Understanding the Corporate Transparency Act and Beneficial Ownership Information

Introduction to the Corporate Transparency Act (CTA)

The U.S. Corporate Transparency Act (CTA), enacted on January 1, 2021, is a landmark legislation aimed at increasing the transparency of company ownership structures to combat illicit activities such as money laundering, fraud, and the financing of terrorism. By requiring companies to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), the CTA seeks to prevent the misuse of corporations and limited liability companies for criminal gain.

What is Beneficial Ownership Information (BOI)?

Beneficial Ownership Information (BOI) includes details about individuals who directly or indirectly own or control a company. According to FinCEN, individuals who fit the following criteria are considered beneficial owners:

• Direct or indirect ownership of 25% or more of the company’s equity.
• Exercising substantial control over the company.

Why is BOI Important? BOI is crucial for:

• Establishing trust with legitimate businesses and business owners.
• Understanding risk exposure, particularly with higher-risk jurisdictions, sanctioned individuals, or politically exposed persons.
• Enhancing third-party risk management strategies.
• Complying with laws on sanctions, terrorist financing, fraud, and money laundering.

Reporting Requirements and Deadlines

FinCEN has established specific deadlines and processes for reporting BOI:

• Companies created or registered before January 1, 2024: Must file their initial BOI report by January 1, 2025.
• Companies created or registered between January 1, 2024, and January 1, 2025: Must file within 90 calendar days of receiving notice of their creation or registration.
• Companies created or registered on or after January 1, 2025: Must file within 30 calendar days of receiving notice of their creation or registration.
• Changes in ownership or control: Must be reported within 30 days of the change.

Reports must be submitted electronically through FinCEN’s secure filing system, and should include names, dates of birth, addresses, and identifying numbers such as a passport or driver’s license.

Consequences of Non-Compliance

The penalties for failing to file or misreporting BOI are severe:

• Civil penalties: Up to $500 for each day of continuing violation.
• Criminal penalties: Up to two years imprisonment and fines up to $10,000.

Errors or omissions can be corrected within 90 days of the original deadline without penalty. However, firms that disregard their BOI reporting obligations could face significant civil and criminal penalties.

Who Must Report?

The BOI reporting requirements apply to:

• Domestic reporting companies: Corporations, limited liability companies, and other entities created by filing a document with a U.S. state or similar office.
• Foreign reporting companies: Entities formed under the law of a foreign country that are registered to do business in the U.S.

Certain exemptions exist, including publicly traded companies, some nonprofits, and specific large operating companies.

Access to Beneficial Ownership Information

Under the CTA, only authorized entities such as federal, state, local, and tribal officials, as well as certain foreign officials, can access BOI for national security, intelligence, and law enforcement purposes. Financial institutions may also access this information under specific circumstances with the consent of the reporting companies.

The Impact of the CTA

The CTA represents a significant step towards transparency and accountability in the business sector. By ensuring that beneficial ownership information is readily available, the CTA helps to:

• Prevent the misuse of corporate structures for illicit purposes.
• Enhance the ability of financial institutions and governments to conduct due diligence and manage risks.
• Foster trust and integrity in the business community.

Legal Challenges and Current Status

Despite the CTA’s objectives, it has faced legal challenges. In March 2024, a U.S. District Court declared the CTA unconstitutional, a decision currently under appeal. FinCEN continues to enforce the CTA while litigation is ongoing, meaning that reporting entities must still comply with the law and file their BOI reports.

Next Steps

If you believe the CTA might apply to your business or if you are unsure about your reporting obligations, reach out to our firm. We offer comprehensive analysis and assistance to ensure compliance with the CTA and BOI reporting requirements. For more information, visit the FinCEN website or contact our team at (202) 455-6010 or schedule a confidential consultation.