Preparing for Corporate Transparency Act Compliance

John Hintze

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August 1, 2024

Corporate Transparency Act Compliance

The Corporate Transparency Act (CTA) went into effect this year and aims to curb illicit activity ranging from tax fraud to money laundering to terrorism financing. The act requires many companies, including smaller firms, to identify and report individuals with direct or indirect ownership stakes to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

Failure to comply with the law could result in civil or criminal penalties, or both, ranging from $500 per day per violation on the civil side to $250,000 in fines and up to five years in prison for criminal charges. 

How the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) chooses to enforce the statute remains to be seen, and numerous lawsuits have been filed that seek to curb the law. Legislation was also recently introduced in Congress to vacate the law entirely. Barring any changes, however, the current deadlines established by the CTA mean that companies will need to begin working toward compliance as soon as possible.

CTA Requirements

The CTA requires companies to file Beneficial Ownership Information Reports (BOIRs) by a certain deadline. Companies formed this year must file within 90 days, while those incorporated before 2024 have until January 1, 2025. Starting next year, BOIRs must be filed within 30 days, not only when new corporate entities are formed or qualified, but when any information on a BOIR changes.

BOIR information is relatively straightforward and includes the name, address, date of birth, driver's license or passport number and photo of any beneficial owner. The law initially applies to all corporate entities except for those that meet the requirements for one of 23 exemptions, which tend to apply to relatively large companies such as those issuing registered securities, bank holding companies and insurers.

“The burden for companies existing before January 1, 2024, will fall mainly on small businesses as most will not qualify for one of the exemptions,” wrote Sandra Feldman, publications attorney at Wolters Kluwer in an April 23 statement. By FinCEN’s own estimate, 32.6 million entities will be required to file a report in the first year, and another five million will have to file in following years. 

Exemption Complications

Determining exemptions may be difficult, especially if a company’s corporate structure is multilayered and issues of control arise. Complex structures are more common in certain business types, such as real estate and private equity, but the CTA is not aimed at any particular industry. “The law is not touching one industry more than another,” said Jeff Dinerstein, partner at law firm Morgan Lewis. “It touches every industry equally and depends on the complexity of the corporate structure.”

Nevertheless, industries in which companies have several tiers of investors or subsidiaries will face the most complicated compliance issues. For example, real estate companies typically have complex layers of financing and oversee numerous operational companies. “How does the operating company know who controls that investor, and how do they get that information, particularly within the required time limits?” said Andrew Weiner, a partner at Pillsbury Law who specializes in real estate. “Most existing agreements create no obligation for investors to provide BOIRs.”

In addition to real estate, the private equity industry is also likely to face particular impact. In a client alert from earlier this year, law firm Paul Hastings warned private equity buyout fund sponsors that one or more exemptions may apply to private equity firms that are registered investment advisers, and their funds and portfolio companies. However, there are no exemptions for holding companies or special purpose vehicles. “Thus, in many cases, management company holding entities, ultimate general partner entities and other similar upper-tier entities may be subject to a CTA filing obligation,” the firm said.

The firm also noted that the CTA could fuel ancillary effects impacting private-equity fundraising and the transaction process. For example, there will be a need for enhanced due diligence on transaction counterparties to verify CTA compliance, and firms will need to ensure appropriate representations and covenants from limited partners and transaction counterparties so sponsors can obtain the necessary information for CTA required filings.

Determining Reporting Obligations

While some large public companies may otherwise be exempt from the CTA, they may be involved in numerous joint ventures that are not. “U.S. public companies are exempt, but their non-wholly owned subsidiaries may not be, and if they have 50 of those, it is a much bigger challenge than if they have two,” Dinerstein said.

The way a company spreads its resources may determine whether there is a reporting obligation. Large operating companies are defined by the CTA as having more than 20 full-time U.S.-based employees, $5 million or more in U.S.-based gross receipts, and a physical presence in the United States. If the holding company meets the criteria, then its subsidiaries are exempt. However, if the employees are concentrated at one of the holding company’s several U.S.-based subsidiaries, that entity may be exempt while the others must file BOIRs.

“Most companies do not put their employees at the holding company level, so that is a problem,” Dinerstein said. “The CTA does not allow a company to say it has more than 20 employees among its affiliated group and is therefore exempt. It looks for employees on an entity-by-entity basis.”

Some legal experts are seeking to clarify undefined elements of the CTA and FinCEN’s subsequent rule as they could have significant implications. “Every general counsel of a nonexempt company could arguably be personally liable if the company does not report properly, even if the general counsel was not involved in the reporting,” Weiner said.

This consideration is further complicated by the CTA’s control element, in which a BOIR must be filed for anyone exerting “substantial control” over the reporting company, including those making decisions. Senior officers, including the general counsel, fall into that bucket, Weiner said. 

Implementation Uncertainty

While companies continue to parse its terms, the CTA already faces legal resistance that could impact its implementation. In March, the U.S. District Court for the Northern District of Alabama ruled that the CTA is unconstitutional, finding the law did not fall within Congress’s authority. FinCEN clarified that during any appeal it cannot enforce CTA with respect to the plaintiffs, which comprise the members of the National Small Business Association that filed the lawsuit and others in the court’s jurisdiction, All other reporting companies must still comply, however.

The case was appealed to the 11th Circuit, with oral arguments tentatively scheduled for September and a decision potentially anticipated by year-end. Litigation is also underway in several other states, including Maine, Michigan and Ohio, but is unlikely to be resolved before the start of 2025.

Senator Tommy Tuberville (R-Ala.) also introduced legislation on May 9 to repeal the CTA, and Congressman Warren Davidson (R-Ohio) introduced companion legislation in the House of Representatives. “[FinCEN] is violating the personal privacy of American business owners by forcing them to disclose sensitive information,” Davidson said in a statement. 

According to Dinerstein, it is too early to tell whether Congress will act on the legislation by year-end, particularly as it could be attached to a must-pass bill such as the National Defense Authorization Act. Without such certainty, companies must therefore be prepared to meet the CTA’s new reporting obligations.

John Hintze is a New Jersey-based freelance writer.