Red Alert: There Will Soon Be a Significant New FinCEN Filing Requirement

A new FinCEN filing requirement will shortly be in effect. The Financial Crimes Enforcement Network of the Department of the Treasury must receive certain information from corporations, LLCs, and other corporate entities under the Corporate Transparency Act (CTA), a new law passed in 2021. (FinCEN).

FinCEN was given time by Congress to create regulations for the new law. Currently, FinCEN is releasing draft regulations outlining how it expects to carry out that legislation. With the exception of the FinCEN department, the proposed regulations contain a number of unpleasant surprises for all parties concerned.

What is the purpose of the Corporate Transparency Act (CTA)?

CTA is a law that was passed to encourage transparency in the business world. Companies are required by the statute to disclose any information that might have an effect on their stock price. This covers financial information, insider trading, and details on connections to linked parties. Additionally, CTA defines guidelines for sharing significant nonpublic information (MNPI).

A federal government campaign to combat corruption, money laundering, financing of terrorism, tax fraud, and other criminal acts includes the Corporate Transparency Act (CTA). The CTA focuses on the use of fictitious shell firms that aid in the movement and exchange of illegal funds within the United States.

The disclosure of information on beneficial ownership, the people who own or manage corporations, LLCs, or other entities, as well as the individuals who constitute those companies, is currently not required by many U.S. states. Furthermore, no federal mandate for such reporting has ever existed. As a result, shell businesses prosper and it can be challenging for law authorities to identify the real proprietors of these businesses.

Now, FinCEN has the authority to request this information from any privately held company operating in the US. These companies include American companies and international companies that register to conduct business in the United States. Only U.S. law enforcement, national security, intelligence, federal regulators, and anti-money laundering agents have access to this database.

Smaller businesses are targeted by this new FinCEN filing requirement because they are more likely to be solitary entities. For the majority of larger firm types, the law contains exclusions from state regulations. Publicly traded companies and numerous other businesses that are subject to strict federal regulation are included in these groups. Excluded as well are:

Any company that had at least 20 full-time employees (those who put in 30 hours per week or 130 hours per month), had a physical office in the United States, and had significant income (after returns and allowances) or sales (excluding foreign sales) of more than $5 million the previous year when filing federal or state tax or information returns.

A CTA violation carries a maximum fine of $10,000 and a potential sentence of two years in prison, as well as a daily penalty of $500.

Interestingly, CTA is not just about corporations and limited liability companies.

Corporations, single-member limited liability companies, and the over 2.5 million LLCs that are taxed as Schedule C sole proprietorships are all affected by these changes (disregarded entities).

The CTA’s individual guideline doesn’t stop there, however, since it also applies to any other non-exempt business formed by filing paperwork with a secretary of state or other comparable government body. Due to the fact that these entities are typically established by submitting a paperwork with the state secretary, FinCEN states that this includes limited liability partnerships, limited liability partnerships, business trusts, and the majority of partnerships.

Almost all businesses, excluding sole proprietorships and general partnerships, are required to follow by CTA regulations. How many companies are we referring to? As of 2022, the Financial Crimes Enforcement Network pegs the number at 30 million.

Second interesting fact: The CTA might take action sooner than expected.

Finalization of the revised FinCEN filing requirement is anticipated for the second half of 2022. When this occurs, it will be time to start submitting reports in accordance with the CTA’s reporting requirements. The CTA is applicable to both recently formed entities and current businesses. In each situation, there are different due dates for compliance.

New entities: After submitting proposed rules for the entire year, new firms will have less than 14 days to submit their beneficial owner reports. As a result, FinCEN will need to file a business in the first half of 2022 if a new business form created in the first half of the year needs to be filed with a state agency in the second half of the year.

Old entities: According to the proposed regulations, existing businesses must submit their initial reports no later than a year after the final rules’ implementation date. Existing organizations are expected to report within two years after the regulations become final, drawing inspiration from the CTA itself; however, the window for giving notice is substantially shorter.

If FinCEN determines that no industry is prepared to implement these laws before 2023, it may consider delaying their completion date.

The definition of “beneficial owners” is broad.

Each beneficial owner’s full name, date of birth, residential street address, and a special identification number from an accepted legal document, like a driver’s license or passport, must be included in a beneficial owner information report, according to the CTA. The proposed restrictions underline the possibility of many, difficult-to-identify beneficial proprietors for a firm.

Beneficial owners fall into two categories: those who hold “substantial control” over the company and those who own 25% or more of its shares.

Significant control was not defined by the CTA. It is widely defined in the proposed laws to include a senior executive of the business’s parent corporation. A senior officer or the majority of the board of directors may be dismissed by this director. The term “substantial control” refers to those people who have a significant say in decisions that have a significant impact on the reporting company, such as spending, borrowing, selling or transferring assets, dissolving or reorganizing the business, choosing or ending business ventures, signing or ending important contracts, setting high-level officer compensation, or altering the bylaws.

The control of a user need not be used directly. Many different indirect methods can be used to exercise it.

Interesting fact #4: There are strict deadlines for reporting the new owner’s advantageous information.

The suggested changes to a beneficial owner information report must be implemented within 30 days in order to comply with the most recent FinCEN filing requirements.

For instance, a new report must be filed within 30 days if a beneficial owner moves. On that note, FinCEN predicts that due to relocations, decedents, or other changes, around 9% of the beneficial owners will change each year.

According to the FinCEN report, more than 11.4 million new filings will need to be made each year. When a beneficial owner passes away, updates are also required.

The Report Should List Those Who Assist in the Formation of Corporations and LLCs, according to Fact #5.

Owners of this company who have submitted a beneficial owner identification report will be listed. Any person who submits the necessary paperwork to establish a domestic reporting firm, or who permits or manages others to do so. This could involve a lawyer submitting reports of formation or articles of incorporation to establish a corporation or LLC.

Currently, all CTA rules and their provisions are excluded from compliance with tax legislation (aside from close regulatory accounting associations, as may be defined by Section 102). Only 851 CPA companies are registered, according to FinCEN.

Things to keep in mind

The five most crucial details about this FinCEN filing obligation are as follows:
• FinCEN has outlined its strategy for putting into effect potential new legislation that would require small businesses to divulge the names, addresses, and other identifying information of their beneficial owners in order to be entered into a FinCEN database that will only be available to law enforcement.
• When the proposed adjustments are finalized, which might happen as soon as the middle of 2022, the CTA will go into force.
• All new and existing small enterprises and organizations must submit a beneficial owner report to FinCEN within a year of the CTA’s implementation.
• Those who own 25% or more of each business and those who have significant control over it will be considered beneficial owners.
• If the information contained in the useful owner reports changes, such as the beneficial owner’s address changing, the reports must be updated within 30 days.

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