The main goal of the Corporate Transparency Act (also called the "CTA") is to combat money laundering and other financial crimes by requiring corporations to disclose their beneficial owners – the individuals who ultimately own or control a company – to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. The CTA applies to all corporations, limited liability companies (LLCs) and other similar entities formed or registered in any state within the United States. This includes both domestic and foreign companies that operate in the country.
The CTA has different ramifications for reporting companies, beneficial owners, and company applicants.
Reporting Companies
A "reporting company" refers to a privately held company, whether domestic or foreign that meets the criteria of the legislation. A domestic reporting company is established through the filing of a document with a secretary of state or equivalent authority in a state. On the other hand, a foreign reporting company is an entity created under the laws of a foreign country and registered to conduct business in the United States by filing a document with a secretary of state or similar office in a state. It is important to note that publicly traded companies, which already have comprehensive reporting requirements, are not encompassed by the CTA.
Beneficial Owners
A "beneficial owner" refers to an individual who, either directly or indirectly, possesses significant control over a reporting company, or owns or controls a minimum of 25% of the ownership interests of a reporting company. Substantial control may be exercised by an individual holding a senior officer position, with the authority to appoint or dismiss senior officers, and the ability to oversee and make decisive judgments on important matters.
You don't have to have a direct interest in a company to be a "beneficial owner." For example, in the case of an entity owned by a trust, the beneficial owner may be the Grantor or Settlor with the authority to revoke or withdraw trust assets, the Trustee responsible for disposing of trust assets, a sole beneficiary entitled to income and principal, or a beneficiary with the right to demand distribution or withdraw a significant portion of trust assets. There are exclusions to the definition of beneficial owner, such as minor children, non-senior employees, and contingent beneficiaries of a trust.
Company Applicants
A "company applicant" refers to any individual who applies to establish or register an entity under state laws, including the person responsible for the submission. For instance, if a family member submits the document on behalf of a relative, both the family member and the relative are regarded as company applicants.
Compliance When Formed
Companies established after January 1, 2022, must submit a report to FinCEN within two years of formation, disclosing the details of their beneficial owners. The report should include the complete legal name, date of birth, residential or business address, and a unique identifier for each beneficial owner.
Companies established before January 1, 2022, have two years from the effective date of the CTA to submit their report to FinCEN. In addition, these businesses must also submit an annual report to update any changes in their beneficial ownership information.
Ongoing Compliance
For new corporate entities, the CTA requires that beneficial owners of the entity submit their personal information (name, date of birth, address) to FinCEN to register the corporation or LLC. For existing corporate entities, the CTA requires that beneficial owners update their information with FinCEN at least once a year, or whenever there is a change in ownership of the entity. This applies to foreign investors as well who must disclose their ownership stake when investing in U.S. real estate.
Financial Institutions
The CTA also requires financial institutions to conduct due diligence on their customers who are beneficial owners of U.S. entities and to report suspicious activities related to these entities to FinCEN. This helps ensure that foreign investors in the U.S. real estate market comply with the law and do not use investment vehicles as a way to hide assets or launder money.
Application of the CTA to Real Estate Investors
Real estate investors, both domestic and foreign, are subject to the oversight of the CTA. If an investor holds a significant portion of a corporation or LLC, they are considered a beneficial owner and must disclose their personal information to FinCEN. This requirement applies to all entities, even those established for real estate investments. Foreign investors who establish U.S. LLCs for real estate acquisition must disclose their ownership stake and personal information to comply with the CTA.
Investors with multiple entities for real estate investments must disclose their beneficial owner status for each entity. This is particularly important for layered structures, where multiple entities are formed in succession, with the final entity holding the real estate. In such cases, the investor may be deemed the beneficial owner of each entity in the chain.
Furthermore, financial institutions must verify the beneficial owner of their customer entities, including those involved in real estate transactions. Investors should be prepared to provide this information to facilitate necessary due diligence processes with their financial institutions.
Other Considerations
As a practical matter, businesses should use this opportunity to take extra steps to protect their personal information and any other sensitive data related to their business. This includes implementing strong security measures such as two-factor authentication, encrypting confidential files, and limiting access to certain information.
Overall, the Corporate Transparency Act provides important safeguards for businesses in the United States against money laundering and terrorism financing and by taking the necessary steps to comply with the CTA, through proper compliance, businesses can protect themselves from legal repercussions from failure to satisfy its requirements.