Effective January 1, 2024, the U.S. Financial Crimes Enforcement Network (the “FinCEN”) implemented the federal Corporate Transparency Act (the “CTA”). The purpose of the CTA is to combat money laundering, its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence. The CTA imposes significant new reporting burdens on businesses in the U.S., requiring them to submit information regarding their beneficial owners.
For our Israeli-based clients, it is important to note that unlike Israeli companies, which are required to report the names and beneficial-ownership of their respective shareholders, and such information is made publicly available through the Israeli Companies’ Registrar database, until the implementation of the CTA, US entities were not required to disclose the names and beneficial ownership of their respective shareholders upon registration of a new company with the Secretary of State.
Under the CTA, all legal entities, both domestic and foreign, operating in the U.S. and formed through filing with the states’ Secretary of State’s offices, such as corporations (including foreign companies registered “to do business in the US”), LLCs, most partnerships, and certain trusts, are required to file the initial Beneficial Ownership Information (BOI) report and/or assess whether they qualify for an exemption to the reporting requirements. This new reporting requirements may be applicable to Israeli companies operating under the model of a U.S. parent company or owning a U.S. subsidiary. A BOI report needs to be submitted only once, unless a company needs to update or correct information.
Who is considered a beneficial owner?
Any individual who directly or indirectly:
Exercises substantial control over the reporting corporation; or
Owns or controls at least 25% of the corporation’s ownership interests.
Companies formed before January 1, 2024, are required to provide information about the company and its beneficial owners, while those formed on or after January 1, 2024, must also include information about the company, its beneficial owners and the individuals applicants who formed the company.
The required information for the reporting company includes:
(1) full legal name;
(2) any trade or "doing business as" names;
(3) complete current street address of the principal place of business;
(4) jurisdiction of formation;
(5) taxpayer identification number.
Additionally, information for each of beneficial owner and applicants must be provided, including: (1) full legal name, (2) date of birth, (3) complete current residential street address, (4) unique identifying number and issuing jurisdiction, and (5) an image of the document from which the unique identifying number was obtained.
The deadline for filing the BOI report varies:
• Domestic reporting companies formed before January 1, 2024, must file by January 1, 2025.
• Domestic reporting companies formed on or after January 1, 2024, and before January 1, 2025, must file within 90 calendar days of their creation becoming effective.
• Domestic reporting companies formed on or after January 1, 2025, must file within 30 calendar days of their creation becoming effective.
Certain entities are exempt from these reporting requirements, including: publicly traded companies, banks, credit unions, and tax-exempt entities. There is also an exemption for "large operating companies" meeting specific criteria related to employee count, physical presence, and gross receipts or sales. It should be noted that all business should assess whether they qualify for an exemption from the reporting requirements. For more details on how to file and where, you can access this link: https://www.fincen.gov/boi.
New Court Decision:
On March 1, 2024, only 2 months after it became effective, this novel legislation met with a surprising court decision, when the U.S. Federal District Court for the Northern District of Alabama in National Small Business United et al. v. Janet Yellen et. al., Case No. 5:22-cv-1448-LCB, held the CTA to be unconstitutional. In this startling decision, the U.S. District Court Judge Liles C. Burke ruled “The CTA is unconstitutional because it cannot be justified as exercise of Congress’ enumerated powers.”
The Court’s holding asserts Congress lacks the authority to require companies to disclose personal beneficial owner information to FinCEN. The Court in so ruling, then permanently enjoined FinCEN from enforcing the CTA against the plaintiffs. Notably, the ruling applies narrowly to the plaintiffs in this case, leaving uncertainty regarding its implications for companies not a party to the litigation. It is anticipated that Treasury will file an appeal to the U.S. Court of Appeals for the Eleventh Circuit, and that until the issue is finally resolved, FinCEN will continue enforcing the CTA and the reporting requirements.
What are clients to do until the CTA’s constitutionality is resolved in the court system?
• Given that noncompliance with the CTA’s BOI reporting could potentially result in civil penalties of up to $500 a day and criminal penalties, including up to $10,000 in fines and/or imprisonment for up to two years, companies formed after January 1, 2024, and their owners should continue to proceed with filing BOI reports with FinCEN.
• Companies formed before January 1, 2024, should consider deferring their BOI filings until later in 2024, but should consider continuing with necessary planning and gathering of requisite information for such filings, as it is uncertain when there will be final resolution on the constitutionality of CTA.
• It is possible that the CTA’s BOI reporting may remain in effect for companies engaged in activities that “affect commerce.”
For optimal compliance with reporting requirements, the U.S. Financial Crimes Enforcement Network advises engaging a qualified attorney or certified public accountant to complete the report. This proactive approach mitigates exposure to potential compliance risks and unnecessary liabilities.
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