US: The Corporate Transparency Act and its effects on the corporate landscape

On September 29, 2022, the US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued a final rule to implement the beneficial ownership reporting provisions included in the Corporate Transparency Act (CTA) passed by Congress in January 2021.

The CTA aims to prevent and combat money laundering, terrorist financing, tax fraud and other similar activities. Under the CTA, an entity may be subject to the reporting requirement if it qualifies as a "reporting company." A "reporting company" can be either a "domestic reporting company" or a "foreign reporting company."

A domestic reporting company is defined as a corporation, limited liability company or any entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe. On the other hand, a foreign reporting company is defined as any entity that is a corporation, limited liability company or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.

If a company determines that it meets the reporting company definition and does not qualify for one of the 23 exemptions provided by the CTA¹, including those listed below, it will need to file a report with FinCEN. The exemptions include, among others, governmental authorities, banks, depository institution holding companies, money services businesses, brokers or dealers in securities and accounting firms as well as certain large operating companies that meet specific employment and/or tax reporting criteria and publicly traded companies that are issuers of securities that are registered under Section 12 of the Securities Exchange Act of 1934 or otherwise required to file supplementary and periodic information under Section 15(d) of the Securities Exchange Act of 1934. Exemptions provided by the CTA include:

• Certain issuers of securities registered with the SEC
• Certain financial institutions, including domestic banks, bank holding companies, federal or state credit unions and FinCEN-registered money services businesses
• Certain pooled investment vehicles
• Certain tax-exempt entities, including 501(c) entities, political organizations and charitable trusts
• Certain US federal and state governmental entities and public utilities
• Insurance companies and insurance producers
• Commodity Exchange Act-registered companies
• Public accounting firms registered pursuant to the Sarbanes-Oxley Act of 2002
• Investment companies and advisors
• "Large operating companies" with a US presence
• Companies whose ownership interests are controlled or wholly owned, directly or indirectly, by one or more entities that themselves qualify for certain of the foregoing exemptions

In addition, reporting companies are required to submit to FinCEN specific identifying information regarding each "beneficial owner" and "company applicant" of the reporting company. For each beneficial owner, the reporting company is required to submit the individual's full legal name, date of birth, current residential or business street address and either a unique identifying number from an acceptable identification document (e.g. a passport) or a FinCEN identifier. For each company applicant, the reporting company is required to submit a business address, if the company applicant creates or registers companies in the course of its business and a residential address for all other individuals.

Pursuant to the final rule, a "beneficial owner" is defined as a person who, directly or indirectly, either (1) exercises substantial control over a reporting company or (2) owns or controls at least 25 percent of the ownership interests of a reporting company. The final rule also provides five exceptions to the beneficial owner definition for (i) minor children, (ii) nominees or other intermediaries, (iii) employees;,(iv) inheritors and (v) creditors.

Further, as explained under the final rule, activities that could constitute "exercising substantial control over a reporting company" include (i) providing service as a senior officer of a reporting company; (ii) having authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body) of the reporting company; (iii) directing, determining or having substantial influence over important matters of the reporting company, such as, for example, the reorganization, dissolution or merger of the reporting company, the selection or termination of business lines or ventures of the reporting company and the amendment of any governance documents of the reporting company; or (iv) having any other form of substantial control over the reporting company. The last category is a catch-all to include a control that may be exercised in less conventional ways. In other words, anyone who is able to make significant business decisions on behalf of the entity would fall under this definition.

The final rule defines a "company applicant" as either (1) an individual who files the document that forms the entity or, in the case of a foreign reporting company, the document that first registers the entity to do business within the United States of America or (2) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another. The final rule was modified from the proposed rule to limit the definition of "company applicant" to only one or two individuals.

The final rule takes effect on January 1, 2024. A reporting company created before the final regulation takes effect has one year to file its initial report. A reporting company created or registered after the effective date has 30 days to file its initial report after its formation or registration. Reporting companies have 30 days to report changes to the information in their previously filed reports and must correct inaccurate information in previously filed reports within 30 days of becoming aware or having reason to know of such inaccuracy.

As compared to the proposed rule, the final rule does not require reporting companies created or registered prior to 2024 to submit beneficial ownership information for company applicants and, therefore, only have to submit the information required for reporting companies and beneficial owners.

Entities should begin exploring these rules and whether they would have additional reporting obligations. While the purpose of the CTA is to prevent the anonymous creation and operation of "shell companies," it has imposed reporting obligations on smaller companies. All companies should carefully monitor compliance in order to avoid potential liabilities under the CTA.