By: Michael Mulvey
As of January 1, 2024, the Corporate Transparency Act (“CTA”) became effective. This legislation requires certain reporting requirements as part of the Anti-Money Laundering Act of 2020. To enforce these requirements, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) created a registry to receive all reportable information. This legislation intends to reduce the occurrences of money laundering, tax fraud, drug trafficking, and terrorism in the United States using shell companies. The federal government may make the information available to state and foreign agencies with the intent to combat the illicit activities mentioned. Credit unions and other financial institutions may obtain access to this information for the purpose of member/customer due diligence if sufficient need is shown. While we can agree on the intent of this legislation, it does create an administrative obligation on millions of small businesses.
The first question you may be asking is, “what does this mean for my organization?” To answer this question a determination is made whether the entity is a “reporting company” under the CTA. Reporting companies are 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 a similar office under the law of a state or Indian tribe or formed under the law of a foreign county and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a state or Indian tribe.
This definition may seem broad, there are twenty-three types of entities exempt from reporting. This list of exempted entities includes credit unions, other entities under the supervision of a regulatory agency (ex. broker-dealer), and subsidiaries of certain exempt entities. This means credit unions and CUSOs that are wholly owned or controlled by credit unions are exempt from the reporting requirements. While the CTA does not define what “controlled by” means, my presumption is majority control of the entity. In the case of collaborative CUSOs, owned by credit unions and third parties, a case-by-case determination needs to be made whether an exemption applies. If no exemption applies, then the reporting company must file a Beneficial Ownership Interest (“BOI”) report with FinCEN. The BOI report includes the full legal name of the reporting company (including DBAs), tax identification number, justification of formation, current United States business address, beneficial owner information, and company applicant information.
Your next question is, “who are beneficial owners?” Beneficial owner(s) means an individual who directly or indirectly, through a contract, arrangement, understanding, relationship, or otherwise, (i) exercises substantial control over the entity, or (ii) owns or controls not less than twenty-five percent of the ownership interest of the entity. This includes the reporting company’s president(s) CEO, CFO, COO, general counsel, and any other individual exercising substantial control. As currently enacted the CTA does not define what “substantial control” means, hopefully, we receive clarity on this in the future. The reporting company must provide FinCEN with each beneficial owner’s name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a driver’s license or passport). The company applicant is the person or persons that file the organizational documents with a state. The company applicant reporting is only required for entities formed after January 1, 2024. Entities formed prior to January 1, 2024, do not need to provide this information.
Concerning the timing of the filing, if the entity existed prior to January 1, 2024, the first report is not due until January 1, 2025. If the entity is formed during 2024, the initial report is due within 90 days after the creation of the entity with the respective state. Any entity created on January 1, 2025, or after, will have 30 days from the creation of the entity to file. If any reported information needs amending, an updated report is due within 30 days of the date the change leading to the amendment occurred.
To enforce these reporting requirements, there is a potential for civil or criminal penalties for failing to report or remedy a report.
To assist with potential questions, I am including links to FinCEN’s webpage with FAQs on this topic Beneficial Ownership Information Reporting | FinCEN.gov along with FinCEN’s BOI Small Compliance Guide v1.1 (fincen.gov) for additional information.
Lastly, FinCEN reported fraudsters are attempting to solicit information from individuals and entities that may be subject to reporting. FinCEN reiterated it does not send unsolicited requests. Any unsolicited communication attempting to collect this type of information is fraudulent and should not be responded to.
I will continue to provide updates on CTA reporting as additional information is provided. If you have any questions about the CTA and its reporting requirements, feel free to reach out.