The Corporate Transparency Act established a pathway for the Financial Crimes Enforcement Network (FinCEN) to develop standardized reporting and disclosure of beneficial ownership information. It aims to guard against money laundering and disrupt circumvention maneuvers, terrorism financing and other forms of illicit financing.
FinCEN has issued final regulations for how businesses must comply. Here’s what businesses must know before the rules take hold in 2024.
This is an Opinion
The act applies to all corporations, limited liability companies, partnerships or other similar entities either created through a U.S. state filing or formed under the law of a foreign country and registered to do business in the U.S. It requires them to report to FinCEN the identities of all company “beneficial owners” — the natural persons holding at least 25% of the company’s equity interests or who otherwise have substantial control over the company. Any individual could exercise substantial control over a company through board representation, ownership or control of a majority of voting rights or any other contract or arrangement.
Reporting companies must also identify the “company applicant” — the natural person who filed the company’s formation documents.
Certain types of U.S. businesses are exempt from these new FinCEN reporting requirements:
► Categorical exemptions are established for certain entities including banks or bank holding companies; federal or state credit unions; government entities; entities having publicly traded securities or that are otherwise registered with regular reporting requirements to FinCEN, the Financial Industry Regulatory Authority (FINRA) or the Securities & Exchange Commission; insurance companies; public accounting firms; public utilities; 501(c) recognized tax-exempt entities; and tax-exempt political organizations.
► Qualified reporting exemptions are established for large operating companies, which must have a physical office in the U.S., more than 20 U.S.-based full-time employees and more than $5 million in gross receipts or sales in the U.S. as reported on prior year federal income tax returns.
FinCEN may disclose beneficial ownership information upon request from federal law enforcement, national security agencies, a nonfederal law enforcement agency with court authorization, a federal agency coordinating with foreign agencies under specified requirements and to financial institutions with company consent.
If a company fails to report to FinCEN as required, its beneficial owners and senior officers can be held individually liable and may be subject to both civil and criminal penalties.
The act’s rules become effective on Jan. 1, 2024. Unless a reporting exemption applies:
► All companies formed or registered to do business in the U.S. after Jan. 1, 2024, must report to FinCEN the identities of the company applicant(s) and all beneficial owners.
► All existing companies formed or registered to do business in the U.S. before Jan. 1, 2024, will have until Jan. 1, 2025, to report the company’s current beneficial owners. But existing reporting companies won’t need to identify the original company applicant.
► And after Jan. 1, 2025, all companies formed or registered to do business in the U.S. must report to FinCEN any changes to company beneficial ownership within 30 days of such a change becoming effective.
Initial reports to FinCEN must include the following: full legal name and any trade name, address of principal place of business (if in the U.S.) or the primary location in the U.S. where the reporting company does business, jurisdiction of formation and taxpayer ID number.
The following information must be reported for each beneficial owner and company applicant: full legal name, date of birth, current residential address and unique identifying number from a government-issued identification document.