United States: The Corporate Transparency Act: An Update

The Corporate Transparency Act (CTA) will be effective on Jan. 1, 2024. For the first time, the United States now will require certain legal entities to report to the federal government identifying information about the individuals who directly or indirectly own or control a company within the scope of the new legislation. This information will be housed in a centralized, secure nonpublic federal government database to be administered by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.

Background

A Reporting Company is a corporation, limited liability company, or similar entity and can be domestic or foreign. A Domestic Reporting Company is an entity 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. A Foreign Reporting Company is 1) an entity formed under foreign law and 2) that has registered to do business in a state or Indian Tribe by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe.

The CTA's reporting regime requires a Reporting Company to electronically file an initial return, called a Beneficial Ownership Information Return (BOIR), with FinCEN. The BOIR will contain information about 1) the Reporting Company itself, 2) the individual(s) (known as the Beneficial Owners, who directly or indirectly control or own the Reporting Company) and 3) provided the entity is formed or registered on or after Jan. 1, 2024, the individual(s) who is (are) Company Applicant(s)¹ of the Reporting Company. A Reporting Company also will be required to file Updated and Corrected BOIRs if there are changes or corrections to the information filed in the Initial BOIR by certain specified due dates.

The final beneficial ownership information reporting rule (Reporting Rule), which was promulgated in a final regulation in 2022, contained the following due dates for the filing of an Initial BOIR:

• for a Reporting Company formed/registered prior to Jan. 1, 2024, not later than Jan. 1, 2025
• for a Reporting Company formed/registered Jan. 1, 2024, within 30 calendar days of receiving actual or public note that the creation or registration of the Reporting Company became effective

Proposed Regulation

For several months now, there has been speculation that FinCEN would file a proposed regulation extending the reporting deadline for Reporting Companies to file an Initial BOIR.²

What the Proposed Regulation Does

On Sept. 27, 2023, FinCEN issued a notice of proposed rulemaking (NPRM). Under this proposal, FinCEN proposes to modify the current 30-day deadline for filing an Initial BOIR to 90 days for Reporting Companies created or registered on or after Jan. 1, 2024, and before Jan. 1, 2025. No other changes were made to the final beneficial ownership information reporting rule. The comment period to the NPRM is 30 days after the date of publication of the proposed regulation in the Federal Register.

The ostensible reasons FinCEN gave for extending that deadline were:

• to give Reporting Companies additional time to understand the new reporting obligation
• to give Reporting Companies additional time to collect the necessary information and complete their filings

Rationale for Proposed Change

FinCEN explained that after "continued dialogue with partners in the private sector, including trade associations, nonprofits, and other key stakeholder organizations, it believes that extending the deadline for Reporting Companies formed in 2024 will have multiple benefits," to include:

• It will give FinCEN additional time to inform the public about the CTA's reporting requirements through the production of additional guidance, frequently asked questions, videos, infographics and compliance guides. FinCEN intends to publish additional materials in the future and conduct extensive outreach to ensure (hopefully) that all stakeholders understand their obligations and how best to seek assistance if stakeholders have questions. Pointedly, FinCEN acknowledged that it "recognizes the novelty of the BOI [beneficial ownership information] reporting requirement and the need to provide filers, many of which are interfacing with FinCEN for the first time, particular consideration when it comes to the reporting deadline for entities created or registered in 2024."
• It will give newly created entities additional time to navigate the complexities of the beneficial owner information reporting requirements, such as with respect to the entity – whether it is within scope or whether it qualifies for one of the 23 exemptions, and to the determination of which individuals have to be reported – which individuals are considered beneficial owners under the Substantial Control Test and the 25 percent Ownership Test.
• It will give new Reporting Companies additional time to obtain the information necessary to complete their Initial BOIR (particularly, to identify their beneficial owners, i.e., individuals who directly or indirectly through other entities, control or own the requisite 25 percent interest in, a Reporting Company).
• It will give all parties, Reporting Companies, stakeholders and FinCEN additional time to resolve open questions (of which there are many). Most interesting in this regard is that FinCEN will establish a contact center prior to Jan. 1, 2024, to field questions from Reporting Companies and stakeholders about the BOI reporting requirements.

Initial BOIR Due Dates if NPRM Finalized

So, assuming the proposed regulation is finalized, the Initial BOIR due dates would be as follows:

• for a Reporting Company formed/registered prior to Jan. 1, 2024, not later than Jan. 1, 2025
• for a Reporting Company formed/registered on or after Jan. 1, 2024, within 90 calendar days of receiving actual or public notice that the creation or registration of the Reporting Company is effective
• for a Reporting Company formed/registered on or after Jan. 1, 2025, and thereafter, within 30 calendar days of receiving actual or public notice that the creation or registration of the Reporting Company is effective

Updated and Corrected BOIR due dates remain unchanged from those in the final rule.

Takeaways

• FinCEN should be commended for proposing this rule, as the Reporting Rule represents a new and expansive obligation that is "novel" and with which companies, beneficial owners and third-party service providers are unfamiliar. The Reporting Rule will impact more than 32 million pre-2024 entities and about 5 million entities per year formed in 2024 and over the next decade, based on FinCEN estimates. Based on Holland & Knight's knowledge and experience, many potentially impacted entities and their owners are unaware of the Reporting Rule and its pervasive application or, if aware, have not appreciated the complexities of making the initial determinations or their obligations to adopt processes and procedures to timely, accurately and completely update the relevant information.
• Apart from the reasons FinCEN mentioned in the NPRM, FinCEN may have been proactive in responding to the concerns of various members of Congress relating to the implementation of the Reporting Rule. These concerns were expressed by members and others in the House Financial Services Subcommittee on National Security, Illicit Finance and International Financial Institutions hearings held on July 18, 2023. Also, a number of House members have introduced several bills dealing with the Reporting Rule and other facets of the CTA; see H.R. 5119, Protect Small Businesses and Prevent Illicit Financial Activity Act, which, among other provisions contained the 90 rule of the subject NPRM and was the first CTA-related bill that had bipartisan sponsorship support (Zachary Nunn (R-Iowa) and Joyce Beatty (D-Ohio), and H.R. 4035, The Protecting Small Businesses Information Act of 2023.
• Although FinCEN identified some of the areas that entities and their controlling and 25 percent owners need to focus on, such as 1) whether the entity is within scope of the legislation, 2) whether one or more of the 23 exemptions apply, 3) whether any of the beneficial owners are excluded, it should be mentioned that there are other areas that require close attention, such as: a) privacy concerns, processes and agreements, b) "red flags" for changes that deal with updates, c) review of current and new documentation to deal with CTA compatibility and compliance, and d) education of beneficial owners and senior offices as to the potential application of willful penalties for noncompliance.
• Everything considered, FinCEN's recognition of the expansive burdens imposed by the Reporting Rule is a welcome development.

Developments

Apart from the NPRM, there are several other developments that are summarized below.

Small Entity Compliance Guide

FinCEN released the Small Entity Compliance Guide (Guide) on Sept. 18, 2203. The Guide is intended to assist small entities to comply with the Reporting Rule. It consists of six chapters and an appendix. The chapters address the following issues: 1) Does my company have to report beneficial owners? 2) Who is a beneficial owner of my company? 3) Does my company have to report its company applicants? 4)What specific information does my company need to report? 5) When and how should my company its Initial BOI report? and 6) What if there are changes to or inaccuracies in reported information? There also is an appendix identifying the different parts of the BOI Reporting Rule covered in the Guide.

Overall, the Guide is user-friendly and easy to follow, breaking down the various constituent elements in questions, charts and flow charts. It also contains useful examples relating to beneficial ownership.

Notice of a New System of Records (Notice)

On Sept. 13, 2023, FinCEN published the Notice of a New System of Records (Notice)³ relating to the Beneficial Ownership Information System (BOSS), which will contain the records of information collected through the implementation of the CTA. The Notice overviews the authority of FinCEN to collect and maintain BOI, which is a Reporting Company's identifying information, its Beneficial Owners and Company Applicants, and provides much detail about BOSS and its operation.⁴

Several interesting points contained in the Notice:

• The purpose of BOSS is to collect, maintain, safeguard and disclose BOI as permitted or required by the CTA and its implementing regulations.
• Commercial vendors and federal government agencies will provide data quality assurance and enhancement information that covers the same categories of information as provided by individuals and Reporting Companies.
• FinCEN is required to maintain BOI relating to each Reporting Company for not fewer than five years after the date on which the Reporting Company terminates, citing 31 U.S.C. 5336(c)(1).
• The Notice coins the name of the report furnished by the Reporting Company – the Beneficial Ownership Information Report (BOIR), which includes the Initial BOIR, Updated BOIR and Corrected BOIR.
• The Notice enumerates the three categories of individuals covered by BOSS: 1) individuals whose information is reported to FinCEN through BOIRs, which will be reported either as Beneficial Owners or Company Applicants, 2) individuals who request FinCEN Identifiers and 3) individuals who submit BOIRs on behalf of the Reporting Company to FinCEN and note that some identifiable information about these individual will be included in BOSS by virtue of their interactions with the system.

Conclusion

FinCEN has been very busy working on implementing many facets of the Reporting Rule. In concluding, we would like to underscore the statements of FinCEN that the Reporting Rule is novel and not yet fully understood by large segments of those that would be impacted by this rule. Jan. 1, 2024, is imminent, and for those impacted, now is the time to prepare.

Footnotes

1 The term "Company Applicant" means the individual who directly files the organizational or registration document of the Reporting Company and the individual who is primarily responsible for directing or controlling the filing of the Reporting Company, if more than one individual is involved.

2 This was evidenced by a FinCEN filing on Aug. 14, 2023, a proposed regulation titled "Beneficial Ownership Information Reporting Deadline Extension for Reporting Companies Created or Registered in 2024" with the Office of Information and Regulatory Affairs (OIRA), which reviews notices of proposed rulemaking.

3 FinCEN, Privacy Act of 1974, System of Records, Notice of a new system of records, Federal Register/Vol. 88, No. 176/Wednesday, September 13, 2023/Notices, p. 62,889-62,892

4 Topics contained in the Notice deal with 1) system name and number, 2) security classification, 3) system location, 4) system manager, 5) authority for maintenance of the system, 6) purpose of the system, 7) categories of individuals covered by the system, 8) categories of records in the system, 9) record source categories – routine uses of records maintained in the system, including categories of user and purposes of such uses, 10) policies and practices for storage of records, 11) policies and practices for retrieval of records, 12) policies and practices for retention and disposal of records, 13) administrative, technical and physical safeguards, 14) record access procedures, 15) contesting record procedures, 16) notification procedures and 17) exemptions promulgated for the system.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.