Nearly 33 million U.S.-based business entities are obligated to file beneficial ownership reports with FinCEN under the Corporate Transparency Act (CTA). But as of this summer, only a fraction — fewer than 10% — had filed, Treasury Secretary Janet Yellen said in July congressional testimony. Companies created before the beginning of 2024 have just three months left to file their initial reports, and the penalties for wilful failure to file or update reports include daily fines and even jail time.
Given the dearth of filings so far, it seems clear that questions remain about the CTA. To help clear up confusion around the requirements, CCI shares a Q&A with two corporate lawyers, Jamie Schafer of Perkins Coie and Perry Sofferman of Baker Donelson.
CCI: The CTA has been challenged in court, and cases are ongoing. How should companies approach their CTA reporting obligations amid uncertainty about whether the requirement will stand? And do you have opinions about the merits of the challenge now before the 11th Circuit?
Jamie Schafer, white collar partner at Perkins Coie who heads up the firm’s CTA compliance task force: Given the current briefing and argument schedule, it seems unlikely that the case on appeal will be decided before year-end. It is possible that the Supreme Court agrees to issue an emergency injunction to alleviate the requirement that existing entities file by year-end but, under the circumstances that also seems unlikely unless the 11th Circuit rules to uphold the Alabama District Court opinion very swiftly after arguments. That Circuit is not known for moving swiftly. Ultimately, even if this challenge is sustained, there appears to be a regulatory fix that would keep the CTA intact as a reporting scheme for the vast majority of clients we advise (essentially only those entities that do not engage in interstate commerce would be relieved of their CTA burden). In light of the uncertainties, I would recommend that clients prepare to make these filings assuming that they will be required but do not submit them until late in Q4 in case there is unanticipated movement toward a nationwide injunction before they are due on Jan. 1, 2025.
Perry Sofferman, shareholder in the Fort Lauderdale office of Baker Donelson: Companies should keep moving forward with their obligations under the CTA. The Alabama case provided a reprieve, while the case is pending, for certain plaintiff parties, but generally speaking, all companies should be doing their necessary due diligence and preparation in connection with their required filings. This relates both to companies created prior to Jan. 1, 2024, whose submissions are due by Jan. 1, 2025, and companies formed this year, who have 90 days from their creation to submit their report. I think it’s always difficult to read how different appellate courts will ultimately decide, but I do think in the end, the requirements will remain. It’s interesting to read the decision of the Alabama District Court striking down the CTA in comparison to the recent Oregon District Court’s rejection of the plaintiff’s motion to enjoin the CTA.
CCI: The Supreme Court’s summer rulings in Loper Bright and Corner Post could be seen as further chipping away at the legality of reporting requirements under the CTA. In your view, how does the overturning of Chevron deference apply in this case?
JS: I would not see it playing a major role in challenges to the CTA because the CTA regulations very closely track the statute, which was enacted by Congress with a greater than two-thirds bipartisan majority. Challenges to the CTA will not turn on the discretion of the agency but on the constitutionality of the law itself.
PS: Not sure these decisions necessarily represent a chipping away of reporting requirements, but Loper Bright will allow claimants to question whether the statute unambiguously gives FinCEN the authority to promulgate the rules they have put in place. Corner Post will also make it possible for these challenges to be brought on an ongoing basis as a result of the time periods established by the court. It will, however, take a long time for the ramifications of these cases on the CTA to be revealed. So, again, companies need to just keep moving forward with the requirements.
CCI: Beneficial ownership information (BOI) filings, as required under the CTA, are lower than FinCEN had expected, according to Treasury Secretary Janet Yellen’s Congressional testimony in July. Why do you think that is?
JS: In my experience, there is a considerable lack of public understanding of the requirements (or even knowledge of its existence) among even the most sophisticated companies (such as those we represent). This is coupled with confusion over the status of the requirement and whether it remains in force in light of the various constitutional challenges.
PS: I think the two primary reasons are (i) many companies are still simply not aware of the law and (ii) those that are aware of it may be delaying their reporting seeing it as a distraction to their day-to-day business and something they will look to get done closer to the end of the year, if they’re a business created prior to Jan. 1 of this year. I think one of the unfortunate aspects of the limited response so far is that companies that would likely have the easiest time in submitting their reports are also the companies that are most likely to be unaware of the requirement. Companies that might have more complex structures that require greater interpretation of the rules likely have the resources that allow them to be more familiar with the CTA sooner rather than later.
CCI: Is there a danger in filing a BOI report with FinCEN even if your company is not technically required to do so?
JS: There is no regulatory risk in my view if you were to (prophylactically or inadvertently) file a report for an exempt entity, but it is possible that you would shirk a privacy obligation you may have to beneficial owners if you were to share their information over their objection without a legal obligation to do so.
PS: If it is clear that a filing is not required, then I don’t see a reason for filing. However, if there is any uncertainty at all, I would default to taking the conservative approach and file.
CCI: What steps can companies take to simplify CTA reporting?
JS: The most important step is to require beneficial owners to obtain FinCEN identification numbers rather than provide individual information and documentation with the company’s filing. This streamlines the filing and also shifts the burden of updating personal information (like address changes) to the individuals rather than the company. After that, I would say invest in a robust upfront assessment of your CTA obligations and consider solutions such as re-organization of your structure to take advantage of subsidiary exemption and movement of employees to avail more entities in your structure of the large operating company exemption. If you have a complex structure, it may be worth streamlining your corporate officer/board determinations. Notably, even if an exemption does not apply if a subsidiary of an entity has identical beneficial ownership to its parent, it can just report the FinCEN ID of the parent entity rather than detailed information about the beneficial owners. If this is available to your entities, then going forward, the company would only need to make updates with regard to the parent company’s CTA report and those would automatically flow through to the subsidiary entities.
PS: Companies should consistently monitor the information that needs to be submitted to FinCEN so that proper reports can be filed and updated or corrected as necessary within the required time frames. It is probably also a good idea to designate an individual to be responsible for addressing CTA issues, with the necessary authority and accountability that goes with it. I also think, to the extent it is possible, individuals should take advantage of FinCEN IDs, which should help simplify and expedite the reporting process.
CCI: FinCEN has now issued almost 100 FAQs about CTA reporting requirements and the companies they apply to. Does this indicate the law is overly broad and confusing?
JS: The volume of FAQs tracks the breadth of this legislation. It impacts nearly every entity in America (or registered to be a business in America). Applying a single statutory reporting framework to such diverse corporate structures is a massive undertaking and it is not at all surprising that clarifications are needed to address the peculiarities of applying the reporting requirements to the many diverse types of businesses that must follow it. As a comparison to another complex regulatory regime, OFAC has issued thousands of FAQs to assist businesses and individuals in understanding how economic sanctions may apply in different scenarios, with new FAQs being issued nearly every day. And, notwithstanding that volume, I still do not have all my questions answered. I think we will see a similar pattern with FAQs relating to the CTA, given the complexity and breadth of the application.
PS: It is a new, complex law and ongoing guidance is necessary. Having said that, while FAQs can help, it is important that the guidance in the form of FAQs does, in fact, bring further clarity and not add to the confusion. The CTA casts a very wide net and that is apparent in the language of the law, especially in how one goes about determining beneficial owners under the ownership and substantial control prongs, which definitely both have a “let’s throw in the kitchen sink” feel to the definitions.
