This is an alert to businesses outside the U.S. and their lawyers about the U.S. Corporate Transparency Act (CTA). (The CTA also covers U.S. businesses and business owners.) The Act requires companies to file information about their beneficial owners with U.S. regulators. A great deal has been written about the CTA. Still, many potentially affected business owners, managers, and advisers in and outside the U.S. have yet to learn about it.
Company owners and managers and their advisors must consider if the company is covered by the Act and may have to file information under it. This is the time to make that determination and to plan if you or your client’s business will be a “reporting company,” required to disclose information about its beneficial owners who have substantial ownership or control of the entity.
It is worth considering compliance because a failure to report can result in a civil penalty of up to USD500 per day and a criminal fine of up to USD10,000, up to two years imprisonment, or both.
REPORTING EFFECTIVE JANUARY 1, 2024:
To calendar the filing deadline, planning new company creation or changes in the form of existing companies:
- Entities formed before January 1, 2024, have until January 1, 2025, to report.
- Entities created or formed after January 1, 2024, must file an initial report within 30 days of formation.
WHAT COMPANIES ARE COVERED?:
The CTA covers most small privately held businesses, including companies formed under the laws of a U.S. state with foreign owners and those formed under the laws of another country registered to do business in a U.S. state. FinCEN estimates there will be approximately 32 million reporting companies in Year 1 of the reporting requirements and approximately 5 million new reporting companies in each following year.
More specifically, a domestic reporting company is a corporation, limited liability company (LLC), or other entity created by the filing of a document with a secretary of state under the law of a state or Indian tribe. A foreign reporting company is a corporation, limited liability company, or other entity created under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe.
The CTA may cover limited partnerships (LPs), limited liability partnerships (LLPs), or general partnerships, depending on state requirements. Generally, general partnerships, along with sole proprietorships and certain types of trusts are not subject to the reporting requirements. (However, the tests for beneficial ownership, not covered in this alert, will require the filing of information about trustees and estate administrators if such persons qualify as beneficial owners.) There are already questions about whether certain types of entities are covered.
WHAT COMPANIES ARE EXEMPT?:
FinCEN says 23 categories of entities are exempt. So, determining if your company must report entails first determining if it falls within the definition of a foreign (or domestic) reporting company and then if it falls within an exempt category.
Exempt categories include banks, credit unions, money services businesses, broker-dealers, securities reporting issuers, Securities Exchange Act registered entities, investment companies or investment advisers, venture capital fund advisers, public accounting firms (but not law firms), insurance companies, Commodity Exchange Act registered entities, pooled investment vehicles, tax-exempt entities, large operating companies, and inactive entities.
Some exemptions are easy to determine, making the process a simple, single step. One such very large exemption for “large reporting companies” is for large operating companies with more than 20 full-time employees and a physical office in the U.S. that filed a U.S. federal tax return or information return in the previous year showing more than USD 5,000,000 in gross receipts or sales.
Companies foreign to the U.S. that meet the description of a foreign reporting company or have an ownership interest in a domestic reporting company must beware of exceptions of them from some of the commonly described exempt categories. Thus, while inactive companies are exempt, the exemption does not apply to entities that otherwise qualify for the exemption but are owned by a foreign person, whether directly or indirectly, wholly or partially.
Another large exempt category is for an entity described as a “pooled investment vehicle,” which is defined as a fund that would be an investment company under the Investment Company Act but for Sections 3(c)(1) or 3(c)(7), that is advised by certain exempt entities, including banks, credit unions, broker-dealers in securities, investment companies and investment advisers, and venture capital fund advisors. If the entity were formed under the laws of a foreign country, however, then it would be a “foreign pooled investment vehicle” and not fully exempt, although its reporting requirement is limited.
WHAT TO CONSIDER IF YOUR COMPANY MAY BE COVERED:
If your company or client may be covered, first determine definitively whether it will report. This may be possible by consulting the FinCEN site and legal and business publications, but it would be wise to obtain the advice of a U.S. lawyer. The next question will be the most important for many foreign reporting companies and owners of domestic reporting companies. That is, who must be reported as a beneficial owner?
The requirement does not necessarily end at the first level of ownership of record. For example, where there are nominees, intermediaries, custodians, or agents acting on behalf of another individual, not only must their information be reported, so also must the information for the individual on whose behalf they are acting. Similarly, in the comments to the final regulations, FinCEN explains that a trustee of a trust or “similar arrangement” is included in the definition of a beneficial owner because such persons can exercise substantial control over a reporting company.
Another consideration may be who will have access to the reported information. Rulemaking for access to and protection of the data to be collected is ongoing, but the basic outline of who will be able to access it is in the law on the books. In addition to the U.S. Department of the Treasury, authorized recipients include other U.S. agencies engaged in national security, intelligence and law enforcement and state, local, and tribal agencies engaged in law enforcement. Financial institutions (FIs) will have access for customer due diligence (CDD) requirements (with the consent of the reporting company), as will supervising regulators of financial institutions (for the limited purpose of determining FI compliance with CDD requirements).
Possibly of most significant interest for foreign beneficial owners is that authorized recipients include law enforcement agencies, prosecutors, and judges of other countries, including foreign central authorities and competent authorities. Requests may be made under an international treaty, agreement, convention, or official request, but where those instruments are not available, authorities in “trusted foreign countries” may make a request. All foreign country requests must be made to FinCEN through a U.S. federal agency. So, there are controls on access, as well as restrictions on use and dissemination. But the fact remains that foreign governments with jurisdiction over foreign reporting companies and reportable foreign beneficial owners will have access to the information reported.
Finally, be aware that CTA compliance will likely arise in various types of business and legal contact with the U.S., and it may figure in your company planning and procedures. It may be addressed, for example, in law firm engagement agreements, M&A transactions, employment agreements, shareholder agreements, LLC operating agreements, and subscription agreements.
Now is the time to determine if you or a company you own, manage, or advise will be required to report beneficial owner and other information under the CTA. This includes obtaining advice as to whose information would have to be reported, who will have access to the information, and the legal options. And be aware that, whether or not you may have a reporting responsibility under the CTA, it may appear in transactions in which you or your company are involved with the U.S.
This alert is a summary for general information and discussion only, and parts of it may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, does not create an attorney-client relationship, and does not purport to represent the views of our clients or the Firm.
 The responsible regulator is the Financial Crimes Enforcement Network (FinCEN) of the United States Treasury Department. It is setting up the reporting system and non-public database.
 Beneficial Ownership Information Reporting Requirements, 87 Fed. Reg. 59498, 59570 (Sept. 30, 2022) (codified at 31 C.F.R. Part 1010, effective Jan. 1, 2024). For answers to specific questions about and an overview of the CTA, FinCEN published on Mar. 24, 2023, a FAQs page at https://www.fincen.gov/boi-faqs (“FinCEN FAQ Sheet”) accessed May 25, 2023.
 The term “Indian tribe” has the meaning given the term “Indian tribe” in section 102 of the Federally Recognized Indian Tribe List Act of 1994 (25 U.S.C. 5130).
 Trusts, as described in section paragraph (1) or (2) of section 4947(a) of the Internal Revenue Code, are listed as exempt entities. 31 C.F.R. 1010.380(c)(2)(xix)(C).
 For example, decentralized autonomous organizations (“DAOs”). See, Robert A. Schwinger, “Can the Autonomous Remain Anonymous?” New York Law Journal May 22, 2023.
 87 Fed. Reg. 59498, supra. The exemptions are set forth at 31 C.F.R. §1010.380(c)(2). For an outline of all exemptions, see FinCEN FAQ Sheet, supra, at Question 8.
 This Alert is not intended to be legal advice or to provide adequate guidance to make a determination as to whether a specific entity is covered by the CTA. Such advice should be sought from a lawyer with appropriate licensing and experience.
 The term “foreign person” means a person who is not a United States person, as defined in section 7701(a) of the Internal Revenue Code of 1986.
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Ted Semaya is an experienced commercial litigator and trusted business advisor. He has tried business disputes before numerous courts and arbitral tribunals. But he first counsels clients, from multinationals to individuals and from the famous to the most confidential, to minimize their liability and avoid formal proceedings, which often is the better course.