inactive company are numerous, and all of the criteria must be met. An inactive company is one that was: 1) in existence on or before January 1, 2020 (i.e., the date of enactment of the CTA); 2) is not engaged in active business; 3) is not owned by a foreign person; 4) has not experienced any change in ownership in the preceding 12-month period; 5) has not engaged in transactions greater than $1,000 in the preceding 12-month period; and 6) does not hold any assets [31 CFR section 1010.380(c)(2)(xxiii)].

As with many aspects of this complex law, the devil is in the details, and companies should be careful to read the requirements for each exception before concluding that they are not required to file a beneficial owner report. In particular, the exception for inactive companies might trip up business owners and advisors who do not ensure that they meet all of the rule’s strict requirements. For example, the exclusion of foreign-owned companies and the requirement that companies not have transferred funds greater than $1,000 in the preceding year could cause confusion for businesses who see that inactive companies do not have to file and assume that they fit that description.

Beneficial Owner Reports

Reporting companies that do not fall within one of the CTA’s 23 exceptions will be required to file a report with FinCEN starting January 1, 2024. Entities in existence before that date are required to submit an initial report within one year, and entities created after January 1, 2024 are required to submit an initial report within 30 days of their creation or registration [31 CFR section 1010.380(a)(1)]. That report will include basic information such as the company’s legal name, trade name, address, and Taxpayer Identification Number (TIN), as well as similar identifying information about the company’s “beneficial owners” and “company applicants” [31 CFR section 1010.380(b)(1)]. The CTA leaves it up to companies and their advisors to figure out who those individuals are. Although the CTA’s focus on small businesses means that this exercise might be simple for most reporting companies, determining company applicants and beneficial owners might prove a challenging exercise for companies with complex management structures.

The definition of a company applicant is fairly straightforward. For a domestic reporting company, the company applicant is the individual who files the document creating the company; for a foreign reporting company, the company applicant is the individual who files the document registering the business in the United States. In cases where more than one individual is involved in the creation of creation or registration of a company, the company applicant is defined as “the individual who is primarily responsible for directing or controlling such filing” [31 CFR section 1010.380(e)].

The definition of a beneficial owner, however, is more complex. The CTA defines a beneficial owner as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25% of the ownership interests of such reporting company” [31 CFR section 1010.380(d)]. Substantial control, in turn, includes anyone who:

A) Serves as a senior officer of the reporting company; B) Has authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); C) Directs, determines, or has substantial influence over important decisions made by the reporting company… or (D) Has any other form of substantial control over the reporting company. [31 CFR section 1010.380(d)(1)]

 

Although this definition is clear on the inclusion of some individuals, such as senior officers, companies may still face decisions about whether a particular person exercises substantial control or influence over the company.

As the effective date approaches and the regulations are implemented, further guidance will hopefully become available. For companies concerned about incurring the CTA’s steep penalties, however, it may be safest to take a broad view of beneficial ownership, reading the regulations’ complex definition in light of the CTA’s “basic goal of requiring a reporting company to identify the key individuals who stand behind the reporting company and direct its actions” (87 FR 59498).

Penalties

Failure to comply with the CTA’s requirements can result in both civil and criminal penalties. It is unlawful to “willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN… or to willfully fail to report complete and updated beneficial ownership information to FinCEN” [31 CFR section 1010.380(g)]. Violators may face a civil penalty of up to $500 per day for each day the violation continues and be fined up to $10,000, imprisoned for up to 2 years, or both [31 USC section 5336(h)(3)(A)].

Given the above, it seems that mere negligence in meeting the reporting requirements would not result in penalties. Furthermore, there is a safe harbor for companies who discover that they may have reported incorrect information on their initial report. The CTA proscribes that persons shall not be subject to the civil or criminal penalties above if they submit a report containing corrected information no later than 90 days after submitting the original (incorrect or incomplete) report. For the safe harbor to apply, the person must not have been acting to evade reporting requirements or had actual knowledge of the inaccurate information when submitting the original report [31 USC section 5336(h)(3)(C)].

Proceed Carefully

The new CTA is likely to impact millions of companies when it goes into effect on January 1, 2024. The law will require reporting companies to submit a report to FinCEN detailing their company applicants and beneficial owners. Yet the law’s definitions of reporting company and beneficial owner are complex and contain many exceptions and caveats. It is therefore imperative that companies and their advisors carefully read the regulation and analyze it in accordance with their own circumstances and the law’s basic purpose of preventing money laundering.

Ian Buksunski, JD, is an associate in the New York office of Kostelanetz LLP.
Abigail Burke, JD, is an associate in Kostelanetz’s Washington, D.C., office.