August 23rd, 2024

Overview

"Demographers describe the baby boomer generation as “the pig in the python”: a huge bulge in an otherwise skinny age distribution … ". The New York Times (21 June 2000).

More generally, the phrase refers to an anomalous statistical increase represented as a noteworthy bulge in an otherwise level graph. The metaphor will certainly apply to the upcoming rush of (predominantly U.S.-organized) companies formed prior to this year that will be required to electronically submit information about their beneficial owners under the Corporate Transparency Act ("CTA") to a database maintained for that purpose by the U.S. Treasury Department's Financial Crimes Enforcement Network ("FinCEN"). The agency predicts that over 30 million entities will be required to file their beneficial ownership information reports ("BOIRs") by 31 December 2024.

Anecdotal evidence suggests that, notwithstanding a major outreach program by FinCEN and numerous client alerts by law and accounting firms, only a fraction of the universe of covered entities (under 10 percent) is already in compliance with the CTA. For the remaining majority, time is running out.

Background

The CTA’s requirements apply to a “reporting company,” defined as (i) any domestic entity that is formed in a U.S. jurisdiction or (ii) a foreign entity registered to do business in such a jurisdiction -- in each case, by filing a document with a competent local authority. Many reporting companies are exempt from filing BOIRs, including among others (i) many regulated entities (publicly listed companies, banks, broker-dealers, etc.), (ii) so-called “large operating companies” with a U.S. presence, and (iii) subsidiary companies wholly owned by certain otherwise exempt parent entities.

A non-exempt reporting company must report the following information about itself:

  • its legal name and any trade names or DBAs;
  • its business address or primary location in the United States;
  • its jurisdiction of formation (and registration, in the case of a foreign entity); and
  • its taxpayer Identification number.

The company must also report the following information for each individual direct or indirect "beneficial owner":

  • full legal name;
  • date of birth;
  • residential address;
  • identifying number from an approved U.S. identification document or, in default thereof, a foreign passport; and
  • a scanned image of the document from which the unique identifying number was obtained.

With some exceptions, a “beneficial owner” is an individual who, directly or indirectly, either

  • owns or controls at least 25% of the “ownership interests” of the reporting company, or
  • exercises “substantial control” over the reporting company.

A reporting company formed in 2024 or thereafter has a prescribed number of days (90 days during 2024, 30 days thereafter) to file its initial BOIR; reporting companies formed before 2024 ("legacy companies") have until the end of 2024 to file their initial BOIRs. All reporting companies with initial submissions already on file with FinCEN must file updates or corrections within 30 days after becoming aware of outdated or incorrect information in a prior filing.

The Time Is Now

In the absence of bandwidth congestion or technical problems, the actual filing of a BOIR with FinCEN should take 15 minutes or less after all the required information has been collected and made available to the applicant in user-friendly form. However, the run-up to the filing will involve a non-trivial expenditure of effort, analysis and time, to wit:

  • an inventory of reporting companies by corporate groups and professional advisers;
  • an analysis of each reporting company's characteristics to determine the possible availability of an exemption;
  • a determination of the catchment of beneficial owners for each non-exempt reporting company; and
  • the collection and verification of the required information for the reporting company and its beneficial owners.

At each stage, allowance must be made for (i) periodic unavailability of key holders of information, (ii) the need to educate various stakeholder as to the legal requirements, and (iii) dealing with resistance from some of those stakeholders. As this post is written at the end of summer 2024, there is effectively a hundred-day path (at best) for the universe of reporting companies that have not yet initiated the submission process to begin.

Conclusion

Some readers may remember a similar wave of submissions to a U.S. governmental database over a decade ago, pursuant to the requirements of the Affordable Care Act (colloquially referred to as "Obamacare"). There, the database crashed under the onslaught of simultaneous filings, causing substantial delays, inconvenience and expense to many.

It does not seem a stretch to imagine that millions of late-2024 filings may have the same effect, possibly delaying many submissions beyond their due date. While one would hope that FinCEN would provide relief in that event, the smart money says, "file early."

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