This article originally appeared in Today's General Counsel, May 2024
With the Corporate Transparency Act now in effect, a recent Wolters Kluwer CT Corporation survey reveals that business and legal professionals are not fully prepared to meet beneficial ownership reporting obligations.
The Corporate Transparency Act (CTA) was passed by Congress to crack down on the use of shell companies for illegal activities such as money laundering, tax fraud, and the financing of terrorism. It mandates that over 32 million businesses, including trusts, investment funds, and small businesses submit information to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). This includes providing details on the company and its beneficial owners, defined as individuals who either (1) exercise substantial control over the reporting company or (2) own or control at least 25 percent of the ownership interests in the reporting company through the corporate entity.
Noncompliance with the CTA carries hefty penalties, including civil fines of up to $591 per day, criminal fines of up to $10,000, and possibly imprisonment for up to two years.
Preparedness levels low and rising slowly
Despite the seriousness of the CTA, preparedness is quite low and only slowly increasing since the law took effect on January 1, 2024.
In a recent CT Corporation survey, only 26% said that their organization’s degree of readiness was between 75% to 100%. The survey was conducted near the end of January during a CT Corporation beneficial ownership webinar with 5,100 attendees. This compares to a November 2023 webinar, where 18% of the 4,200 attendees said that they were similarly prepared.
Importantly, the majority of respondents of the January webinar poll indicated that their preparedness levels were 50% or below, with 31% responding that they “are not at all prepared.”
What’s driving the uncertainty?
The nuances in determining if an organization is subject to the reporting rule, coupled with the task of identifying potential beneficial owners, may be primary reasons for low preparedness levels. 30% of the survey respondents were unsure if their organizations will need to make a filing.
Certain organizations, such as public companies and large operating companies, may believe that they are spared from these compliance obligations because they meet one of the Act’s 23 exemptions. However, these organizations will need to consider their subsidiaries, which may not meet the qualifications for exemption. When asked how many beneficial ownership filings their organizations anticipated having to make in 2024 for existing entities or newly formed entities, 20% said that they would have to make “101 or more” filings. Forty-one percent responded that they do not know at this stage.
Another potential issue is how to manage the process for the initial filing and any updated filings. The initial filing involves the handling and storage of sensitive information, including personal information pertaining to the beneficial owners and image files of the required identification documents (such as a driver’s license or passport). This raises questions as to whether there are adequate data security measures in place and how information access management will be carried out.
Filings for newly formed entities also require submitting personal information on the company applicant to FinCEN. A company applicant is the individual who is responsible for filing an entity’s formation documents with the state.
Reporting companies created or registered before 2024 have until January 1, 2025, to submit information to FinCEN. Reporting companies formed or registered in 2024 must file within 90 days. For reporting companies formed or registered in 2025 and beyond, the filing must be made within 30 days.
The complexities of this undertaking are even greater when dealing with multiple entities, with multiple filing deadlines.
In addition, there is the obligation to submit any changes to the initially reported information. These changes must be provided to FinCEN within 30 days. So common events such as a company name change, an address change for a beneficial owner, or a name change of a beneficial owner through marriage would necessitate a new filing. An organization needs a mechanism for capturing these events before forwarding the current reporting information to FinCEN.
Next steps
While the compliance responsibilities surrounding the reporting may seem overwhelming, there are steps that an organization can take. First, know whether your organization is impacted by the Corporate Transparency Act. If necessary, contact an advisor for assistance. There are also online tools and resources available to help you determine your beneficial ownership information filing status. If your business is subject to these reporting requirements, you will need to ensure that you’re compliant. You may wish to leverage a service provider, like CT Corporation, that can assist in managing complex, multiple filings and can offer a process that allows for secure links to be sent to beneficial owners to enable uploading one’s beneficial owner information directly to a central, secure platform.
It’s best to tackle these issues early on so that your organization has time to optimize its processes to facilitate timely, accurate filings before the January 1, 2025 deadline—as well as to provide updated filings necessitated by changes.