As in the old radio and television police drama of the 1950s, a dragnet will be cast by the Financial Crimes Enforcement Network (FinCEN) on January 1, 2024. However, the net will not be directed solely at the likes of gangsters, bank robbers or burglary rings. Instead, it is being cast at every corporation, every limited liability company and every other entity in the United States that has been formed or created by the filing of documentation with a state government. And every foreign entity that has registered with a state government to do business in that state is also a target. Even persons (such as lawyers or accountants) who filed the entity’s formation or creation documents are targets.
Being small and unimportant does not enable an entity to hide or be excused. Feigning ignorance of the requirement also does not provide an excuse.
There are a number of exemptions, but you will have to determine if you and your business entity meet the precise exemption requirements. There is no exemption from taking the steps to affirmatively determine if an exemption applies.
A failure to comply might result in your finding out why the words “financial crimes enforcement” are in FinCEN’s name, because even an inadvertent failure might give rise to a criminal fine of as much as $10,000 and imprisonment for up to two years. And even if a criminal charge is avoided, a failure to file may result in a $500 per day civil penalty.
These hefty penalties are the sharp teeth in an act passed by Congress early in 2021 as part of an effort to ferret out persons involved in money laundering and similar activities through the use of shell companies in the United States. The Corporate Transparency Act (CTA) has sharp teeth, but its broad impact will result in a big and imprecise bite that will force even small and innocent family enterprises to spend the time and incur the expenses needed to comply with the FinCEN regulations issued in response to its sweeping provisions.
The regulations take effect on January 1, 2024. They require each covered entity (which is every kind and size of entity that exists on December 31, 2023, and that cannot conclude that it qualifies for one of the CTA’s precisely drawn exemptions) to file information regarding itself and its beneficial owners with FinCEN by January 1, 2025. Entities that are created on or after January 1, 2024, will have 30 days following their creation to make such a filing.
And if the information in a filing changes, the affected entity will have only 30 days to update its filing. Entities that do not comply may begin to feel the ensnaring tug of the CTA dragnet and may face the potential penalties described above.
Some potentially impacted persons and entities may be tempted just to dismiss the prospect of the CTA and simply choose to hide from it or ignore it. But all indications are that FinCEN intends to carry out its mandate to use the CTA to collect and maintain a large database of beneficial ownership information.
FinCEN’s own estimate is that at least 32 million existing entities will be required to make filings in 2024 in order to comply with the CTA.
A statute that will impact so many persons and entities will require attention from those who are impacted and their advisers. Information about the CTA will be the most valuable tool for those who wish to avoid any adverse consequences from the CTA dragnet. We anticipate significant developments and guidance from FinCEN over the next few months as we move closer to the January 1, 2024, effective date.