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)