Further transparency rules come into force: The US Corporate Transparency Act will require action by overseas companies

The US Corporate Transparency Act (the “CTA”) came into force on 1 January 2024. Going forward, certain entities (“reporting companies”) will be required to file new online beneficial ownership information reports (“BOI reports”) with the US Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). Many US and foreign companies will be required to file these reports.

The CTA is part of a long-standing US federal effort to reduce money laundering at small corporations operating in the US by improving the transparency of corporate structures. With the information gained from new reporting by companies, FinCEN aims to create an internal database of individual information that will act as a barrier to criminal activity. This new US legislation follows the introduction in the UK of the Economic Crime and Corporate Transparency Act 2023 which requires similar individual identity verification by companies.

Which companies will need to take action? 

The new reporting requirements under the CTA will require many smaller private entities operating in the United States to report beneficial ownership information. FinCEN has estimated that 32.6 million entities will be required to file an initial BOI report during the 2024 calendar year.

Those that are required to file BOI reports as reporting companies include:

• Any corporation or LLC incorporated in a US State.
• Any corporation, LLC or other entity that is registered to business in any US State. This includes foreign entities that are incorporated outside of the United States.

Importantly, the CTA will require action by certain foreign companies and LLCs. A foreign company registered to do business in the United States would be subject to the requirement, unless it falls within one of exemption categories discussed below.

There are several types of entities that are exempt from the CTA’s beneficial ownership information reporting requirements. The CTA lists 23 exemptions including for: certain large operating companies with more than 20 US employees and more than $5 million in US sales; banks and bank holding companies; US registered broker-dealers; US registered investment companies and investment advisers; US tax-exempt entities; reporting issuers that are already subject to other beneficial ownership reporting rules in the United States; subsidiaries of any other exempt entities; and certain inactive entities.

When must reporting companies file a BOI report by?

Reporting companies will need to file their initial BOI report with FinCEN by the following deadlines:

• Those in existence on January 1, 2024 must file within one year (so by January 1, 2025); and
• Those created or registered to do business after January 1, 2024 will have 90 days after receiving notice of their creation or registration to file their initial report. This time period will reduce to 30 days in 2025.

Once an initial BOI report has been filed in accordance with these deadlines, BOI reports must be updated within 30 days of a change to the beneficial ownership, or 30 days upon becoming aware of or having reason to know of inaccurate information previously filed.

How should reporting companies file a BOI report?

Reporting companies will report beneficial ownership information electronically through FinCEN’s website by using the e-filing system.

The report will not be made available to the public. However, it will be made available to federal and state law enforcement agencies, financial institutions with customer due diligence requirements and US Department of the Treasury officers and employees.

What must the BOI report contain?

The filing will contain information about the reporting company itself as well as two categories of individuals, beneficial owners and company applicants (“covered individuals”), which are discussed in more detail below. In summary, we expect reporting companies will have to provide personal information on beneficial owners (over 25%), officers, other persons with control, and, for entities created or registered after 1 January 2024, company applicants (being the person who makes filings of behalf of an entity, which can include lawyers or third-party service providers.)

The reporting company must report its legal name, any trade names, current physical address of its principal office, its state of incorporation and its tax ID number, each where applicable. For each covered individual, the reporting company discloses their full legal name, date of birth, residential address, an ID number (typically a passport or driver’s licence) and an image of the ID.

For individuals who would have to report this information more than once, there is a process where they can apply for a FinCEN identifier, a unique number used to reference their personal information. Once an individual has obtained a FinCEN identifier, reporting companies may report it instead of the list of personal information above. Companies should also request a FinCEN identifier when submitting their initial BOI report by checking a box on the reporting form.

Who would be classed as a covered individual?

Covered individuals fall within two categories:

1. Beneficial owners. This would be an individual who owns or controls at least 25 percent of the “ownership interests” of a reporting company or who has “substantial control” over the reporting company. FinCEN expects every reporting company will have at least one beneficial owner. There is no maximum number of beneficial owners.
   
   An “ownership interest” can be equity, shares, voting rights, a capital or profit interest, convertible instruments, options or other non-binding privileges to buy or sell any of the above, or any other mechanism used to establish ownership.
   
   An individual exercises “substantial control” over a reporting company if they (i) are a senior officer (namely, a President, CEO, CFO, GC, COO or similar role); (ii) have the authority to appoint or remove certain officers or a majority of directors of the reporting company; (iii) are an important decision-maker; or (iv) have any other form of substantial control over the reporting company.
    
2. Company applicants. This would be the individual who directly files, or is primarily responsible for, the filing of the document that creates or registers the reporting company in the United States. It can include internal individuals or external individuals at service providers, such as law firms or registrars. All company applicants must be individuals and up to two can be reported.
   
   Reporting companies are not required to report their company applicants if they were created (for US reporting companies) or first registered to do business (for foreign companies) before January 1 2024. 

What happens if I am a reporting company and I fail to file a BOI report, or file incorrectly?

Although there is a safe harbor under the CTA for corrections within 90 days, the penalties for non-compliance are relatively severe, with civil penalties ($500 per day, up to a total of $10,000) and criminal penalties (up to two years of imprisonment) for individuals who willfully provide false or fraudulent information on a BOI report or who otherwise willfully fail to comply with the CTA’s reporting requirements. Senior officers of a reporting entity that fails to file a required BOI report may also be held accountable for that failure.

Do consider if it would be useful to update your clients on the reporting requirements under the new CTA. If you need any assistance in determining whether your clients would be subject to the CTA, or how a transaction would be impacted, please don’t hesitate to contact us.

What should companies do now?

Companies should:

• Assess whether any existing entity in their corporate group is a reporting company. For any such entities, gather the information needed to complete a BOI report and file it with FinCEN before the January 1, 2025 deadline.
• For any new entity that will be a reporting company, file the BOI report with FinCEN within 90 days of creation or registration.  
• Going forward, become familiar with the reporting requirements and adjust internal processes to ensure ongoing filing obligations are met.

Although the deadlines for compliance under the CTA are relatively reasonable in this first year of implementation, companies should start procedures as soon as possible, as it may take time to gather the information needed from shareholders, officers and other control persons to complete the BOI report.

FinCEN has released a useful brochure and small entity compliance guide explaining the new reporting requirements. This may be useful to help directors, company secretaries and in-house legal teams familiarise themselves with what to expect.

For more information, or to discuss how the CTA will affect your business, please contact the author or your usual CMS contact.