The Corporate Transparency Act (“CTA”) was passed in January 2021 over presidential veto as part of the 2021 National Defense Authorization Act. Beginning on January 1, 2024, The CTA mandates onerous registration requirements for the beneficial owners of reporting companies, noncompliance with which may result in substantial penalties for those failing to report.
The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) estimates the cost of compliance will total approximately $21.7 billion for the first year and $5.65 billion per year thereafter.
FinCEN issued its Final Rule
On September 29, 2022, FinCEN issued its Final Rule implementing the CTA’s requirements to report beneficial ownership information. The CTA’s purported goal is to strengthen the anti-money laundering regime by increasing transparency, primarily by requiring numerous business entities to report their beneficial owners for the first time. Although the Rule exempts many companies from reporting obligations, FinCEN estimates that the CTA and the Rule will affect over 32 million entities, imposing significant new compliance burdens.
Failure to comply with the CTA’s reporting requirements can lead to civil and criminal penalties, including a maximum civil penalty of $500 per day (up to a maximum of $10,000) and imprisonment for up to two years. These substantial compliance requirements and severe potential penalties may have a chilling effect on the legitimate use of entities covered by the CTA’s definition of reporting company by attorneys and their clients.
Who Are Beneficial Owners
Under the CTA, beneficial owners are defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such report company." An individual can exercise substantial control over a reporting company if they serve as a senior officer in the reporting company, have authority over the appointment or removal of senior officers or a majority of the board, have “substantial influence over important decisions” of the reporting company, or have any other form of substantial control over a reporting company. The broad definition may include third parties.
According to FinCEN
According to FinCEN, the vast majority of the 32 million companies estimated to fall under the Rule will be small businesses and single-owner LLCs. However, complicated beneficial ownership information reporting situations will still arise, especially in the estate planning context where LLCs, corporations, and other reporting entities are routinely utilized for legitimate asset protection and privacy purposes.
Estate Planning: Procedures to Assess Reporting Obligations
Estate planning attorneys will have to develop policies and procedures to assess their and their clients’ reporting obligations, identify beneficial owners, and identify company applicants, which could include third parties given the broad definition of beneficial owner. Additionally, policies and procedures must be developed to monitor changes to reporting status or beneficial ownership on an ongoing basis to avoid potential penalties.
These new obligations are also relevant to corporate attorneys – it is now of crucial importance to ensure client companies and target companies in mergers or acquisitions have fulfilled and continue to fulfill their reporting obligations. Further, attorneys and their clients can almost certainly expect a heightened risk that companies will be subject to anti-money laundering or other corruption investigations, even if they have complied with the law.