Millions of corporations, LLCs and other legal entities are formed in United States each year. These companies play an essential role in our country’s and the global economy. But they can also be used to facilitate corruption. There are many states where people who create a legal entity don’t even have to disclose who actually owns the company, which creates opportunities for criminals to remain anonymous.
In part because of this, America has become the money laundering capital of the world. How do criminals use companies for money laundering? One way is they will create bogus companies and open bank accounts in their names. Then they transfer illegal money between these various bank accounts and then back to their original account. Then they dissolve the bogus companies which breaks up the chain from the beginning to the end.
The United States now has a new law called the Corporate Transparency Act (CTA) which is going to make this a lot more difficult to do. Here's how.
CTA requires that all new and existing companies begin reporting on their ownership to the Financial Crimes Enforcement Network, or FinCEN. It’s part of the U.S. Treasury Department and it receives and maintains financial transaction information.
(You may have heard of FinCEN already: you may know that banks have to report suspicious activities such as when there’s any deposit over $10,000. The place they report to is FinCEN, and it is also going to be at the center of all of this new activity related to the CTA.)
From now on, any legal entity that is registered with the Secretary of State of any state will have to file a report with FinCEN that discloses its beneficial ownership. The reporting applies to anyone who owns at least 25% of the ownership interest or exercises "substantial control" over the company. Those people are called Beneficial Owners.
The report must include five discrete items of information for each Beneficial Owner:
(a) full legal name,
(b) residential address,
(c) date of birth,
(d) a “unique identifying number” (which can be a driver’s license or passport) and
(e) an image of the document that provides the unique identifying number
It’s going to be very difficult from now on for corporate owners to remain anonymous.
There are many exceptions to the filing obligation. Certain entities are specifically excluded, because the ownership is already known to the government. Also exempt are larger companies that employ more than 20 full time employees, have a physical location and reported more than $5M in sales in the previous year. But note that many companies that may be exempt might have subsidiaries which are not exempt.
What Is Required:
Companies in existence as of January 1, 2024 will have until January 1, 2025 to file the initial report with FinCEN.
Companies created on or after January 1, 2024 will need to file a first report within 90 days after the date of formation.
All companies must report any change to previously reported information within 30 days after the change.
Companies formed on or after January 1, 2024 will also need to provide the same information for the “company applicant” -- that's the person who actually registered the company with the Secretary of State (whether it was the owner, a lawyer or the lawyer's paralegal, an accountant or your brother-in-law).
The biggest practical implication of this ongoing compliance requirement is the need to file an amendment within 30 days after any change to the information previously submitted. So, if an person has a change of address, or even just gets a new drivers’ license photo, an amendment will need to be filed within 30 days of that change. Failure to comply comes with both civil and criminal penalties, including potential jail time.
I expect that you will have a lot of questions about how this new law applies to your specific situation. You may be unsure if your company falls into one of the exceptions or whether an owner who owns less than 25% of the equity exercises "substantial control" as defined in the CTA.
I would be glad to help you figure it out.
There is a lot to do to prepare for the CTA, and companies should start acting right now.
What to Do Now:
(1) Identify all business entities that you have and work with me or your business attorney to review each one:
Does it qualify for an exemption?
Which owners meet the criteria for reporting?
(2) Amend the operating or shareholder agreement to require all owners to submit the required information and to update the company immediately if there’s any change so the company can file its report.
This is a great time to dust off those agreements and see what other changes might need to be made.
(3) Appoint someone within the company who will be responsible for CTA compliance. They should think about:
How the information on its owners should be collected?
How will it be stored securely?
How will changes be tracked?
Implement a company policy and set up a process to make sure the changes are captured and reported timely.
Forever
The compliance obligations under the CTA are forever ongoing, it never ends until the company is dissolved or becomes inactive.
Compliance is Not Optional
Neither FinCEN nor any other government entity is going to send you an email about your compliance obligation. You’re just expected to comply.
Of course, there are already fraudsters out there trying to take advantage. You or your employees may get official looking emails that may be titled "Important Compliance Notice" and asks the recipient to click on a URL or to scan a QR code.
Please don’t click on any links unless you’re sure of the source.
Should you have any questions or want additional information, do not hesitate to contact me at tanya @ osenskylaw (dot) com.