Transparency in company operations. For businesses, investors, and legal practitioners, understanding the Act is vital not only for compliance but also to stay ahead in a market that increasingly values transparency and ethical business practices.
Background
The Corporate Transparency Act was enacted as part of the National Defense Authorization Act for Fiscal Year 2021. The Act primarily addresses concerns related to anonymous shell companies, which have, in the past, been utilized for money laundering, financing terrorism, and other illicit activities. One of the primary objectives of the Act is to make it more challenging for individuals to conceal their identities behind such entities.
Key Disclosure Provisions
Incorporator Reporting: The Act requires the individuals causing the company to be formed to disclose identifying information to the Financial Crimes Enforcement Network (FinCEN). This could be interpreted broadly to include different individuals in the chain of authority, including business owners, attorneys, paralegals, CPAs, etc. We will look for further guidance as the year end nears.
Beneficial Ownership Reporting: The Act mandates that certain U.S. businesses disclose their “beneficial owners” to FinCEN. A beneficial owner is defined as any individual who exercises substantial control over a company or owns 25% or more of its equity interests. By doing so, the Act seeks to ensure that the real people behind companies are known to regulators.
Limited Exemptions: The Act casts a wide net and applies to all entities that are required to file documents with a secretary of state or similar governing body. Established entities like publicly traded companies, banks, credit unions, and certain regulated investment companies are exempt, primarily because they already face strict regulatory reporting requirements.
Privacy Considerations: Although beneficial ownership information is to be reported to FinCEN, the data won’t be available to the general public. Access is restricted to specific law enforcement agencies for investigative purposes.
Penalties for Non-Compliance: The Act has teeth. Entities, or their agents, that purposely provide false information or fail to report beneficial ownership data can face civil penalties and even criminal charges that can lead to imprisonment.
Timeline for Reporting and Duties to Keep Current
One critical aspect to note about the Corporate Transparency Act is the timeline for reporting and the continuous obligation to update the information provided.
Initial Reporting Requirements: Companies formed after January 1, 2024 must submit the required beneficial ownership information at the time of formation or registration. This means new businesses won’t have a grace period and should be prepared to provide these details upon inception. In practice, this will require changes to a number of routine transactions where companies are created but ownership is decided further down the road.
Existing Entities: For companies that are already in existence, there will be a transitional period. These businesses will generally have until 2025 to comply with reporting requirements.
Duties to Update: One of the crucial components of the Act is not just the initial reporting but also the duty to keep the reported information current. Entities are required to report changes in beneficial ownership or the provided information within a specified timeframe. This ensures that the data held by FinCEN remains accurate and up-to-date. Present guidance suggests changes to addresses, license or passport numbers, and other personal information will need to be kept current. This could be an onerous obligation for owners to keep tabs on passive investors.
Anticipated Clarifications: As the Act is still in its early stages, businesses should be on the lookout for additional guidance and clarifications, especially concerning the precise timelines for reporting. The Treasury is expected to issue detailed regulations that will provide clearer instructions on how and when to submit and update beneficial ownership information.
The CTA will affect nearly every company we work with. By keeping abreast of guidance and regulations, you can mitigate civil and potential criminal liability. The wave is coming. Don’t let it crash on you- get paddling now and you can hang ten instead of getting hung out to dry.
Jonathan Milgrom is the founder of Milgrom & Daskam, Jonathan (Jon) Milgrom advises businesses of all sizes and works across a variety of sectors.
