Simon PLC Attorneys & Counselors – April 2024 Memorandum
The Corporate Transparency Act and the Issue of Beneficial Ownership and Substantial
Control
Troy, MI. The Bank Secrecy Act of 1970 required financial institutions to comply with certain reporting requirements for large cash transactions. However, real estate transactions and the professionals involved in them were excepted, thus missing a huge network of shell and stacked entities, including foreign entities, set up for the purpose of moving cash without any regulation or scrutiny.
In response, the Corporate Transparency Act was enacted as of January 1, 2021. The CTA is contained within the Anti-Money Laundering Act of 2020, which in turn is contained in the
National Defense Authorization Act (NDAA). The CTA’s stated purpose was to expose the concealment of illicit funds within real estate transactions. The legislative history of the CTA cites “bad actors” who hide their interest in shell companies with the intention of facilitating illegal activities including money laundering, drug trafficking, and securities fraud. There is also harm cited in addition to the money laundering itself, for example, the cash purchase of multi-unit residential properties in urban areas which then sit vacant because their only purpose is to be a stand-in for the cash.
One element of the perceived solution is to establish and maintain a national registry of beneficial owners of entities that are deemed ‘reporting companies’ under the CTA.
The Financial Crimes Enforcement Network (FinCEN) within the Department of Treasury is responsible for rulemaking and enforcement under the CTA.
As of this date, compliance with the CTA includes the following:
1. A “reporting company” includes: “(1) any corporation, LLC, limited partnership or similar entity created by filing a document with any U.S. state, territory, or Indian tribe (domestic reporting companies), and (2) any non-U.S. entity that registers to do business with any U.S. state, territory, or Indian tribe (foreign reporting companies).”
2. Each reporting company must report information including its legal name, any assumed names (DBAs), and its EIN.
3. Each reporting company must identify every individual who qualifies as a “beneficial owner,” including their full legal name, date of birth, current address, and an ‘identifying number’ and ‘image’ from documents like a U.S. passport, U.S. driver’s license, U.S. identification card or, if no U.S.-issued document is available, a foreign passport.
Who is a “beneficial owner”? As defined by FinCEN: “an individual who either directly or indirectly: (1) exercises substantial control over the reporting company, or (2) owns or controls at least 25% of the reporting company’s ownership interests.”
What constitutes exercising “substantial control”? FinCEN provides a very broad definition: (i) a senior officer (“president, chief financial officer, general counsel, chief executive office[r], chief operating officer, or any other officer who performs a similar function”); (ii) an individual with “authority to appoint or remove certain officers or a majority of directors (or similar body) of the reporting company”; (iii) an “important decision-maker for the reporting company”; or (iv) someone who would otherwise qualify under the rules spelled out in FinCEN’s Small Entity Compliance Guide.
New reporting companies (formed after January 1, 2024) must also identify up to two “company applicants”, defined as an individual who is primarily responsible for the filing of a Reporting Company’s organizational documents. Legal professionals who as a matter of course list themselves as agent or organizer should take note of this requirement and change their procedures accordingly so that a beneficial owner is listed instead.
Categories exempted from reporting are: (i) regulated companies such as banks and credit unions; (ii) large companies, defined as having more than 20 employees and $5 million in annual revenue; and (iii) companies that are inactive or dormant, with “inactive” defined as not holding any kind or type of assets, not having sent or received any funds greater than $1,000 directly or indirectly, in existence on January 1, 2020, and not owned by a foreign person. The requirement of holding no assets at all stands to make it difficult to qualify for exemption based on inactivity.
Even this brief overview makes it clear that anyone subject to the CTA is likely to be overwhelmed by the obligations imposed. Unsurprisingly, several legal challenges have been raised, claiming that the law imposes an undue burden on millions of small businesses in order to catch the tiny fraction of them that may be breaking the law. In a case brought by the National Small Business Association, the Northern District of Alabama/Northeastern Division found the law to be unconstitutional, citing privacy concerns, overreach, burden, and unreasonable fees for noncompliance. However, this ruling is limited and prevents further enforcement of the law only against the plaintiffs who brought the case. The decision has already been appealed to the 11th Circuit by the DOJ. Since the NSBA decision, cases have been filed in the Federal District Courts in Maine and in the Western District of Michigan, based on the same objections. The status of the law is therefore in flux, with resulting confusion as to when, how, and if the rules will be enforced or modified.
FinCEN has already announced some modifications:
• The implementation date of January 1, 2024, has been extended to January 1, 2025. In particular, companies existing prior to January 1, 2024 have until January 1, 2025 to comply. Companies formed in 2024 are required to file a report within 90 days of creation. After January 1, 2025, new companies will have just 30 days to file.
- FinCEN has a secure website for online filing.
- Individuals and companies can request an “identifier” number from FinCEN that can be used instead of re-entering the information required for changes or for new companies.
What should a potential “reporting company” do in the meantime?
Companies formed on or after January 1, 2024 should go to the FinCEN website (https://fincen.gov/boi) and file.
Companies in existence prior to January 1, 2024 should wait until changes and updates to the law are available.
We are available to assist with understanding your requirements under CTA and with the actual mechanics of filing. We will also track legal developments affecting your obligations under CTA and announce updates on this page.
N.B. Not Legal Advice: Please contact us if you would like to discuss the facts and circumstances of your specific matter. Simon PLC Attorneys & Counselors expressly disclaims all liability in respect to actions taken or not taken based on any or all the contents of this memorandum. The information contained herein may not reflect current legal developments and is provided without any knowledge as to the recipient’s location, industry, identity or specific circumstances. No recipients of this content, clients or otherwise, should act, or refrain from acting, on the basis of any content included in this memorandum without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from an attorney licensed in the jurisdiction for which the recipient’s legal issue(s) involve. The application and impact of relevant laws varies from jurisdiction to jurisdiction, and our attorneys do not seek to practice law in states, territories and foreign countries where they are not properly authorized to do so.
