As a financial institution (FI), you are exempt from the Corporate Transparency Act (CTA). However, many of your business customers are not. It is important for you, as their FI, to initiate a conversation regarding what the CTA is, how it will affect your customers, and any future penalties for noncompliance. By having these conversations with customers today in preparation for mandated reporting beginning Jan. 1, 2024, you can help save them and your institution time and money.

What Is the CTA?

The CTA was passed in 2020 as part of the Anti-Money Laundering Act of 2020. The CTA establishes uniform beneficial ownership information (BOI) reporting requirements for certain types of corporations, limited liability companies (LLCs), and other similar entities created in or registered to conduct business in the United States.

Under the CTA, a reporting company must report certain beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), referred to as BOI reporting provisions. The CTA authorizes FinCEN to collect that information and disclose it to authorized governmental authorities and financial institutions, subject to effective safeguards and controls.

The goal is to provide essential information to law enforcement, national security agencies, and others to help prevent criminals, terrorists, proliferators, and corrupt oligarchs from hiding illicit money or other property in the United States.

What Companies Must Comply with CTA?

The rule identifies two types of companies subject to the reporting provisions: a domestic reporting company and a foreign reporting company.

A domestic reporting company is a corporation, LLC, or any entity created by the filing of a document with a secretary of state or any similar office under the law of a state or tribe.

A foreign reporting company is a corporation, LLC, or other entity formed under the law of a foreign country that is registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office.

FinCEN expects that these definitions of reporting companies will encompass limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and LLCs, because such entities are generally created by a filing with a secretary of state or similar office. Under the rule, and in keeping with the CTA, 23 types of entities are exempt from the definition of “reporting company,” such as SEC filers, banks, credit unions, insurance companies, accounting firms, and, most notably, what is called a “large operating company.” A large operating company is defined as a company that employs more than 20 full-time employees in the U.S., has an operating presence at a physical office in the U.S., and filed a federal tax or information return for the previous year, showing it had more than $5 million in gross receipts or sales.

What Is Needed for BOI Reports?

When filing BOI reports with FinCEN, the rule requires a reporting company to identify itself and information about each of its beneficial owners. The CTA defines a beneficial owner of an entity as any individual who, directly or indirectly, (1) exercises substantial control over the entity or (2) owns or controls at least 25% of the ownership interests of a reporting company. The required BOI is name, birthdate, address, and a unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document). In addition, the rule requires that reporting companies created after Jan. 1, 2024, provide the four pieces of information and document image for beneficial owners.

If an individual provides the four pieces of information to FinCEN directly, the individual may obtain a “FinCEN identifier,” which can then be provided to FinCEN on a BOI report in lieu of the required information about the individual.

When Does BOI Reporting Become Effective?

The rule is effective Jan. 1, 2024. Reporting companies created or registered before Jan. 1, 2024, will have one year (until Jan. 1, 2025) to file their initial reports, while reporting companies created or registered after Jan. 1, 2024, will have 30 days after creation or registration to file their initial reports. Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their BOI. The BOI reporting rule is one of three rulemakings planned to implement the CTA.

Rule Two/Access Rule

FinCEN will engage in additional rulemaking to establish who may access the BOI database for what purpose and what safeguards will be required to help ensure the information is secured and protected. On Dec. 16, 2022, FinCEN issued a notice of Proposed Rulemaking, which would implement the provisions stated above.

Rule Three/Revising Customer Due Diligence (CDD)

FinCEN will be revising the CDD rule no later than one year after the effective date of the reporting rule — as required by the CTA. The language seems to indicate no later than Jan. 1, 2025, so more patience will be required.

The CTA and its subsequent rules present significant updates to the U.S. anti-money laundering laws. It will provide law enforcement agencies greater access to the beneficial ownership information of entities. In addition, it will remove the burden of collecting customer due diligence information from financial institutions by mandating self-reporting of information by customers, thereby allowing financial institutions to simply obtain required information from the federal government. FinCEN acknowledges it has a great deal of work to do prior to Jan. 1, 2024; thus, it has begun developing materials to educate and guide reporting companies through the filing of BOI reports. Furthermore, it has developed a page on FinCEN’s website dedicated to BOI reporting requirements, which will be updated regularly, and a call center available by phone or email designed to assist businesses with additional questions. So initiate the conversations and start preparing today.

This article is for general information purposes only and is not to be considered as legal advice. This information was written by qualified, experienced professionals at FORVIS, but applying this information to your particular situation requires careful consideration of your specific facts and circumstances. Consult a professional at FORVIS or legal counsel before acting on any matter covered in this update.