This article is the third in a four-part series about the Corporate Transparency Act (CTA), 2022. We have already discussed the CTA’s purpose, (i.e., to support the 2020 Anti-Money Laundering Act’s efforts to prevent criminals from laundering their illegal monies through the U.S. financial system), defined beneficial ownership, and explained what reporting companies are required to submit in their CTA reports. In this article, we’ll do a deeper dive into which companies are required to file (or rather which companies are exempt), the number of companies this legislation may affect, and the penalties for not filing.

Exemptions

It’s easier to figure out which companies have to file a Corporate Transparency Act report by understanding which companies are exempt from filing such a report. If you have a question about whether you need to file a CTA report, the short answer is: If you’re not on this list, you need to file the report.

Now, here’s the long answer:

Categories

The CTA specifically excludes 23 types of companies from reporting:

1. Securities issuers
2. Domestic governmental authorities
3. Banks
4. Domestic credit unions
5. Depository institution holding companies
6. Money transmitting businesses
7. Brokers or securities dealers
8. Securities exchange or clearing agencies
9. Other Securities Exchange Act of 1934 entities
10. Registered investment companies and advisers
11. Venture capital fund advisers
12. Insurance companies
13. State licensed insurance producers
14. Commodity Exchange Act registered entities
15. Accounting firms
16. Public utilities
17. Financial market utilities
18. Pooled investment vehicles
19. Tax exempt entities
20. Entities assisting tax exempt entities
21. Large operating companies
22. Subsidiaries of certain exempt entities
23. Inactive businesses

These entity categories are exempt because state and Federal agencies already closely regulate them, so their beneficial ownership is most likely known.

Large Companies

In addition, organizations that fall into the “large operating company” category are exempt from reporting. The three criteria for an entity to be considered a large operating company are:

1. They employ more than 20 employees on a full-time basis in the United States. In this case, FinCEN borrows the definition of “full-time employee” from the IRS, which defines it as anyone who works at least 30 hours per week or 130 hours per month.
2. They filed Federal U.S. income tax returns in the previous year that showed more than $5,000,000 in gross receipts or sales.
3. They operate from physical premises in the United States. Under this criterion, to be exempt, the entity must own or lease the office space, the space cannot be a personal residence, and they can’t share the space with anyone other than affiliated entities.

Approximately How Many Companies Will Have to Report?

In attempting to estimate how many companies will need to file a CTA report, finCEN looks at the following criteria:

• The number of domestic and foreign entities in existence at the regulation’s effective date.
• The number of domestic and foreign entities that are newly created each year.

These numbers will always be educated estimates, based on information from the following credible sources:

Financial Action Task Force (FATF)

The FATF estimates that around 30 million legal entities are currently operating in the United States, and about two million new companies are formed every year.

CDD Rule

The CDD Rule requires U.S. financial institutions to “identify and verify the identity of the natural persons (known as beneficial owners) of legal entity customers who own, control, and profit from companies when those companies open accounts” (finCEN.gov).  Because of this rule, FinCEN was able to estimate that about eight million new corporate bank accounts are opened each year.

Census Data

FinCEN reviewed data from the U.S. Census Bureau, in particular from the Statistics of U.S. Businesses.

State Statistics

FinCEN reviewed state governments’ online publications regarding business entity statistics, including total active companies and new company formations.

International Association of Commercial Administrators (IACA) 2018 Annual Reports Survey

FinCEN reviewed the IACA’s most recent (2018) Annual Report of Jurisdictions survey. In this survey, respondents from 14 states answered the same series of questions regarding the total number of existing and new business entities in their jurisdictions.

After compiling all the above data and performing complex mathematical calculations you can read more about here if you feel so inclined, finCEN has estimated that 30,290,586 existing companies could be required to report, and 3,777,420 new companies per year could be added to that number.

Penalties for Not Reporting

So what happens if these 34,068,006 companies (more or less) don’t report as required? First of all, let’s make it clear that failure to report is illegal. The CTA isn’t a set of guidelines or best practices; it’s law. Failure to report, or supplying false information, will subject an individual to civil and criminal penalties. These penalties may include:

• Assessment of a $500-per-day fine every day the violation continues (up to $10,000).
• Up to a two-year prison sentence.
• Both

Only eligible companies are required to file the reports; the beneficial owners and company applicants don’t file individually. Therefore, reporting companies must take measures to ensure that these individuals provide valid, accurate, up-to-date information, so the entity can meet their legal obligations.

One important clarification we need to make is that these consequences apply to persons who willfully provide false or fraudulent information or who purposely fail to report as required, despite knowing the law. No civil or criminal penalties apply to negligent violations. In other words, if individuals provide inaccurate information, but they 1) didn’t know about the inaccuracy, 2) weren’t attempting to evade reporting requirements, and 3) willingly and swiftly correct any inaccurately-reported information within 90 days after submission, safe harbor rules apply. A safe harbor  is a legal provision whereby a person can “sidestep or eliminate legal or regulatory liability in certain situations, provided that certain conditions are met.”

In the next article, we’ll provide a summary of what needs to be filed and/or updated, and the timeline for getting your Corporate Transparency Act reports processed.