Red Alert: A Massive New FinCEN Filing Requirement Is Coming

There is a new FinCEN filing requirement coming soon. The Corporate Transparency Act (CTA), a new law passed in 2021, requires corporations, LLCs, and other business entities to provide specified information to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

Congress gave FinCEN time to write regulations about the new law. FinCEN is now issuing proposed rules on how it intends to implement that legislation. The proposed regulations have several unpleasant surprises for all parties involved except for the FinCEN department…

What is the Corporate Transparency Act (CTA) About?

CTA is a piece of legislation passed to promote transparency within the corporate sector. The act requires companies to disclose any information that could potentially impact the company’s share price. This includes financial reports, insider trading, and information about relationships with related parties. CTA also establishes rules for distributing material nonpublic information (MNPI).

The Corporate Transparency Act (CTA) is part of a central government initiative to fight corruption, money laundering, terrorist financing, tax fraud, and other illegal activities. The CTA targets the use of anonymous shell companies that facilitate the flow and transformation of illicit money in the United States.

Currently, not many U.S. states require corporations, LLCs, or other entities to disclose information about beneficial ownership, the human beings who own or control them, or the people who form them. And there has never been a federal requirement for such reporting. As a result, shell companies flourish, and it can be difficult for law enforcement to find the actual owners behind such companies.

FinCEN is now empowered to obtain this information regarding any privately owned entity in the United States. Such businesses include U.S.-based firms and foreign entities that register to do business in the U.S. This database is only accessible to U.S. law enforcement, national security, intelligence agencies, federal regulators, and anti-money laundering agents.

This new FinCEN filing requirement is aimed toward smaller businesses as they are most apt to be isolated enterprises. The law contains exemptions from state legislation for most types of larger firms. These groups include publicly traded corporations and many other enterprises heavily regulated by federal governments. Also excluded is:
• any business with 20 or more full-time employees (employees who work 30 hours per week or 130 hours per month)
• and a U.S. physical office,
• and that filed a federal or state tax or information return the year prior with more significant income (after returns and allowances) or sales (excluding foreign sales) than $5 million.

A CTA violation can make the bearer liable for $500 daily, with a maximum penalty of $10,000 and up to two years in prison.

Interesting fact 1: CTA is not all about Corporations and LLCs

These changes apply to corporations and single member limited liability companies as well as almost 2.5 million LLCs taxed as Schedule C sole proprietorships (disregarded entities).

Even though the individual guidance of the CTA does not end there, any other non-exempt entity created by filing documents with a secretary of state or similar agency is subject to it. FinCEN explains that this includes limited liability partnerships, limited liability partnerships, business trusts, and most partnerships because these entities are generally created by filing a document with the state secretary.

Nearly all companies, not sole proprietorships, or general partnerships, must abide by CTA rules. How many businesses are we talking about? The Financial Crimes Enforcement Network estimates as much as 30 million as of 2022!

Interesting fact 2: The CTA could act earlier than anticipated.

The updated FinCEN filing requirement will likely be finalized sometime in the second half of 2022. After this is the case, the deadline for complying with the CTAs reporting requirements will have arrived. The CTA applies to both newly forming entities and existing companies. The deadlines for compliance differ in each scenario.

New entities: New businesses will have less than 14 days to file their beneficial owner reports after filing proposed rules for the entire year. Therefore, if a new business form during the first half of 2022 requires filing with a state agency in the year’s second half, a business filing will be necessary for FinCEN in the first half.

Old entities: The proposed regulations require existing companies to file an initial report no later than one year after the effective date of the final rules. Inspired by the CTA itself, existing companies are required to report within two years immediately following the regulations become final; however, the time frame for giving notice is much shorter.

FinCEN may consider postponing the completion date of these regulations if it has discovered that no industry is ready to implement them before 2023.

Interesting fact 3: Beneficial owners are broadly defined

The CTA requires that companies affected by a data breach file beneficial owner information report from each beneficial owner’s full name, date of birth, and residential street address, as well as a unique identifying number from an acceptable legal document, such as a driver’s license or a passport. The proposed regulations emphasize that a company can have multiple beneficial owners, which might not be easy to identify.

There are two categories of beneficial owners: Any individual who owns 25% or more of the company’s equity and anyone with “substantial control” over the company.

The CTA did not define substantial control. The proposed laws define it broadly to include a top officer of the company’s parent company. This director has the authority to remove a high-ranking officer or most of the board of directors. Those individuals who influence essential matters affecting the reporting company, including expenditures, investments, or borrowing; sale or other transfer of assets; selling, dissolving, or reorganizing the company; selecting or terminating business lines or ventures; entering or terminating significant contracts; compensation for high-level officers or changing the governing documents of the company, are under the definition of substantial control.

A user’s control needs not to be exercised directly. It can be indirectly exercised in a multitude of ways.

Interesting fact 4: Tight deadlines for reporting the beneficial information of the new owner

When a beneficial owner information report is revised, the proposed changes must materialize within 30 days to stay compliant with the updated FinCEN filing requirement.

For example, if a beneficial owner moves, a new report must be filed within 30 days. On that note, FinCEN estimates that approximately 9 percent of the beneficial owners will change each year due to moves, deaths, or other changes.

The FinCEN report estimates that over 11.4 million new filings will need to be submitted annually. Updates must also be made when a beneficial owner dies.

Interesting fact 5: The Report Should List Those Who Help Form Corporations and LLCs

The beneficial owner identification report owners of this company will be listed. Anyone who files the documents needed to form the domestic reporting company or authorizes or controls others to do so. This could include an attorney filing articles of incorporation to create a corporation or reports of formation to form an LLC.

The compliance of all CTA regulations and their provisions with tax laws is currently exempt (aside from close regulatory accounting associations, as may be defined by Section 102). Per FinCEN, only 851 CPA firms are registered.

Points to remember

These are the five most important things for you to recall about this FinCEN filing requirement:
• FinCEN has proposed how it’s planning to implement the new possible laws to require small companies to disclose the name, address, and other identifying information of their beneficial owners for inclusion in a FinCEN database that will be accessible only to law enforcement.
• The CTA will take effect when the proposed amendments are finalized, which may be as early as mid-2022.
• Within one year after the CTA takes effect, all new and existing small businesses and organizations must file a beneficial owner report with FinCEN.
• Beneficial owners will include those who own 25 percent of every business and those who exercise substantial control over it.
• Useful owner reports must be modified within 30 days if a change in information is made, such as a new address for the beneficial owner.

If you have additional questions about these FinCEN reporting changes or how they impact your business, give us a call at 281-440-6279.

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