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EMA Regulatory Reminder: The Corporate Transparency Act (CTA) – In Effect January 1, 2024
In December 2020, Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act (NDAA). According to the Financial Crimes Enforcement Network (FinCEN), the purpose of the CTA is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity” by creating a federal framework for reporting, storing, and disclosing beneficial ownership information of “reporting companies.”
While the CTA was ostensibly targeted to foreign-owned companies, domestic companies – particularly small businesses – who meet the broad definition of reporting company will be affected by the CTA’s disclosure provision. The CTA took effect on January 1, 2024.
Compliance with the reporting requirements depends on the formation date of each reporting company. For entities formed prior to January 1, 2024, reports must be filed no later than January 1, 2025. If there is a change to the information previously submitted to FinCEN, an entity must file an updated report within 30 calendar days of the change occurring. The same applies for any situations where a reporting company becomes aware of an inaccuracy in a report.
For entities formed on or after January 1, 2024, reports must be filed within 30 calendar days of when it receives actual notice that its creation has become effective or when the secretary of state or similar office provides public notice of its formation, whichever occurs first.
What is a “Reporting Company?”
Under the CTA, a reporting company is defined as a corporation, a limited liability company, or other entity that is 1) formed by filing documents with a secretary of state or similar office of a state or Indian tribe or 2) formed under the law of a foreign country and registered to do business in the United States.
FinCEN has provided an extensive list of entities exempted to the term “reporting company.” Three such exempt entities include publicly traded companies, public utility companies, and entities that employ more than 20 employees, operate at a physical office in the United States, and filed federal tax returns demonstrating more than $5 million in gross receipts or sales. For purposes of the exemption, a "full-time employee" in any given month provides at least 30 service hours, regardless of whether the employee is paid by salary or by the hour.
Even with the exemptions, tens of millions of entities will be required to file beneficial ownership reports with FinCEN. The filing requirements will affect a broad range of entities, including but not limited to, smaller private companies and joint ventures that are not exempt.
What is Required to Be Reported and When?
Reporting companies will be required starting in 2024 to deliver to FinCEN a report containing the following information about the reporting company:
- Entity’s full legal name
- Trade names
- A complete current address
- The jurisdiction it was formed in or jurisdiction in which a foreign company first registers
- Internal Revenue Service Taxpayer Identification Number and Employer Identification Number
More notably, reporting companies must also furnish the following information to FinCEN about each beneficial owner and company applicant of the reporting company:
- Full legal name
- Date of birth
- Current business or residential address
- A unique identifying number from an acceptable identification document (i.e., passport, driver’s license, etc.) or FinCEN identifier
The CTA defines “beneficial owner” as an individual, who directly or indirectly, exercises substantial control over the reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company. An individual exercises “substantial control” over an entity if the individual 1) serves as a senior officer, 2) has authority over the appointment or removal of a senior officer or a majority of the board of directors, or 3) directs, determines, or has substantial influence over important business decisions.
The CTA also excludes certain individuals and entities from the term “beneficial owner,” including minor children, individuals acting as agents, employees, individuals with a future inherited interest, and creditors. However, the parents of minor children – who would meet the beneficial owner standard but for the exception noted – must have their information reported, according to the CTA.
A “company applicant” is an individual who directly files the formation documents for the reporting company.
Violations and Penalties
A false, fraudulent, or incomplete beneficial ownership report constitutes a reporting violation only if it is the willful act of an individual. Failure to comply with the CTA reporting requirements can lead to significant civil and criminal penalties, including a maximum civil penalty of $500 per day (up to $10,000) and imprisonment for up to two years.
Who Has Access to the Reports?
FinCEN is required to maintain the information in these reports in a confidential, secure, and non-public database. Under the CTA, beneficial ownership information is neither publicly accessible nor subject to requests under the Freedom of Information Act. However, the CTA authorizes FinCEN to disclose beneficial ownership information to a) federal agencies engaged in national security, intelligence, or law enforcement, b) state, local, or tribal law enforcement for purposes of criminal or civil investigations, c) federal agency issued in response to a request for assistance to a foreign investigation or prosecution, d) financial institutions requesting this information, with the consent of the reporting company, to facilitate compliance with customer due diligence regulations, and e) federal functional regulators or other appropriate regulatory agencies. FinCEN is currently engaged in the rulemaking process for rules on protection and confidentiality regarding these reports.
EMA encourages energy marketers to check with their attorneys and accountants about whether they must report.
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