Key Considerations for In-House Counsel under the Corporate Transparency Act

In recent years, there has been a growing focus on corporate transparency and the need to combat illicit activities, such as money laundering and terrorism financing. In response to these concerns, on January 1, 2021, Congress enacted the Corporate Transparency Act (CTA or the Act), as part of the National Defense Authorization Act. The Act will take effect on January 1, 2024.

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), the group in charge of implementing the law, estimates that approximately 32.6 million existing companies will be impacted in 2024, with an additional five million new reporting companies impacted every year thereafter.

In October 2023, Wolters Kluwer, a global leader in compliance, released the results of its survey on the new beneficial ownership information (BOI) reporting rule under the Act. The findings show that 74% of U.S. businesses subject to these new regulations are unaware of these obligations and unsure how they will comply with the new rules. Furthermore, 46% of law firms and certified public accountant firms responded they are unaware of the new BOI reporting requirements.

The CTA brings about significant operational considerations for corporate law departments, necessitating a proactive approach to compliance and entity management. By understanding the Act’s BOI reporting rules, corporate law departments can adapt their procedures and leverage technology to thrive in an evolving regulatory landscape.

Understanding the Corporate Transparency Act

The CTA aims to create a comprehensive federal beneficial ownership registry, requiring certain corporations, limited liability companies, and other similar entities to disclose information about their ultimate beneficial owners.  Reporting companies created in the United States before January 1, 2024 must report company and BOI details to FinCEN by January 1, 2025 within its secure “BOSS” database. Reporting companies created on or after January 1, 2024 and before January 1, 2025 must submit the report to FinCEN within 90 calendar days of receiving notice of their creation.

Starting January 1, 2025, the reporting window is reduced to within 30 calendar days of receiving notice of creation. (Reporting companies formed under the law of a foreign country and registered to do business in the United States are also required to file a report, however this article is dealing with domestic reporting companies only). 

Identifying covered entities

One of the initial tasks for in-house counsel is to determine whether their organization is a covered entity under the Act. The Act applies not only to corporations and LLCs but to other entities created by filing a document with the Secretary of State (or similar office) under state law—whether they engage in interstate commerce or not– a broad category encompassing most businesses. However, there are 23 exemptions to being a reporting company.  For example, if these companies meet certain criteria, such as having more than 20  employees in the United States,  gross annual receipts or sales of more than $5 million, and a physical presence in the U.S., they may be exempt from BOI reporting under the CTA.

Beneficial owners are individuals who directly or indirectly either own or control at least 25% of the entity’s ownership interests or exercise substantial control over the entity. Legal teams should assess the organization’s ownership structure and the decision-making authority of the individuals in the organization to ensure accurate classification and compliance.

Collecting beneficial ownership information

In-house counsel must establish robust mechanisms for collecting, verifying, and maintaining beneficial ownership information. This information should include details about individuals who own or control the entity that will need to report, including their name, date of birth, residential address and a unique number from a document such as a driver’s license or passport.  (Your report will also have to include an image of the document). Accurate records are crucial to meeting the Act’s reporting requirements.

Data security and privacy

In-house counsel should prioritize data security and privacy when handling sensitive personal information. Implementing robust cybersecurity measures, access controls, and encryption is crucial to protect this data from unauthorized access or breaches. Compliance with data protection regulations, such as GDPR, may also be necessary.

Compliance programs and training

Developing comprehensive compliance programs and training is essential to ensure that any individuals who may be considered as beneficial owners are aware of their obligations under the CTA. Regular training sessions can help these individuals recognize the importance of accurate reporting and the consequences of non-compliance.

Reporting and filing requirements

Understanding the reporting and filing requirements under the CTA is essential. Legal teams should ensure that the required reports are submitted to FinCEN within the specified timeframes and in the prescribed format. Errors or omissions in reporting can result in penalties, so thorough attention to detail is critical.

Record keeping and document retention

In-house counsel should establish record-keeping and document retention policies to maintain compliance with the Act. Maintaining records of beneficial ownership information and submitted reports is crucial for audits and due diligence processes.

Penalties and enforcement

Counsel should be well-versed in the potential penalties and enforcement actions under the Act. Failure to comply can result in civil and criminal penalties, including fines and imprisonment. Knowing the consequences of non-compliance is vital to mitigating risks.

Conclusion

The CTA ushers in a new era of corporate accountability and transparency. In-house counsel play a pivotal role in ensuring their organizations comply with this legislation. By understanding the Act, identifying covered entities, collecting and securing beneficial ownership information, implementing compliance programs, and staying aware of penalties and enforcement, legal teams can navigate the complexities of the CTA and safeguard their organizations from potential legal consequences.