Is the Corporate Transparency Act Still ‘Opaque’ to You?
Here’s Some Clarity
By Marilyn C. Cunningham
As part of an ongoing effort to protect national interests and curb financial crimes, the U.S. Congress in 2021 passed the Corporate Transparency Act (CTA). Taking effect on Jan. 1, 2024, the CTA requires certain U.S. companies to report specific information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of Treasury. The reporting requirements aim to combat anonymous shell companies and/or “opaque” ownership structures used to facilitate money laundering, terrorist financing, sanctions evasion, the sheltering of illicit funds and other financial crimes.
What is an “opaque” entity? Simply put, they are parties that provide the anonymity many companies need to legally do business. Those same entities make it easy for criminals to hide their illegal gains and thwart investigations into illegal activities – and the real estate industry is a prime target for those laundering money.
Title insurance professionals uniquely understand the need and the burden of discovering the ultimate owner of each entity to prove they have the authority to act in a real estate transaction. FinCEN’s reporting requirements have increased that burden. Here is some guidance to help you comply with the CTA.
Who must report?
Non-exempt entities incorporated, organized or registered to do business with a state must disclose beneficial ownership information (BOI). The CTA requires small legal entities, both domestic and foreign, to file information about the owners, individuals that control the entity, and if formed after Jan. 1, 2024, the individuals who formed them.
Exemptions include insurance companies, some tax-exempt entities, subsidiaries of exempt entities, inactive entities and large entities defined as employing more than 20 employees in the U.S., $5 million in gross receipts and a U.S. office. Sole proprietorships, general partnerships and some trusts are not subject to the CTA because they do not register with any state.
Looking closer at the insurance company exemption, an entity qualifies for the exemption if: 1) Its primary business is writing insurance or reinsuring risks underwritten by insurance companies and is subject to supervision of the state, or any liquidating agent of such company (15 U.S.C. 80a-2); or 2) An insurance producer that is authorized by and subject to supervision of the state, and has a U.S. office.
Who is a beneficial owner?
A beneficial owner is an individual who directly or indirectly either exercises substantial control or owns or controls at least 25-percent ownership interest. Individuals have substantial control if they satisfy one of the following:
• A senior officer; have authority over senior officers or most of the board;
• An individual with substantial influence over the company’s important decisions; or
• An individual with other substantial control.
Individuals who can’t be considered beneficial owners are minor children (parents or legal guardians must claim their interest); a nominee, intermediary, escrow officer or agent; an employee solely acting as an employee (not a senior officer); those with a future interest; and a creditor, unless they otherwise met the requirements.
What must be reported, and when must it be reported?
The information that must be reported for the entity includes the full legal name and any trade names, the address of the entity and jurisdiction of formation, and the entity’s federal taxpayer ID number. The information that must be reported for each beneficial owner is full legal name, date of birth, home address, unique identifying number and issuing jurisdiction from a U.S. passport, and an image of the U.S. passport.
Alternatively, one of the following must be provided: A state driver’s license or identification issued by state, local government or tribe; or a foreign passport.
Reporting deadlines vary, depending on when the entity was created:
DATE ENTITY CREATED | DUE DATE FOR REPORT |
Prior to Jan. 1, 2024 | Within 1 year |
After Jan. 1, 2024 | 90 days from entity’s creation |
After Jan. 1, 2025 | 30 days from entity’s creation |
In addition, entities must file amendments within 30 days if there has been a material change to the reported information, such as ownership or address.
What are the penalties for noncompliance?
Willful reporting violations can carry civil penalties of up to $500 a day that each violation continues, criminal penalties of up to $10,000 per occurrence, and two years of imprisonment. Unauthorized use violations can incur civil penalties of up to $500 for each day the violation continues, criminal penalties of up to $250,000 or five years of imprisonment.
“Transparent” to whom?
FinCEN may disclose BOI only upon request from a federal agency engaged in national security, intelligence or law enforcement; a state, local, or tribal law enforcement agency, if court authorized; or foreign law enforcement agencies, judges, prosecutors and competent authorities. In addition, FinCEN may disclose BOI at the request of a financial institution subject to consumer due diligence requirements, with the consent of the reporting company.
FinCEN’s recent access rule does not create a new regulatory requirement of non-bank financial institutions to access this information, nor does it create any expectation that they do so. Thus, title professionals’ access to the records are unlikely. Adding to the burden on title professionals is the 60-day comment period of FinCEN’s recently proposed rule, which mandates that reporting is not geographically limited, and has no dollar threshold.
Wait – Hasn’t the CTA been declared unconstitutional?
You may have heard rumblings around this, as the U.S. District Court for the Northern District of Alabama recently declared in National Small Business United DBA The National Small Business Association, et al., v. Yellen, et al., that the CTA exceeded the powers granted to Congress, and held it to be unconstitutional. The government was enjoined from the enforcement of the CTA – but only against the plaintiffs in the case. FinCEN will continue to enforce the CTA against all others. The government has appealed, and similar cases in other jurisdictions have been filed.
This issue is far from being settled. For now, everyone who is not a plaintiff in the case should plan to comply before the end of the applicable reporting period. Doma Title Insurance, Inc., will keep our agents and approved attorneys apprised of any changes or developments in this area.
Marilyn C. Cunningham is Vice President, Mid-Atlantic Regional Underwriting Counsel for Doma Title Insurance, Inc.