The Corporate Transparency Act (CTA) is a new law coming into effect January 1, 2024, that was signed into law as part of the National Defense Authorization Act for Fiscal Year 2021, and tasked the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) with implementation through regulations. The CTA aims to enhance corporate transparency in an effort to prevent and combat illicit financial activities, such as money laundering and tax evasion, discouraging the use of shell corporations as a tool to disguise and move illicit funds.
The CTA implements reporting requirements for limited liability companies (LLCs), corporations, and other business entities that have never had to report such information previously. While the CTA primarily targets businesses’ legal and financial obligations, it is important for our readers to understand the reporting changes and requirements to ensure compliance as well as to recognize how the CTA could affect trust and estate planning.
Reporting Requirements:
Under the CTA, certain covered entities are required to report beneficial ownership information to FinCEN. The CTA applies only to certain domestic companies and foreign entities that are registered to do business in the U.S, termed as Reporting Companies. A Reporting Company is defined as a corporation, limited liability company, or other similar entity that is:
- Created by the filing of a document with a secretary of state or similar office under the law of a U.S. state or Indian Tribe, or
- Formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or a similar office under the laws of a U.S. state or Indian Tribe.
Beneficial Owners:
A Beneficial Owner is an individual who directly or indirectly – through any contract, arrangement, understanding, relationship, or otherwise:
- Exercises substantial control* over the entity, or
- Owns or controls 25% or more of the ownership interests of a covered entity.
* Substantial control is defined as: serving as a senior officer of the reporting company; having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body); or directing, determining, or having substantial influence over important decisions made by the reporting company.
What is Reported?
In general, the CTA requires a reporting company to disclose specific information regarding (1) the company itself, (2) its beneficial owners, and (3) the company applicants to FinCEN, including:
- Full legal name
- Date of birth
- Current address
- Unique identifying number and the issuing jurisdiction
- If an individual has obtained a FinCEN identifier and provided that FinCEN identifier to a reporting company, the reporting company may include the FinCEN identifier in its report in lieu of the information required for that individual.
Exemptions:
Some entities are exempt from reporting including publicly traded companies, certain financial institutions, and entities with a physical presence and substantial operations in the United States.
- Financial institutions or certain issuers of securities in heavily regulated industries (e.g., banks, credit unions, broker-dealers, money services businesses registered with FinCEN, and issuers registered with the U.S. Securities and Exchange Commission).
- “Large operating companies” (defined in the final rule as an entity that employs more than 20 full-time employees in the U.S., has an operating presence at a physical office within the U.S., and filed a federal income tax or information return in the U.S. for the previous year demonstrating more than $5,000,000 in gross receipts or sales).
- Legal entities, including certain trusts, will be excluded to the extent that they are not created by the filing of a document with a secretary of state or similar office.
Penalties for Non-Compliance:
The CTA establishes penalties for non-compliance, including civil and criminal penalties. Failure to report accurate and timely information can result in fines and even imprisonment.
- Any person who provides false information, or fails to report complete or updated information, is subject to a civil penalty of not more than $500 for each day that the violation continues, and may face fines not more than $10,000, imprisonment for not more than two years, or both.
- Separate from the CTA, persons could face criminal liability under the federal criminal code, which prohibits knowingly and willfully providing false information or concealing a material fact to any of the three branches of the federal government.
Privacy Protections:
The CTA includes provisions to protect the privacy of beneficial owners’ personal information. Access to this information is limited to authorized government agencies for law enforcement and national security purposes.
- The CTA mandates that such information will be available only to authorized government authorities, subject to effective safeguards and controls.
- The U.S. Department of the Treasury will maintain the information in a secure, nonpublic database. Importantly, however, the collected information may also be available to financial institutions so that they can confirm beneficial ownership information provided by their customers.
While trust companies themselves are not directly impacted by the CTA, clients who use trusts as part of their holding company structure may be affected. This increased transparency may influence how individuals and entities structure their trusts and holding companies for privacy and asset protection purposes. For more information on the CTA and its implications for trust and estate planning, please contact us via our contact page or by calling (605) 224-9189.
