Corporate Transparency Act: What faction managers – directors and executives – need to know

A new federal law requires businesses to release personal information and photos of their owners and controlling persons, including detained executive officers.

Why is this important to you? From Wall Street to Main Street to your street, the vast majority of private and many non-profit entities will be included in compliance with the Corporate Transparency Act (CTA). If you are a sub-manager of a business, you need to pay attention to this. Not only is initial reporting important, but ongoing compliance is also important.

What is this law about? If you haven’t heard of CTAs, you’re not alone. Many business owners, executives and their professional advisors are taken aback when they first learn about the existence and scope of CTAs. At its core, the CTA requires the reporting of personal direct and indirect beneficial ownership and control information relating to businesses operating in the US. Personally Identifiable Information (PII) includes your name, date of birth, physical residential address and your photograph. The US Department of the Treasury’s Financial Crimes Enforcement Division (FinCEN) is currently building the Beneficial Ownership Secure System (BOSS) to receive, store and manage this massive influx of information. FinCEN estimates that more than 32 million existing businesses will be required to report in the first year. This law aims to prevent money laundering, illicit financial activities, corrupt practices and terrorist financing at the expense of the many legitimate businesses (and their owners and controllers) that are overwhelmed by its by-catch.

Who must apply? Beginning January 1, 2024, PII must be reported for persons who directly or indirectly own 25% or more of any class or category of beneficial ownership in a business, or who have or may directly or indirectly exercise “substantial control” over the business.

Important to sub-managers, the CTA provides that all senior officers of a business (which would include sub-managers) are by definition persons with “substantial control” and therefore must be disclosed in a reporting company’s CTA report to FinCEN.

Although the CTA contains an “employee” exemption from the beneficial owner reporting requirements, this exemption does not expressly apply to senior officers of reporting corporations. According to FinCEN, senior officers “perform functions that by their nature involve substantial control and go beyond mere employee status.”

What ongoing notification obligation is there? Once the first report is made, this information must be updated within 30 days of any subsequent event that renders the previously reported information inaccurate. The attribution of ownership and what constitutes substantial control will vary from business to business and will require analysis and professional advice.

Further, sub-executive positions tend to be transitory in nature, and companies that hire or retire sub-executives will require current updated FinCEN reporting.

Exempt entities. Certain categories of business entities are exempt from the obligation to comply with the CTA. These generally include regulated business entities such as publicly traded companies, insurance companies, banking companies, federally exempt 501(c) nonprofit entities, and quasi-governmental organizations. In addition to other exempt categories, a blanket exemption is available to all business entities that meet all three of the following limits: (1) have a physical business address in the U.S., (2) have 21 or more full-time employees, and (3) generate more than $5 million in annual gross receipts as reported on the previous year’s federal income tax return. Failure to meet any of these limits will render the business ineligible for this exemption.

What will compliance look like? Businesses will need to compile, maintain and update their reported PII on an ongoing basis to meet the CTA’s compliance requirements. Any change or correction to previously reported information must be made within 30 days of the event, not after the business becomes aware of the event. Starting January 1, 2024, all newly incorporated business entities will be required to file their first CTA report within 30 calendar days of incorporation. Reporting companies that existed before January 1, 2024 will have one year to file the original CTA report along with any subsequent supplemental filings that would have been required if the report had been filed on January 1, 2024.

What happens if you don’t comply? There are heavy fines ($500 per day up to $10,000) per incident and possible jail time (up to two years) for those who fail to comply with the CTA in a timely and proper manner. Those who fail to file their first report will also be subject to penalties for failing to file what should be subsequent filings – the fines can stack up. In addition, the IRS recently announced an increase in enforcement, using new data analytics technology to identify audit targets. The FinCEN database was identified by the IRS as a key component of such a data analysis initiative.

Who has access to FinCEN’s Beneficial Ownership Secure System (BOSS)? The information in BOSS will be accessible to law enforcement agencies at the federal, state, and local levels and includes law enforcement components of various federal agencies. Financial institutions may also have access with the consent of their customers. Importantly, this information is not available to the general public and is not accessible through Freedom of Information Act (FOIA) requests.

Conclusion. CTA compliance requirements go into effect on January 1, 2024, and you only have the remaining waning months of this year to prepare for your future compliance position. Now is the time to discuss this with your legal team and seek advice.

The content of this article is intended to provide a general guide to the issue. Professional advice should be sought regarding your particular situation.

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