With the Corporate Transparency Act (CTA) the US will create the first robust and comprehensive database of beneficial ownership information. Aimed at preventing corrupt business practices, such as money laundering and the financing of terrorism, it will provide essential information to law enforcement agencies.
The beneficial ownership disclosure rules apply to domestic and foreign entities, registered at secretary of state level or any similar office under the laws of a state or Indian tribe. These rules will affect a huge volume of entities, and businesses need to start preparations to ensure compliance.
Aligning with international practices
Enhancing beneficial ownership transparency across and between jurisdictions – to clearly identify who owns, controls and benefits from companies’ activities – has been a major focus of many jurisdictions around the globe. At least 30 countries have already implemented some form of central register of Beneficial Ownership Information (BOI). With the enactment of the Corporate Transparency Act (CTA) into law on 1 January 2021, and the establishment of its final regulations, the US now joins global efforts to promote financial transparency. This step aims to enhance national security and provide critical information to law enforcement agencies and the intelligence community.
When will the new CTA rules come into effect?
The final rules apply from 1 January 2024. Compaies formed after that date have 30 days after creation to submit initial BOI reports. Companies formed before the effective date will have until 1 January 2025 to file their BOI reports. Companies who experience a change in beneficial ownership (including change of name, address, etc) after having filed their BOI reports, must report the change within 30 days.
Which companies will be required to report?
The majority of reporting companies will be corporations, limited liability companies, or entities that are created by the filing of a document with the secretary of state or a similar office under applicable state law, including Indian tribes. The rules include existing and future domestic and foreign companies.
This regulation identifies 23 types of exempt entities:
- securities reporting issuers
- governmental authorities
- banks
- credit unions
- depository institution holding companies
- money service businesses
- brokers or dealers in securities
- securities exchanges or clearing agencies
- other Exchange Act registered entities
- investment companies or investment advisers
- venture capital fund advisers
- insurance companies
- state licensed insurance producers
- commodity Exchange Act registered entities
- accounting firms
- public utilities
- financial market utilities
- pooled investment vehicles
- tax-exempted entities
- entities assisting a tax-exempt entity
- large operating companies
- subsidiaries of certain exempt entities
- inactive entities.
What information must be reported?
Reporting companies will be required to provide the Financial Crimes Enforcement network (FinCEN) with beneficial owner information.
- The reporting company itself: full legal name, business address, jurisdiction of formation or registration and Taxpayer Identification Number (TIN). Foreign reporting companies will be permitted to provide their foreign tax identification number, when they do not have a US TIN.
- Each beneficial owner of the reporting company and the reporting company’s company applicant: full legal name, date of birth, current residential or business street and unique identifying number from an acceptable identification document; when a US identification number is not available, a valid non-US passport will be acceptable.
Who are the beneficial owner(s) and company applicants?
A beneficial owner is any individual who, directly or indirectly, either exercises substantial control over such a reporting company or owns or controls at least 25% of the ownership interests of such a reporting company. It is important to highlight that, even if there is no one individual with 25% of the ownership interest, at least one person with substantial control is expected to file the report.
The final rule added clarifications that significantly expanded the concept of beneficial ownership established in the Customer Due Diligence rule. For example, an individual that serves as a senior officer in the reporting company has the authority to appoint and remove senior officers of the reporting company, or has substantial influence over important decisions by the company and is considered to have a form of substantial control.
For trustees, the final rule identifies three circumstances in which ownership interests held in trust will be considered as owned or controlled by a beneficiary:
- a beneficiary who is the sole permissible recipient of trust income and principal, or who has the right to demand distribution or withdraw substantially all of the assets of the trust;
- a trustee of the trust or other individual with authority to dispose of trust assets; or
- a grantor or settlor who has the right to revoke the trust or otherwise withdraw the assets of the trust.
When it comes to company applicants, the beneficial owner is the individual who directly files the document to create or register the reporting company and, where there is more than one individual involved in such filings, it defines it as the individual who is primarily responsible for directing or controlling such filing.
Are there penalties for non-compliance?
Penalties for non-compliance are severe, including fines and possible imprisonment for up to two years.
Who will have access to the database of beneficial owner information?
Beneficial owner information will be used only for statutorily authorised purposes and will be subject to strict use and security protocols. FinCEN will promulgate appropriate protocols for protecting the security and confidentiality of that information. Unauthorised use or disclosure of BOI may be subject to criminal and civil penalties.
What is next?
The rules have a lengthy implementation period, but we recommend companies start preparing now and seek guidance from their lawyers and tax advisors to:
- determine whether their entities fall under a reporting company, and assess their reporting obligations
- identify beneficial owners, and their company applicants, which could include third parties.
- At the same time, to avoid penalties, companies need to keep a close eye on any change that could affect their beneficial ownership status.
How can TMF Group help?
Contact TMF Group’s US-based entity management services team to find out how we can help your company meet its obligations under the new US UBO regulations, and to stay up-to-date with all other aspects of your US entity governance. Make an enquiry with us today and we can help you further understand and discuss the impact of the requirements.