The Corporate Transparency Act ("CTA") is new legislation that requires information to be filed on individuals who are beneficial owners of most US entities and non-US entities formed or registered to do business in a US state. The legislation also requires information to be filed on individuals involved in forming an entity and those that own and control it (the senior officers).
The CTA represents a significant effort by US lawmakers to identify, on a major scale, the beneficial owners of businesses in the US, aligning with similar practice in other countries such as Canada, the UK and across the EU, generally bringing the US into compliance with international anti-money laundering standards in this area.
Institutions would be well advised to work with their US counsel to gain a good understanding of this far-reaching legislation. From the perspective of a sophisticated US entity management provider, with a major global network, the Maples Group shares in this article, our initial thoughts on the practical implications of this legislation on entity management.
What information is required and when?
Final rules published under the CTA by the Financial Crimes Enforcement Network ("FinCEN") on 30 September 2022, mean institutions should be prepared to either identify an exemption or disclose personal information about their Beneficial Owner(s) who are individuals in respect of US and non-US entities. Regulations for new formations take effect on 1 January 2024, so existing reporting companies have an additional year from the effective date, meaning an initial Beneficial Ownership Information report ("BOI report") must be filed with FinCEN by 1 January 2025. Reporting companies created on or after 1 January 2024, will have 30 calendar days to file their initial BOI report.
All domestic and foreign entities, created or registered to do
business in the US and deemed reporting companies under the CTA,
are required to file a BOI report. Certain exemptions include large
operating companies and financial institutions already required by
law to file beneficial ownership information, however most entities
will be impacted. This includes, but is not limited to, companies,
limited liability companies, limited liability partnerships,
limited partnerships and business trusts.
The CTA is also concerned with individuals who own and control entities in the US. Individuals, who directly or indirectly own or control at least 25% of a reporting company, are deemed to have an "ownership interest", while individuals who can direct or influence important decisions will have "substantial control". Essentially, any individual meeting either definition, in addition to other 'catch-all' provisions, is considered a beneficial owner and subject to the CTA requirements. For the avoidance of doubt, the substantial control test will typically catch senior officers of entities.
All related filings are required within 30 days of formation or a material change in beneficial ownership. The consequences of failing to comply are civil penalties of up to US$500 every day the violation continues and criminal fines up to US$10,000 and / or imprisonment for up to two years. Given the scope and consequences of the CTA, institutions should be considering ahead of the 1 January 2024 implementation date, how it may practically affect their entity management practices. Set out below are five initial considerations, based on our analysis, which could be important.
1) How robust are your entity management procedures to identify exemptions and assist with filing requirements?
According to FinCEN, at least 32.6 million reporting companies
will exist when the final rules become effective, so the CTA will
have a major impact. Reporting companies are responsible for
accurate and timely filings of their information, both at formation
and throughout the life of an entity.
Reviewing your current book to identify all reporting companies, beneficial owners and company applicants is a critical first step. Processes should be put into place now to collect and track beneficial owners to ensure accurate and timely filings. Having the correct documentation on hand, or with a trusted service provider prior to formation, will be essential to file the initial BOI report within 30 calendar days. Any delays in obtaining personal information or documents from just one company applicant or beneficial owner to an entity may result in missed CTA deadlines.
Changes to any information in a BOI report will require an updated filing within 30 calendar days, with potentially thousands of lines of data needing to be tracked. Also, unlike FinCEN's 2016 Customer Due Diligence Rule, there is no cap to the number of beneficial owners who must be reported under the CTA.
The Maples Group has extensive experience in the global entity management business and with all relevant federal and state filing requirements. By establishing protocols with your organisation, our team of experienced professionals can help alleviate and prepare CTA filings on your behalf.
2) Identify non-US Firms, Entities and Individuals in Scope
The CTA also introduces challenges for non-US firms, entities
and individuals who fall into scope of the filing requirements
(i.e. if the entity is registered to do business in a US state).
Reporting companies without a US Taxpayer Identification Number
(TIN) must instead provide a foreign TIN, and where that cannot be
obtained, costly time delays may occur. Whilst we think this
scenario will be uncommon, it should be dealt with well in advance
of the effective date in order to avoid any disruption to
Additionally, US entities which do not have a "responsible party" (as defined by the IRS) with a US TIN (i.e. if all senior officers are non-US persons), must apply for an Employer Identification Number ("EIN") from the IRS via fax. Due to processing times when applying by fax, EINs may not be issued before the 30-calendar day deadline required for compliance with the CTA.
Where beneficial owners have both US and non-US ID, the CTA is clear that a foreign passport may only be used if the other forms of ID are not available. Furthermore, reporting companies may not use a PO Box, or the address of a company formation agent or other third party as its address. Due to the high cost and amount of time involved in establishing a primary place of business in the US just to comply with the CTA, such steps should be carefully considered, with the effective date only 15 months away. With a presence in the US, the Maples Group can provide bespoke solutions that can assist your reporting companies in meeting the CTA requirements.
3) Individuals Will Need FinCEN Identifiers
Under the CTA, individuals may obtain a FinCEN Identifier as an
alternative to providing BOI. While this will make the reporting
process easier, individuals will still be responsible for
submitting updates or corrections to their FinCEN ID on the same
deadlines as a reporting company.
Further clarity is expected from FinCEN on the ID application process, in particular whether agents may apply on behalf of individuals; however, it will be imperative for organisations to track FinCEN IDs. A clear process should be in place ahead of the deadline to ensure all relevant individuals are making the necessary updates to FinCEN applications within 30 calendar days.
4) New Formations and "Shelf" Entities
Historically, certain US entities can be formed with operating agreements or other constitutional documents being put in place at a later date. Whilst this isn't technically changing as a result of the CTA, practically, once the CTA becomes effective, it may be necessary to have an initial operating agreement in place shortly after formation in order to confirm information needed to meet the 30-calendar day filing deadline. This could impact current processes for forming new entities, including "shelf entities" formed for future use. Having a partner that is familiar with the formation process across the US and can provide bespoke solutions that meet your business needs, can provide you with the flexibility needed after the CTA goes into effect.
5) Do you have a reliable company applicant or filing agent to assist with the CTA's obligations?
Reporting companies, and any individuals filing on their behalf,
are required to certify that BOI reports and certifications are
"true, correct, and complete". While an individual or an
agent may file a report on behalf of a reporting company, the
reporting company is ultimately responsible, so any service
provider used as an agent must be reliable and trusted to provide
accurate information to FinCEN.
It is also important to understand who is considered to "direct or control" the company applicant. A company applicant is defined by the CTA as (i) the individual who directly files the document to create or register the reporting company, and (ii) the individual primarily responsible for directing or controlling such filing if more than one individual is involved in the filing. Without a process in place for new formations, including identifying both types of company applicant, there is a risk of being out of compliance with the CTA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.