In April of 2016, documents leaked from a Panamanian law firm (the “Panama Papers”) revealed a shocking pattern of the use of shell companies by wealthy elites and oligarchs to hide assets for purposes of money laundering, tax fraud and other acts of corruption. The leak of the Panama Papers amplified discussion of the fight against financial crimes, which culminated in the bipartisan passage of the Corporate Transparency Act (the “CTA”) by the United States Congress on January 21, 2021.
Prior to the CTA, businesses were able to form and operate without disclosure of ownership information. This practice will end with the passage of the CTA because the new law will require most U.S. entities, and foreign entities doing business in the U.S., to file registration statements with the Financial Crimes Enforcement Network (FinCEN). FinCEN estimates that approximately 32 million U.S. entities will need to file registration statements under the CTA during its first year of enactment, and approximately 5 million additional entities will need to register each year thereafter.
Entities subject to reporting requirements under the CTA are known as “reporting companies.” Reporting companies include any corporation, limited liability company or any other entity that is created by the filing of a document with a secretary of state office or similar office under tribal laws. Certain foreign entities registered to do business in the United States are also reporting companies.
There are exceptions from the reporting rules that generally apply to heavily regulated entities that already have reporting requirements to federal agencies.
Exemptions include, but are not limited to:
- Large operating companies with more than 20 employees.
- Over $5 million in gross receipts, and a physical operating presence in the United States.
- Publicly traded companies.
- Banks and credit unions.
- “Inactive” entities that hold no assets and are not engaged in the transaction of any business.
The required report filed with FinCEN must disclose the names, dates of birth, addresses and identification numbers of all individuals who have “substantial control” over the entity or own at least 25% of the ownership interests of the entity. For entities formed on or after January 1, 2024, the report must also include identical information for the “company applicant,” meaning the person who filed the document with the secretary of state office to create the entity.
The effective date of the CTA is January 1, 2024. Entities that are in existence prior to that date generally are required to file initial reports with FinCEN no later than January 1, 2025. However, entities created on or after January 1, 2024 must file initial reports within 30 days of the date of creation. Although reporting companies are not required to file additional reports each year, they are required to update their existing reports within 30 days after any change occurs to previously submitted information.
Practitioners are still analyzing the mechanics and implications of the CTA. The legislation was intentionally written so broadly that it will obligate nearly every small business in the United States to comply with the reporting requirements. A key takeaway is that, even if you formed an entity simply to hold a brokerage account or a parcel of real estate for liability protection purposes, chances are that you will have to register with FinCEN under the new law. Penalties may be imposed for noncompliance. We encourage you to contact your trusted advisor to determine the steps you will need to take to comply with the CTA.
About Schneider Downs Financial Services
The Schneider Downs Financial Services industry group provides financial institutions of all sizes with the expertise to effectively address their needs in risk management, IT security and internal audit. Through cybersecurity, IT risk advisory, internal audit, IT compliance frameworks, risk advisory, risk management and more, our experienced professionals provide extensive and comprehensive solutions to our financial services industry clients.
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