United States: Groundbreaking US Corporate Transparency Act Takes Effect January 1

Effective January 1, 2024, most legal entities operating in the United States—including domestic and foreign entities—must consider whether to file beneficial ownership information ("BOI") reports with the Financial Crimes Enforcement Network ("FinCEN"), pursuant to the Corporate Transparency Act ("CTA").¹ Entities formed or registered on or before December 31, 2023 (including non-US entities registered to do business in any US state) will have a staggered compliance date, as summarized below. The CTA is a groundbreaking change in the way the US federal government tracks the beneficial ownership of covered "reporting companies."

The CTA covers both US and non-US entities conducting business in the United States, and is intended to help law enforcement agencies prosecute and deter money laundering, tax fraud, and other fraudulent activities by requiring covered companies to file reports with FinCEN about the company itself, its beneficial owners, and its company applicants.

It is important for all domestic and non-US entities doing business in the country to ensure compliance to avoid liability and penalties for violations. We recommend all business owners review the new reporting obligations and, if necessary, adopt policies and procedures to ensure ongoing compliance with the CTA. If you would like additional information specific to your reporting obligations or are interested in obtaining services related to the CTA, please contact your Mayer Brown attorney.

CTA Summary

In 2021, Congress enacted the CTA, which requires FinCEN to implement a BOI reporting requirement, as part of the establishment of a national beneficial ownership registry. On September 30, 2022, FinCEN released a final rule to implement the CTA's reporting requirements, amended on November 29, 2023.²

The BOI reporting requirement applies to all domestic and foreign reporting companies. A domestic reporting company includes a corporation, limited liability company, limited partnership, or any other entity created by the filing of a document with a secretary of state or similar office, including—in certain circumstances—limited liability partnerships and business trusts. A foreign reporting company includes similar entities formed under the law of a foreign country which is registered to do business in any jurisdiction within the United States. Unless an exemption applies, each reporting company must submit to FinCEN information regarding itself, each of its beneficial owners, and its company applicants.

The penalties contemplated for non-compliance are severe. The CTA establishes civil penalties ($500 per day, up to a total of $10,000) and criminal penalties (up to two years of imprisonment) for individuals who willfully provide false or fraudulent information in connection with a BOI report, or who otherwise willfully fail to comply with the CTA reporting requirements.

Narrow Exemptions

Though the CTA contains 23 exemptions, they are narrowly tailored and must be claimed on an entity-by-entity basis.

At this time, we expect most newly formed and existing entities operating in the United States will not be exempt, unless they are wholly owned or controlled subsidiaries of:

• a regulated entity subject to regular reporting with an agency of the US government (e.g., public companies, banks, broker-dealers, investment advisers, as enumerated in the CTA); or
• an entity able to rely on the "large operating company" exemption, which requires (x) 20 full-time employees in the United States; (y) filing a US federal income tax or information return in the United States demonstrating more than $5,000,000 in US gross receipts or sales for the prior fiscal year, and (z) an operating presence at a physical office in the United States.

Notably, FinCEN currently interprets the statutory text as requiring an entity to be owned entirely by one or more specified exempt entities in order to qualify for the exemption, which may preclude controlled entities from qualifying. Therefore, pending further guidance from FinCEN, even if an entity is a controlled subsidiary of a public company for certain purposes (e.g., accounting consolidation), it may not meet the definition of subsidiary for purposes of the CTA requirements unless it is, in fact, wholly owned.

Initial Compliance Dates

Under the newly adopted extension, the initial reporting timelines are as follows:³

Springing Obligations

An entity that was previously exempt from the BOI reporting requirement must file its initial BOI report within 30 calendar days of the date that it no longer meets the criteria for any exemption.

Updating Obligations

If the reported information changes, or if a reporting company becomes aware of an inaccuracy, it must file an updated or corrected BOI report with FinCEN within 30 calendar days of the date of the change to reportable information, or of the date it becomes aware or has reason to know of the inaccuracy.

Final Thoughts

You should be aware of the BOI reporting requirements and how they may apply to legal entities that you own, control, or operate. All reporting companies should prepare for their applicable CTA compliance date by familiarizing themselves with the CTA's requirements, and by developing internal processes for identifying their beneficial owners and, if applicable, company applicants, as well as for collecting and updating the reportable information.

Many open questions remain concerning implementation of the CTA, and FinCEN continues to issue guidance in the form of Frequently Asked Questions. We are monitoring developments in this space, and are happy to answer any questions in the meantime.

Footnotes

1. Press Release, FinCEN Extends Deadline for Companies Created or Registered in 2024 to File Beneficial Ownership Information Reports (Nov. 29, 2023), https://www.fincen.gov/news/news-releases/fincen-extends-deadline-companies-created-or-registered-2024-file-beneficial.

2. Please see our Legal Update on the final rule: https://www.mayerbrown.com/en/perspectives-events/publications/2023/05/new-fincen-ownership-reporting-requirement-for-legal-entities.

3. A reporting company is deemed to be formed on the earlier of the date on which it receives actual notice that its creation or registration has become effective or the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the reporting company has been created or registered.

Visit us at mayerbrown.com

Mayer Brown is a global services provider comprising associated legal practices that are separate entities, including Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP (England & Wales), Mayer Brown (a Hong Kong partnership) and Tauil & Chequer Advogados (a Brazilian law partnership) and non-legal service providers, which provide consultancy services (collectively, the "Mayer Brown Practices"). The Mayer Brown Practices are established in various jurisdictions and may be a legal person or a partnership. PK Wong & Nair LLC ("PKWN") is the constituent Singapore law practice of our licensed joint law venture in Singapore, Mayer Brown PK Wong & Nair Pte. Ltd. Details of the individual Mayer Brown Practices and PKWN can be found in the Legal Notices section of our website. "Mayer Brown" and the Mayer Brown logo are the trademarks of Mayer Brown.

© Copyright 2023. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.