Starting January 1, 2024, many privately-owned entities will be exposed to ongoing disclosure and reporting obligations required by the Corporate Transparency Act (“CTA”). The goal of the CTA is to strengthen national security and the integrity of the U.S. financial system by making it more difficult for illicit actors to use shell companies for money laundering, terrorism, tax evasion and other financial crimes. The CTA will not only assist the U.S. government with uncovering these crimes, but it will also help international efforts to expose individuals that defraud governments around the world. While privately-owned entities and their shareholders have historically enjoyed a degree of confidentiality regarding their internal affairs, the CTA subjects many entities, including health care providers, to new reporting requirements and exposure to significant financial penalties for non-compliance.
Background
Congress enacted the CTA as part of the Anti-Money Laundering Act of 2020 (31 U.S.C.A. § 5336). The CTA mandates the creation of the Beneficial Ownership Secure System (“BOSS”) database and requires entities to disclose information regarding beneficial ownership.
On September 30, 2022, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued the final rule outlining the CTA’s reporting requirements. The final rule is estimated to affect over 32 million entities by mandating reports of Beneficial Owners (as defined below).
Who Will Be Impacted
Any entity that is created by filing with a Secretary of State (or tribal jurisdiction) is deemed a “Reporting Company” subject to the CTA. More specifically, the CTA will impact the owners and directors of almost all limited liability companies, corporations, limited liability partnerships, professional corporations and other closely held entities that fail to qualify for an exemption. Consequently, most small businesses will be subject to the reporting rules.
The CTA exempts many entities from being classified as a Reporting Company. These exemptions are generally for entities that already have significant government reporting requirements and include, but are not limited to:
- Large operating entities (entities with 20 or more full-time employees and more than $5 million in reported annual revenue for the prior tax year);
- Entities exempt from taxation under Section 501(c) of the Internal Revenue Code;
- Wholly-owned subsidiaries of certain exempted entities, including wholly-owned subsidiaries of large operating entities and tax-exempt entities;
- Insurance companies;
- Banks; and
- Dormant and inactive entities (entities in existence for over 1 year, not engaged in active business, not owned by a foreign person and have not in the last year had a change in ownership or exchanged more than $1,000 in funds).
New Reporting Requirements
Starting January 1, 2024, any Reporting Company existing or registered before January 1, 2024, must file an initial report with FinCEN by January 1, 2025. Any Reporting Company created or registered after January 1, 2024, must file an initial report 90 days after its creation or registration. While there is no annual filing requirement, all Reporting Companies must report changes to any filing within 30 days of the change (e.g., change of address or Beneficial Owner (as defined below)). The information reported is not publicly available but will be accessible by certain government agencies including the Centers for Medicare and Medicaid Services as well as other federal and state agencies that provide oversight to health care entities.
The Reporting Company information that must be reported includes:
- Legal name and trade names;
- Street address for the entity’s principal place of business;
- State of formation;
- Tax Identification Number; and
- An identifying document from an issuing jurisdiction (e.g., a certificate of incorporation) and the image of that document.
In addition to providing information about the Reporting Company, the CTA also requires information to be reported regarding any individual who is a “Beneficial Owner.” A Beneficial Owner is generally anyone that owns at least 25% of the Reporting Company or that has substantial control over the Reporting Company. For example, all officers and directors are considered Beneficial Owners.
The information to be reported for each Beneficial Owner includes:
- Full legal name;
- Date of birth;
- Residential address; and
- PDF (photocopy) of the individual’s U.S. passport or state driver’s license.
Practical Takeaways
- FinCEN indicated that it will publish forms to comply with the obligations under these reporting rules.
- If Beneficial Owners have concerns about providing personal information within the Reporting Company’s report, the final rule outlines a process for a Beneficial Owner to obtain a FinCEN identification number that can be provided to the Reporting Company as an alternative. Note that it is the burden of the Reporting Company to collect and provide the information required, including the information of its Beneficial Owners.
- Penalties for failure to comply with the CTA’s reporting requirements include civil fines of $500 per day, criminal fines of up to $10,000, and up to two years imprisonment.
- There is no specific exemption for health care entities, indicating that health care providers and subsidiaries of health care systems could be considered Reporting Companies and be among the large number of entities impacted by this legislation. However, larger health care entities and many tax-exempt health care entities may be relieved from the new requirements if they qualify for an exemption listed above. Based on the significant penalties, leadership should carefully evaluate each entity it owns to determine which, if any, are impacted by the new rule.
Next Steps
Reporting Companies should consider seeking professional guidance from an attorney to ensure compliance with the final rule. Given the complexities of identifying all the entities and persons that must be reported under the CTA and the substantial penalties for failure to comply, entities subject to the new rule should also begin collecting the information required to be reported as soon as possible.
If you have any questions or would like additional information about this topic, please contact:
- Chad Sukurs at csukurs@hallrender.com or (317) 977-1452;
- Jeff Peek at jpeek@hallrender.com or (317) 977-1405;
- John Bowen at jbowen@hallrender.com or (317) 429-3629;
- Kelci Laster at klaster@hallrender.com or (317) 977-1401;
- Eric Speer at espeer@hallrender.com or (317) 741-0661; or
- Your primary Hall Render contact.
Special thanks to Becca Foerder, summer associate, for her assistance in this article.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot—outside of an attorney-client relationship—answer specific questions that would be legal advice.
