This article originally appeared in the November 2024 issue of Security Business magazine. Don’t forget to mention Security Business magazine on LinkedIn and @SecBusinessMag on Twitter if you share it.
In the children’s book, Franklin Fibs by Paulette Bourgeois, Franklin the Turtle tries to impress his friends by falsely claiming that he can swallow 76 flies in the blink of an eye. In the end, Franklin learns the importance of telling the truth – a lesson we hope all young readers absorb. However, not all people abide by this lesson. Some people must be compelled by law to tell the truth – or at least not be fake.
One recent and powerful example is the Corporate Transparency Act (CTA), a federal law enacted in 2021 and effective as of January 1, 2024.
Franklin the Turtle was merely trying to impress his friends. We all do that from time to time; however, we do not all commit crimes. Nevertheless, because some people do and because they use corporate shells to do it, the CTA is an important new tool. Although it will be onerous for good corporate citizens, the CTA is a necessary step to help law enforcement catch the bad guys and protect the integrity of our corporate system.
What the CTA Requires
The CTA is aimed at combating money laundering, tax evasion, and other illicit financial activities by increasing transparency in corporate ownership. The CTA requires a broad range of entities to disclose information about their owners and persons who exercise control to the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Treasury.
The requirements primarily apply to smaller companies, including limited liability companies (LLCs) and corporations with fewer than 20 employees and less than $5 million in gross receipts. There are 23 enumerated exemptions for public companies, large operating companies, investment companies and advisers, and subsidiaries of certain exempt entities. Your company and its legal counsel should perform an analysis to determine whether your company meets the technical requirements for any exemption to apply.
The information disclosed is intended to be used by law enforcement and regulatory agencies to assist in investigations and enforcement actions. It is not intended to be public.
Key Requirements for Businesses
Beneficial ownership reporting:
Disclosure of the individuals who ultimately own or control the company. This includes name, date of birth, address, and a unique identifying number (like a driver's license number or passport number). A Beneficial Owner is defined as any individual who owns 25% or more of a reporting company or exercises “substantial control” over a reporting company.
Identifying a beneficial owner based on owning 25% or more:
This measure seems simple – but could be complicated depending on how ownership interests are held. Under the CTA, ownership can come in many forms, such as equity, stock, voting rights, capital or profit interest, convertible instruments, options, etc. Ultimately, when assessing who needs to report, an ownership interest assessment should be completed with your counsel.
Identifying a beneficial owner based on substantial control:
Determining whether an individual has “substantial control” is also tricky under the CTA. Some examples listed in the statute: A senior officer or general counsel, someone with authority to appoint officers or a majority of directors, an important decision-maker for the business, and other measuring standards. Ultimately, what constitutes “substantial control” will become more clear as the CTA is enforced and challenged in court.
Filing:
Businesses must make these disclosures to FinCEN and update their beneficial ownership information within specific timeframe identified in the CTA. Also, updated disclosures are required whenever there is a change in its basic information, beneficial owners, or its status as a reporting company (i.e., if the company was exemption and now is not – or vice-versa). The updated report must be filed no later than 30 days after the change. Failure to comply can result in civil penalties of up to $500 for each day the violation continues, or criminal penalties, including imprisonment of up to two years and/or a fine of up to $10,000.
Determining who is a beneficial owner, who has substantial control, whether your company is exempt, etc. is a complicated process. It is critical that your company consult with counsel to ensure compliance with the CTA.
