A Little Something Different – Let’s Talk About Legal and Compliance, Part 1

The Corporate Transparency Act

In this blog series, I plan to touch on a small variety of legal and compliance-related topics that are directly related to the day-to-day operations of small and large companies, including those in the turbomachinery realm. The series will include topics like confidentiality, the recent FTC attempt to ban non-compete agreements, and export/trade compliance. At the outset of each entry (including this one) I will remind readers that this publication is not legal advice, and it should not be relied upon as such. If you find that this discussion raises some questions for you, I encourage you to seek legal counsel.

Now let’s start our adventure together with a discussion of what is known as The Corporate Transparency Act – what is it? Where did it come from? And why is it important? The Corporate Transparency Act or CTA was born as part of the Anti-Money Laundering Act of 2020, which itself was part of the FY 2021 NDAA (National Defense Authorization Act for Fiscal Year 2021).   The 2021 NDAA became law on January 1^st, 2021, as a result of a congressional override of a presidential veto. In short, and to be elaborated on later, the CTA requires registration of all non-exempt “reporting companies” with FinCEN (Financial Crimes Enforcement Network) of the United States Treasury. Now, you might be asking yourself at this point, what does registering US companies have to do with national defense? Because the registration includes divulging the “beneficial owners” of the reporting entity. The goal of the government in requiring this information is to cut down on shell corporations, money laundering, and other illicit financial activity that finances terrorism.

Before we dive into the details of the CTA’s requirements, it is important to note that the whole thing was nearly over before it began. Shortly after the already delayed start to the reporting period, the National Small Business Association argued in federal district and appellate courts that the CTA’s reporting requirement violates the constitutional rights of US citizens. Specifically, the NSBA argued (cleverly I think) that the CTA reporting requirement represented an unwarranted search, in violation of the Fourth Amendment. Interestingly, the Federal District Judge in Alabama ruled that the CTA does indeed violate the Constitution, but this ruling only applies to members of the NSBA. The Court failed to issue a sweeping halt to the reporting requirements at this time. If you are a member of the NSBA and want to claim exemption to CTA requirements, I strongly suggest you get assistance from counsel. As it stands currently, reporting is still mandatory for non-exempt “reporting companies”. It will be interesting to see how the legal challenges play out, but that could be some time from now.

Now what is a reporting company? According to 31 U.S.C. § 5336(a)(11)(A), a reporting company is a corporation, LLC, or other similar business entity that is created by filing a formation document with a State or a foreign company that is registered with a state to do business in the United States. Please see the chart below (provided by FinCEN) for illustration.

 On its face, the requirement seems to engulf all domestic businesses. However, the CTA creates some logical carveouts. The CTA creates exemptions for entities that are registered with the SEC (Securities and Exchange Commission) and entities that are financial institutions because both of those groups are already heavily regulated, making the CTA reporting redundant. There is also an exception for truly dormant entities. Assuming that an entity is not exempt, what information needs to be reported to FinCEN under the CTA? For each “beneficial owner” the Reporting Company must provide:

1. 1. 1. Full Legal Name
      2. Date of Birth
      3. Current Residential or Business Street Address
      4. An identifying number such as driver’s license or passport ID number, or FinCEN identifier.

A “beneficial owner” is defined as an individual who 1) exercises substantial control over the entity whether directly or indirectly or 2) owns or controls not less than 25% of the ownership interests of the subject entity.

The deadline, as it stands right now, for existing Reporting Companies to complete the reporting process is January 1^st, 2025. The rolling deadline for newly formed businesses is within 90 days of creation or registration. The Government-run website for registration is www.fincen.gov. For much more detailed information, I recommend checking out the Small Entity Compliance Guide, provided directly by FinCEN, https://www.fincen.gov/boi/small-entity-compliance-guide

It is truly too soon to know whether the Corporate Transparency Act will stand up to the onslaught of constitutional challenges, be whittled down in application to a shadow of its former self, or even be effective in combating the types of crimes it was designed to prevent. For now, all I know is that I’d plan to have registration completed before the snow gets too high here in Vermont (which could be October, honestly).

Until next time, thanks for reading.

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