Overview

On January 1, 2021, the U.S. Congress passed the Corporate Transparency Act (CTA) as part of the 2021 National Defense Authorization Act (NDAA). The CTA is designed to effectively ban anonymous shell corporations and strengthen anti-money laundering controls. It requires companies formed or registered in the U.S. to file a Beneficial Ownership Information (BOI) Report with the Financial Crimes Enforcement Network (FinCEN) for any business entities determined to be in-scope for the CTA.

Reports must be filed within 90 days of business formation after the CTA becomes effective on January 1, 2024, or by the end of 2024 for existing businesses that are subject to the new regulations. After filing, in-scope firms must update their reports on an as needed basis, any time there is a change in beneficial ownership or control. This amended BOI report must be filed within 30 days of the change.

FinCEN is authorized to disclose the information provided in BOI Reports to U.S. federal law enforcement agencies and, with court approval, to certain other enforcement agencies. The information may also be provided to non-U.S. law enforcement agencies, prosecutors, or judges based upon a request of a U.S. federal law enforcement agency or to financial institutions and their regulators with the consent of the filer.

Which Companies are Reporting Companies Under the CTA?

A "Reporting Company" is defined as any domestic or foreign corporation, limited liability company (LLC), limited partnership, or similar entity formed or registered to do business within any U.S. state or tribal jurisdiction by filing a document.

The CTA will principally target private entities not registered with another government entity, such as a special purpose vehicle (SPV). It also has the potential to impact family offices if they do not otherwise file with a financial authority. A family investment entity, like a limited partnership or LLC, would also likely fall within the definition of a Reporting Company.

There are exemptions to the Reporting Company definition for many public companies, including:

• Entities already subject to other federal reporting (typically financial companies registered with federal financial regulators).
• Large operating companies.
• Exempt subsidiaries.
• Tax-exempt entities, such as private foundations. 
• Certain inactive entities.
• Certain types of trusts that are not created by a filing with a Secretary of State or similar office.

Additionally, there are limited exceptions for pooled investment vehicles formed under the laws of a foreign country. These foreign pooled investment vehicles must file a written certification with FinCEN that provides the identification information of an individual who exercises substantial control over the pooled investment vehicle.

Who Will Have to Provide BOI?

The CTA took an expansive approach for individuals who qualify as Beneficial Owners, broadening the definition beyond the previous numerical test based on ownership interests to include a concept of substantial control. This substantial control test will sweep in a far broader number of individuals than existing definitions. Each Reporting Company must have at least one Beneficial Owner identified, even if no single person owns at least 25% of the entity.

Those affected most by the substantial control test will be those in senior officer roles at Reporting Companies. Going forward, the President, CFO, General Counsel, CEO, COO, or any other officer (regardless of official title) who performs a similar function, will need to provide their identifying information in the BOI Report. This will likely be the biggest cause of refilling's and amendments since these positions change routinely.

The CTA is also designed to include direct and indirect ownership interests or control of a Reporting Company. An individual is seen as exercising direct or indirect control when they can effectively control a Reporting Company through a board representation, majority voting power or rights, financing rights, an intermediary or multiple intermediaries that separately or collectively exercise control over the Reporting Company, individuals serving as nominees, and any other contract, arrangement, understanding, relationship, or otherwise that gives that individual substantial control.

The limited exemptions to the definition of a Beneficial Owner include:

(A) A minor child, provided the Reporting Company reports the required information of a parent or legal guardian.

(B) An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual.

(C) An employee of a Reporting Company, acting solely as an employee, whose substantial control over or economic benefits from the entity are derived solely from his or her employment status, provided that the person is not a senior officer.

(D) An individual whose only interest is a future interest through a right of inheritance.

(E) A creditor of a Reporting Company.

What Information Needs to be Filed?

A Reporting Company must provide the following personal, identifying information about each of its Beneficial Owners in its BOI Report:

• Legal name.
• Date of birth.
• Residence address.
• Identifying number and issuing jurisdiction from a driver's license, passport, or other authorized document.
• Image of the document associated with the number.

All this information is sensitive and firms will have to consider their cyber and information security controls when collecting this, especially the images of identifying documentation.

When Do the Rules Become Effective?

The BOI reporting requirements go into effect January 1, 2024. For entities created after January 1, 2024, BOI Reports will need to be filed no later than 90 days after an entity was organized. All preexisting entities that fall into the definition of a Reporting Company must file by January 1, 2025. Subsequent changes of beneficial ownership are to be reported within 30 days. This means that any time a C-Suite executive leaves a company subject to the reporting requirements, a new report must be filed within 30 days with the naming of a new employee who could assert substantial control over a Reporting Company.

Consequences for Failing to Comply

Firms can be subject to significant civil and criminal penalties if they fail to file BOI Reports as required. Any person violating the reporting requirements is liable for civil penalties of not more than $500 for each day that the violation continues and criminal penalties of imprisonment of up to two years and fines of up to $10,000.

There is a safe harbor if a person submitting incorrect information submits a report containing corrected information no later than 90 days after submission of the original report. This is only available if they were not acting to evade the reporting requirements and did not know that information contained in the original report was inaccurate.

Unauthorized knowing disclosure or use of BOI is punishable by civil penalties of $500 for each day the violation continues and criminal penalties of imprisonment of up to 10 years and fines of up to $500,000.

What Can Firms Do to Prepare?

Any company that has legal entities subject to the requirements of the CTA should begin the process of identifying the Beneficial Owners of these entities and collecting the required information before the initial report is due. Companies that routinely create new entities, such as SPVs, should be assessing their legal entity creation process to ensure that they are able to collect the required information for BOI Reports during this process. Firms must examine the most efficient way to collect the necessary information for the entities under their purview.

How Can S&P Global Market Intelligence Assist?

S&P Market Intelligence is here to assist firms at every step of the process. Our industry-leading Managed Service team is prepared to help design, implement, and operate the entity creation process, from onboarding to report submission. Utilizing technology solutions, such as Client Lifecycle Management (CLM) Pro, S&P Market Intelligence can serve as a one-stop shop and data warehouse for all the relevant datapoints needed to create the BOI Reports.

Our Managed Service team is also prepared to assist firms in remediating their existing entities to ensure that all required filings are submitted to FinCEN prior to December 31, 2024. CLM Pro can also be utilized to file amended reports as soon as BOI changes for an in-scope entity, generating the required amended filings for all in-scope firms.

Click here for more information on CLM Pro.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.