The Federal Corporate Transparency Act (“CTA”) took effect at the beginning of 2024, imposing new reporting requirements for many companies existing and/or operating in the United States. In doing so, the federal government is attempting to clampdown on financial crimes. See also our July 11, 2023 legal briefing, linked here:
Why was the Corporate Transparency Act enacted? The United States has not historically performed well when evaluated by the Foreign Action Task Force (“FATF”), set up by the Organization for Economic Cooperation and Development to grade countries, on whether beneficial ownership information was adequately disclosed with respect to businesses that were created within their jurisdictions. Stated another way, FATF scored the United States as “non-compliant” when evaluating the “transparency of legal persons and arrangements.”
The FATF reports, coupled with the argument that countries with high transparency standards have lower money laundering, tax fraud, and financial terrorism, led to the enactment of the CTA in January of 2021 as part of the National Defense Authorization Act. The proposed rules were published in September of 2022. The CTA directs the Financial Crimes Enforcement Network (“FinCEN”), a bureau in the Department of the Treasury, to establish a national registry of beneficial owners. Although the intent of the CTA was to prevent the operation of shell companies for criminal and/or tax evasion, the actual implication means that for the first time, there are federal reporting requirements for small companies that require annual collection and reporting of owner information.
Who is a beneficial owner? Under the CTA beneficial owners are those individuals who exercise substantial control (directly or indirectly) over the entity or who own or control at least twenty five percent of the ownership interest in the entity. The CTA contains twenty-three exemptions for certain types of entities, for example, tax exempt entities and large operating companies are generally exempt.
What information will be reported? FinCEN is seeking to collect the names, addresses, birth dates, and identifying numbers (this can be a nonexpired driver’s license number, passport number, or personal identification card number) for each beneficial owner, which will need to be updated annually.
Who has access? FinCEN must maintain the reported information in a non-public database. FinCEN will allow certain government officials to access the information who submit a request through a U.S. Federal government agency, for purposes related to national security, intelligence, and law enforcement. In certain circumstances, financial institutions can access the beneficial ownership information with the entity’s consent.
The regulators of these financial institutions will also have access to the beneficial ownership information when they supervise the institutions. However, the beneficial ownership information is not publicly accessible and not subject to requests made under the Freedom of Information Act.
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This Legal Briefing is intended for general informational and educational purposes only and should not be considered legal advice or counsel. The substance of this Legal Briefing is not intended to cover all legal issues or developments regarding the matter. Please consult with an attorney to ascertain how these new developments may relate to you or your business. © 2024 Law Offices of Pullano & Farrow PLLC