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WATCH OUT! SERIOUS NEW COMPLIANCE REQUIREMENTS ARE COMING

Small privately-held companies will have new compliance burdens starting in the new year.

The Federal Corporate Transparency Act (“CTA”) will require substantial disclosures of company and personal information and updates of that information with severe penalties for non-compliance.  The following summary provides an overview of key considerations.  For questions about how your unique situation impacts compliance, contact us at (908) 540-6901 or [email protected] to schedule a discussion with a member of our team.

Why did the government enact these new requirements?

The CTA was passed as part of the National Defense Authorization Act in January 2021.  It aims to prevent and combat money laundering, terrorist financing and other illicit activities that frequently are facilitated through small privately-held entities.  It seeks to do this through a comprehensive system for disclosures about who are the “beneficial owners” of small privately-held entities.

Let’s look at some of the key concepts and requirements:

1.     Understanding the Act’s Purpose: The CTA was enacted to enhance transparency in the ownership of most small privately-held corporations, LLCs, and other similar entities. It requires these entities to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of Treasury.

2.     Definition of a Beneficial Owner: A beneficial owner is any individual who,

2.1.  directly or indirectly, exercises substantial control over an entity or

2.2.   owns at least 25% of the equity interests in the entity.

The act mandates the disclosure of certain personal information about these individuals.

3.     Entities Subject to the Act: Most corporations, LLCs, and other entities created by filing a document with a Secretary of State or similar office are subject to the CTA. However, there are exemptions for certain entities, such as

3.1.  publicly traded companies,

3.2.  U.S.-based operating companies with more than 20 employees and more than $5 Million in gross receipts or sales in the U.S. for the most recent completed year

3.3.  entities involved in private equity or venture capital (subject to certain criteria)

3.4.  banks,

3.5.  credit unions, and

3.6.  other entities already subject to specific regulatory disclosure requirements.

4.     Required Information: Entities must provide FinCEN with information about their beneficial owners, including full legal name, date of birth, current residential or business street address, and a unique identifying number from an acceptable document (e.g., passport, driver’s license).

5.     Reporting Requirements: Entities formed on or after January 1, 2024 must file a report with FinCEN containing the required information within 90 days after formation or registration. Existing entities have a transitional period to comply with the reporting requirements. This period currently ends on January 1, 2025.  Reports must be made online at the FinCEN website which will be available on and after January 2, 2024.

6.     Updating Information: Entities are required to update the information submitted to FinCEN within a specified period if there is a change in beneficial ownership or if any provided information changes.  This is a key ongoing requirement and a risk factor for companies without policies and procedures to ensure regular inquiry of beneficial owners about any changes in submitted information.

7.     Access to Information: Information reported under the CTA is intended to be confidential and will be accessible only to authorized government authorities for specific purposes, such as law enforcement investigations. [NOTEGiven recent disclosures of cyberbreaches of government databases and unauthorized disclosure of such information by government employees, we consider this a major risk factor for the protection of the information required to be reported.]

8.     Penalties for Non-Compliance: Failure to report accurate information or knowingly providing false information can result in significant civil and criminal penalties.

9.     Implementing Regulations: FinCEN is responsible for developing and implementing regulations under the CTA. Entities should stay informed about these regulations and any guidance issued by FinCEN to ensure compliance.

10.  Record-Keeping Requirements: Entities are required to maintain records of the information reported to FinCEN and any documents used to verify the identity of the beneficial owners.

11.  Training and Awareness: It’s essential for entities to train their relevant staff about the requirements of the CTA and ensure ongoing awareness and understanding of compliance obligations.  This will be a key element of a company’s compliance plan to protect entities from inadvertent violations.

12.  Seeking Professional Advice: Given the complexities and legal implications of the CTA, entities should consider seeking advice from legal professionals or compliance experts to ensure they fully understand and meet their obligations.  This consultation should be ongoing as the CTA and its regulations and interpretations by FinCEN evolve.

13.  Deadline Awareness: Be aware of and adhere to all relevant deadlines for initial reporting and updates to ensure ongoing compliance.

This checklist provides a broad overview of the requirements under the Federal Corporate Transparency Act. It’s important for entities to thoroughly understand these requirements and seek professional guidance to ensure full compliance.  The team at Crowley Law is very familiar with these requirements.  Contact us at (908) 540-6901 or [email protected] to schedule a discussion with a team member.

We’re here to help.

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