Crucial Details on the Corporate Transparency Act
Most of your firms will be exempt from these reporting requirements—but read on.
On Jan. 1, the Corporate Transparency Act (CTA) beneficial owner information (BOI) reporting requirements issued and enforced by the U.S. Treasury Department’s Financial Crimes Enforcement Network went into effect.
The BOI disclosures are intended to impede illicit actors from using shell companies to conceal the proceeds of illegal activities. Their reach will be far more extensive, though, as an estimated 33 million entities are subject to the new BOI regime including, undoubtedly, many of your clients.
Many of you have also asked us whether your brokerage firms are subject to the BOI reporting obligations and, if so, what you will need to do to comply. The answer is most of your firms will be exempt from these reporting requirements. But read on: the basic parameters of the new BOI reporting regime are outlined below.
What entities must report? Generally, any U.S.-organized entity that is established by filing a registration document with a secretary of state or a similar office of a state or tribal authority is a “reporting company” that must comply unless it falls under one of 23 exemptions specified in the regulations. Foreign entities that are registered to do business in any U.S. state or tribal jurisdiction also are “reporting companies” subject to the disclosure obligations.
General partnerships, sole proprietorships and certain types of trusts that are not created by filing a document with a secretary of state are not “reporting companies.”
The new obligations and the associated penalties obviously constitute a substantial new regulatory enforcement risk for entities that are not exempt from the reporting regime.
What entities are exempt from the reporting requirements? The 23 types of entities exempt from the reporting obligations under the CTA encompass, notably, state-licensed insurance producers that have at least one physical office in a state.
There are two exclusions from this exemption. First, insurance producers that are registered to do business in a state but that have no physical office in the United States are not exempt. Second, holding companies that have licensed insurance agency subsidiaries but that are not themselves licensed are not covered by the licensed insurance producer exemption.
Two other exemptions may, however, protect such unlicensed holding companies: U.S. publicly traded companies (and their subsidiaries) are exempt, as are “large operating companies.” An entity qualifies as a “large operating company” if it meets all three of these requirements in the United States:
- A physical office
- More than 20 full-time employees
- More than $5 million in gross receipts or sales.
The $5 million gross receipts or sales test is evaluated on a consolidated basis across an entire holding company, but the first two elements are evaluated on an individual company basis. A large privately held holding company for which the holding company itself is unlicensed and directly employs fewer than 20 full-time employees thus will not qualify for the “large operating company” exemption.
State-regulated insurers are also exempt. The other exemptions primarily apply to regulated entities (banks and registered securities firms, for example) and government and tax-exempt entities.
What must be reported? Reporting companies must report “beneficial owners”—any individual who directly or indirectly either (1) exercises substantial control over a reporting company (primarily senior officers and board member types) or (2) owns or controls at least 25% of the ownership interest of a reporting company (as defined under the applicable rules and subject to its own list of exemptions). Direct and indirect interests include joint ownership interests, interests held through another individual acting as nominee, custodian or agent, and interests held through ownership or control of intermediary entities. Reporting companies formed on or after Jan. 1, 2024, also must report on “company applicants” who execute and direct their formation activities.
In addition to identifying information for the reporting company itself, the company must provide, for each beneficial owner and company applicant required to be identified and reported, the (1) name, (2) date of birth, (3) address (in most cases, a residential street address), (4) a unique identifying number and issuing jurisdiction from an acceptable identification document (such as a non-expired passport or a U.S. driver’s license or other state-issued identification card), and (5) an image of such identification document.
When must reports be filed? A reporting company created or registered prior to 2024 has until Jan. 1, 2025, to file its initial report. A reporting company created or registered during 2024 has 90 days from the date it receives notice that its creation or registration has become effective. Starting on Jan. 1, 2025, a new reporting company must submit its initial report no later than 30 days after the date it receives notice that its creation or registration has become effective.
After filing the initial report, both existing and new reporting companies must submit updates within 30 days of a change or discovery of an error in the previously submitted information.
A reporting company created or registered prior to 2024 has until Jan. 1, 2025, to file its initial report.
Potential penalties. Penalties for reporting violations—both failures to report and providing false or fraudulent information in a BOI report—can be severe (civil penalties of up to $500 per day that the violation continues and criminal penalties of up to a $10,000 fine and up to two years in prison). The penalties fall principally on individuals, not the reporting companies, such as the entity’s “senior officers”—a very broadly defined category of company officers, which includes the president, general counsel, CEO, CFO, COO and any other officer who performs similar functions regardless of title—even if such persons lack any specific knowledge of the reporting failure.
The new obligations and the associated penalties obviously constitute a substantial new regulatory enforcement risk for entities that are not exempt from the reporting regime. As always, we are here to help you and your clients navigate the regulatory thicket.
