We previously discussed the CTA here – https://htj.tax/?s=corporate+transparency+act
It was off the radar for a while but now it’s back in the headlines. Why? Every two years, the Tax Justice Network releases the Financial Secrecy Index, which “ranks each country based on how intensely the country’s financial and legal system allows individuals to hide and launder money extracted from around the world”. The US moved from #2 to #1 on the Financial Secrecy Index in 2022 after increasing its supply of financial secrecy to global players by 31 percent since 2020.
A higher rank on the index does not necessarily mean a jurisdiction has more secretive laws, but rather that the jurisdiction plays a bigger role globally in enabling the bank secrecy, anonymously shell company ownership, anonymous real estate ownership or other forms of financial secrecy, which in turn enable money laundering, tax evasion, and tax evasion of sanctions
Germany, Italy, Japan, the US, and the UK increased their financial secrecy and managed to offset global decreases by 3%. These countries are all members of the Russian Elites, Proxies, and Oligarch Task Force, discussed infra, and collectively supply one eight of all financial secrecy in the world
WHAT WAS THE ISSUE?
THE PROBLEM
The current lack of centralized US (beneficial ownership information) reporting requirements and database make the United States jurisdiction of choice to establish shell companies that hide the ultimate beneficiaries. This was viewed as a significant loophole that weakened the US efforts to combat money laundering and terrorism financing
THE SOLUTION
The ultimate goal of this regulatory proposal is to combat the proliferation of anonymous shell companies that facilitate the flow and sheltering of illicit money in the United States
CTA THE BASICS
- Federal legislation
- Applicable to States/ territories/ possessions
- First ever US BOI legislation
- Reporting: By “reporting companies”
- Of “beneficial owners” and company applicants”
- To WHOM: FinCEN
- FinCEN will maintain centralized, secure, non-public database
- Disclosure: Non-public
- Only to selected government agencies (domestic and foreign) & financial institutions for customer due diligence
- Penalties: Civil and Criminal
- In-scope entities reporting companies
- Pre-existing
- Newly formed
- Domestic
- Foreign
- Corporations, limited liability companies or other similar entities that are
- Domestic – Created by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian tribe, or
- Foreign – Formed under the laws of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian tribe
- Note – not all activities require registration
Targets smaller companies that may act as shell companies in a money laundering schemes
EXEMPTIONS
- Heavily regulated companies, e.g.,
- Public traded companies
- Banks
- Insurance companies
- Registered investments advisors
- Tax-exempt organizations
- Large operating companies in US/ >20 full-time employees/ >$5m gross receipts (of US source income) reported to IRS in prior year/ physical US office
- Certain US-owned dormant companies (non-active) in existence for over one year
- Entities owned by an excluded entity
NOT WITHIN SCOPE
- Sole proprietorships
- General Partnerships
- Foreign entities not registered to do business in US
- Unincorporated associations
- Wealth planning trusts (likely)
WHO IS A BENEFICIAL OWNER?
Two-Part Test
- An individual who, directly/ indirectly or, through any contract/ arrangement understands/ relationship, or otherwise
- Exercise substantial control over a reporting company, or
- Owns or controls at least 25 percent of the ownership interest of a reporting company
Exceptions
- Minor children,
- Nominees
- Employees,
- Inheritors
- Creditors
Focus on Trusts
- Individual may directly/ indirectly own/ control ownership interest in a reporting company through a trust or similar arrangement in capacity as a:
- Settlor,
- Beneficiary
- Trustee
- A person with authority to dispose of trust assets
WHO IS A COMPANY APPLICANT?
- Any individual
-
- Who files a document that creates a domestic reporting company or
- Who first registers a foreign reporting company with a secretary of state or similar office in the United States
- Includes any individual who directs or controls filing of a formation or registration document by another person
- Designed to ensure that reporting company provides information with respect to individuals responsible for decision to form a reporting company
Takeaway: Will result in numerous individuals associated with the formation/registration of an in-scope entity to be encompassed within company application definition.
WHAT INFORMATION MUST BE PROVIDED?
- Reporting company: Identifies itself (name/ tradename/ address/ state of formation/ IRS TIN)
- Information about each beneficial owner/ company applicant
- Full legal name
- Date of birth
- Complete address
- Unique ID number from an acceptable identification document (such as a non-expired passport, driver’s license)
- FinCEN Identifier – If an individual/ reporting company provided its BO to FinCEN, a person can obtain a FinCEN identifier, which then is provided to FinCEN in lieu of other items of information.
FinCEN to prescribe form/ manner of report. Each person filing a report required to certify that report is accurate and complete.
WHEN IS A REPORT DUE?
- Initial Report:
- Preexisting reporting companies (prior to effective date of final rule) NLT than one year after effective date of final regulations
- Newly created reporting companies (on or after fila rule) Within 14 days of the date of formation (domestic)/ registration (foreign)
- Updated report: within 14 days after discover or had reason to know that report information inaccurate information submitted within 90 days of inaccurate report)
Update – 29 September 2022
29 September 2022, the US Financial Crimes Enforcement Network (FinCEN) issued a final rule implementing the Corporate Transparency Act’s (CTA) beneficial ownership information (BOI) reporting provisions. The effective date for the rule is 1 January 2024.
The rule requires reporting companies to file reports with FinCEN that identify two categories of individuals: the beneficial owners of the entity and the company applicants of the entity.
The rule identifies two types of reporting companies:
- A domestic reporting company is a corporation, limited liability company (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 Indian 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 mean that reporting companies will include (subject to the applicability of specific exemptions) 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. Other types of legal entities, including certain trusts, are excluded from the definitions to the extent that they are not created by the filing of a document with a secretary of state or similar office.
Under the rule, a beneficial owner includes any individual who, directly or indirectly, either exercises substantial control over a reporting company, or owns or controls at least 25% of the ownership interests of a reporting company. The rule defines the terms ‘substantial control’ and ‘ownership interest’. The range of activities that could constitute substantial control captures anyone who is able to make important decisions on behalf of the entity.
The rule provides standards and mechanisms for determining whether an individual owns or controls 25% of the ownership interests of a reporting company. Among other things, these standards and mechanisms address how a reporting company should handle a situation in which ownership interests are held in trust.
The rule defines a company applicant to be only two persons:
- The individual who directly files the document that creates the entity, or in the case of a foreign reporting company, the document that first registers the entity to do business in the US
- The individual who is primarily responsible for directing or controlling the filing of the relevant document by another.
The rule does not require reporting companies existing or registered at the time of the effective date of the rule to identify and report on their company applicants. In addition, reporting companies formed or registered after the effective date of the rule do not need to update company applicant information.
When filing BOI reports with FinCEN, the rule requires a reporting company to identify itself and report four pieces of information about each of its beneficial owners: name, birthdate, address, and a unique identifying number and issuing jurisdiction from an acceptable identification document. Reporting companies created after 1 January 2024, provide the four pieces of information for company applicants.
If an individual provides their information to FinCEN directly, the individual may obtain a ‘FinCEN identifier’ that can then be provided to FinCEN on a BOI report in lieu of the required information about the individual.
Reporting companies created or registered before 1 January 2024 will have one year to file their initial reports, while reporting companies created or registered after 1 January 2024, will have 30 days after receiving notice of their creation or registration to file their initial reports.
Reporting companies have 30 days to report changes to the information in their previously filed reports and must correct inaccurate information in previously filed reports within 30 days of when the reporting company becomes aware or has reason to know of the inaccuracy of information in earlier reports.
The BOI reporting rule is one of three rulemakings planned to implement the CTA. FinCEN will engage in additional rulemakings to establish rules for who may access BOI, for what purposes, and what safeguards will be required to ensure that the information is secured and protected. It will also revise FinCEN’s customer due diligence rule following the promulgation of the BOI reporting final rule.
FinCEN continues to develop the infrastructure to administer these requirements in accordance with the strict security and confidentiality requirements of the CTA, including the information technology system that will be used to store beneficial ownership information: the Beneficial Ownership Secure System (BOSS).
“This rule will make it harder for criminals, organised crime rings, and other illicit actors to hide their identities and launder their money through the financial system,” said Secretary of the Treasury Janet Yellen. “It will help strengthen our national security by making it more difficult for oligarchs, terrorists, and other global threats to use complex legal structures to launder money, traffic humans and drugs, and commit other crimes that threaten harm to the American people.
“And it will help level the playing field for honest businesses that play by the rules but are at a disadvantage when competing against bad actors who use shell companies to evade taxes, hide their illicit wealth, and defraud customers and employees. On the international front, the rule will also help the US more effectively combat financial crime alongside our partners and allies under strong global standards.
