In September 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued its Final Rule under the Corporate Transparency Act (CTA) updating the U.S. anti-money laundering laws. The Rule has new reporting requirements so that the beneficial owners of businesses will be revealed.
The Rule goes into effect on January 1, 2024. There are different deadlines for business entities depending on the date they were established. There are long lists of types of business entities that must report as well as a list of 23 categories of businesses that are exempt from reporting.
The new CTA Final Rule is long, nearly 200 pages of text, and complicated. There are stiff criminal and civil penalties for violating the Rule. Business owners who violate the Rule are subject to spending up to two years in prison and a fine of $500 per day for every day FinCEN determines the business was in violation.
What is the Final Rule and What Do I Need to Know
The best overview of the Final Rule comes from FinCEN:
“The Corporate Transparency Act (CTA) establishes uniform beneficial ownership information reporting requirements for certain types of corporations, limited liability companies, and other similar entities created in or registered to do business in the United States. The CTA authorizes FinCEN to collect that information and disclose it to authorized government authorities and financial institutions, subject to effective safeguards and controls.”
The purpose of the Final Rule of the CTA is to “help prevent criminals, terrorists, proliferators, and corrupt oligarchs from hiding illicit money or other property in the United States.”
The main thing you need to know is what “beneficial owner” means, what are the reporting requirements, and how to make sure your business is in compliance.
Who is a Beneficial Owner?
According to the Rule, a beneficial owner is defined as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interest of such reporting company.” This includes any senior officer of a business entity who has “substantial control” over important decisions.
Determining whether a person is a beneficial owner is not an easy task. For example, a person may be considered to have substantial control if:
- They serve as a senior officer in the reporting company.
- Have authority over the appointment or removal of senior officers.
Or a majority of the board has “substantial influence of important decisions. Or the person or board members have “any other form of substantial control over a reporting company.
There are also exceptions. For example, minor children are not beneficial owners if their parent or guardian is identified as a beneficial owner. Heirs of the beneficial owners and creditors are not beneficial owners.
What are “Reporting Companies,” When, and How, Do They Report?
What is a reporting company? If the business structure is one that is “created by filing a document with “a secretary of state or similar state or tribal office” it is one that is also required to report the beneficial owners. This includes corporations, limited liability companies, and more.
There is also a list of 23 categories of businesses that are exempt, such as banks and public utilities.
When do they report? Reporting requirements go into effect beginning January 1, 2024. If the business was registered prior to January 1, 2024, its first reporting date is January 1, 2025. If the business is created after January 1, 2024, its first reporting date is within 30 calendar days after its creation or registration.
How do they report? FinCEN is creating forms for reporting companies to use for reporting beneficial ownership information. The forms are expected to be available far in advance of January 1, 2024. They will be published in the Federal Register.
Contact The Reecer Law Firm PLLC for Assistance
You need to start preparing now to comply with the Final Rule by its effective date of January 1, 2024. It requires determining if your entity is one that must report, if so, you must identify the beneficial owners, and more. You must establish policies to monitor any change in ownership and changes to your reporting status.
If you are involved in mergers and acquisitions, your due diligence will now include making sure the target companies have met their reporting requirements.
The risk of being swept up in money-laundering investigations is great for those who have done no wrong but simply failed to comply with their reporting requirements. You can avoid that risk by using the resources of the Reecer Law Firm, PLLC.
The founder and owner of The Reecer Law Firm, Dena Reecer is Board Certified in Estate Planning and Probate Law by the Texas Board of Legal Specialization. Contact us for more information about how our attorneys can help you.