In 2021, Congress passed the Corporate Transparency Act (CTA).  Shortly after, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCen) began work on regulations designed to implement the CTA.  The purported purpose is to combat illegal activity that is hidden behind business entities (for example, money laundering).  The proposed regulations have now been published, and it is clear that they will require closely-held businesses to report ownership and other information to the Treasury.

• Who is required to report?

Any company that is formed by filing a document with a Secretary of State will be considered a reporting entity, whether that company is a corporation, limited liability company, partnership, or other form of business entity.  In addition, certain companies formed outside of the United States, but which do business in the U.S. will be required to file the required reports.  Potential exemptions currently identify 23 types of companies that will not have to report, and those are primarily companies that are already subject to substantial reporting requirements such as banks, insurance companies, SEC reporting companies, and accounting firms.  One other exemption is for companies with more than 20 full-time employees, more than $5 million in gross sales, and a physical office in the U.S.

• When will reporting begin? 

The regulations are expected to take effect in late 2022 or early 2023.  Under the proposed regulations, companies formed after the FinCen regulations take effect will be required to report within 14 days of the company’s formation.  Companies that exist at the time of implementation will have 12 months to file their initial report.

• What reporting will be required?

Generally, the regulations will require reporting of a company’s senior officers, individuals with 25% or more equity ownership (including beneficial owners), and individuals who have substantial control such as directors.  The net will be wide, and could include people who own less than 25% of the equity, but who are in control positions through a number of means.  Reporting of parent company information may also be required.  Required information will include names, addresses, tax identifiers, government issued identification numbers, and photos of identification documents.  If information changes, updated reports will be required.

• Will FinCen share the reported information?

While the CTA imposes strict confidentiality, security and access restrictions on the information, FinCen will be available to federal agencies for national security, intelligence and law enforcement purposes.  State agencies will have to obtain a court order to obtain the reported information.  FinCen may also disclose the information to financial institutions that need the information in order to comply with their reporting requirements.

• What if you don’t report?

A willful failure to report or truthfully report will result in a $500 per day civil penalty plus a possible criminal penalty of $10,000 and up to two years in prison.  If found to have knowingly disclosed or used ownership data for an improper purpose, the punishment will be $500 per day plus a mandatory fine up to $250,000 or up to 5 years in prison or both.