WHAT IS THE CTA?

The CTA is a federal statute intended to combat the use of anonymous shell companies for money laundering, tax fraud, terrorist financing and financial crimes.  The Act takes effect January 1, 2024, and will be administered by the US Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”).

Absent on available exemption, the CTA requires business entities to:

·         report beneficial ownership information to FinCEN;

·         disclose information about the entity and who created the entity or registered it to do business in the U.S.; and

·         update any previously reported information as changes occur.

WHO IS SUBJECT TO THE CTA?

The CTA applies to all corporations, limited liability companies and other entities formed by a filing with the office of Secretary of State of a state or similar office.  This Act also applies to foreign entities registered to do business in the US.  The CTA applies to limited liability partnerships, business trusts and most limited partnerships, but generally excluding sole proprietorships and general partnerships.  The CTA also applies to foreign entities registered to do business in the United States.

WHO IS EXEMPT UNDER THE CTA?

The CTA exempts certain entities.  The exemptions are generally designed to exclude entities that report ownership information to the U.S. government in some way. 

There are 23 exemptions from the CTA, including the following:

·         Publicly traded companies registered with the SEC

·         Banks

·         Securities broker-dealers

·         Insurance companies

·         Tax exempt entities

·         Companies operating in the US with 20 full-time employees and $5 million of gross revenues reported to the IRS for the prior year

·         Accounting firms registered with the SEC under the Sarbanes-Oxley Act

·         Entities which have been inactive (as defined) since January 1, 2020

The exemption for inactive entities applies to an entity that:

·         Was in existence on or before January 1, 2020;

·         Is not engaged in active business;

·        Is not wholly or partially owned, directly or indirectly, by a non-US person;

·        Has not experienced a change in ownership in the prior 12-month period; and

·        Does not otherwise hold any kind or type of assets, whether inside or outside the US, including an ownership interest in any corporation, LLC, or other similar entity.

WHAT MUST BE REPORTED UNDER THE CTA?

Initial reports to FinCEN must include certain information with respect t (1) the reporting company itself; (2) the reporting company’s beneficial owners; and (3) in the event that the reporting company was created or registered to do business in a U.S. state after January 1, 2024, the reporting company’s company applicant.  A company applicant is the individual who, in the case of a domestic reporting company, directly files the document that creates the company, and in the case of a foreign reporting company, directly files the document that registers the company to do business in a U.S. state.  If more than one individual is involved in the filing, the individual who is primarily responsible for directing or controlling the filing is also a company applicant.

These reports must also include certain information about the reporting company itself, such as the company’s legal name, current address, state of formation, and IRS Taxpayer Identification Number.  If the reporting company was created after January 1, 2024, the initial report must include similar identifying information on the company’s company applicant.

The initial reports must also identify each of a reporting company’s beneficial owners.  A beneficial owner is defined as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company.  Initial reports must include the individual’s legal name, date of birth, current address, and a photograph of an identification document (e.g., passport or driver’s license).

 Beneficial ownership includes the following:

·         stock or equity ownership, even through multiple “layers” of entities

·         profits interests

·         voting rights

·         convertible instruments that may be converted into an ownership interest

·         options, put rights and call rights, and

·         any other arrangement used to establish ownership of an entity

Once an initial report is filed, reporting companies do not have annual filing requirements.  However, the CTA requires the filing of updated or corrected reports if necessary.  Specifically, reporting companies are required to file an updated report in the event that there is any change with respect to required information previously submitted to FinCEN concerning the reporting company or its beneficial owners.  However, changes in information concerning a reporting company’s company applicant do not need to be updated.  A reporting company also must file a corrected report in the event that information submitted to FinCEN was inaccurate when filed and remains inaccurate.  Corrected reports must be submitted within 30 calendar days of the date on which the reporting company became aware of the inaccuracy or had reason to be aware of the inaccuracy. 

WHEN DO REPORTS HAVE TO BE FILED?

The following table sets forth the applicable reporting deadlines for different reporting companies depending upon when the reporting company was formed and assuming no available exemption. 

STORAGE OF AND ACCESS TO FILED INFORMATION

Reported information under the CTA will be maintained by FinCEN in a secure nonpublic database.

Access to filed information is supposed to be restricted to selected government agencies, financial institutions for customer due diligence and financial regulators.  However, hacking and leaks should be expected to result in unauthorized disclosures of filed information. 

WHAT ARE THE PENALTIES FOR VIOLATING THE CTA?

Penalties for violating the CTA, including providing false or fraudulent information or failing to report complete or updated information, include:

·         a civil penalty of up to $500 for each day that the violation continues or has not been remedied; and

·         a fine of up to $10,000 and 2 years imprisonment.

WHAT SHOULD I DO NOW?

 The key questions companies should ask themselves in anticipation of the effective date of the CTA are the following:

(1)   Does the company fall under the CTA’s broad definition of a reporting company?

(2)   Does the company qualify for any of the 23 exemptions under the CTA?

(3)   If the company is a reporting company and does not qualify for an exemption:

·         What information must be reported to FinCEN?

·         When does the report have to be filed with FinCEN?

HOW CAN I GET ASSISTANCE WITH THE CTA?

The lawyers of Evans & Dixon can assist you with determining how the CTA may affect your business and determining what must be done to comply with the CTA.  For more information contact the below individuals or your regular Evans & Dixon attorney. 

Joe von Kaenel | jvonkaenel@evans-dixon.com | (314) 552-4155

Michelle Meloche | mmeloche@evans-dixon.com | (314) 552-4087

DISCLAIMER