Category: FinCEN Updates

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District Court Rules CTA Unconstitutional: An Introduction

On March 1, 2024, U.S. District Court Judge Liles C. Burke issued a ruling that declared the Corporate Transparency Act (CTA) unconstitutional. This ruling, emerging from the case of National Small Business Association (NSBA) v. Yellen, raises critical questions about the future of CTA reporting requirements. It is particularly noteworthy given that the Financial Crimes Enforcement Network (FinCEN) reported that approximately half a million reports had already been filed under the CTA by mid-February. At the outset of this summary, it is important to highlight that the only businesses currently affected by this verdict are those affiliated with the members of the NSBA.

The Corporate Transparency Act: An Overview

The CTA was designed to impose mandatory reporting obligations on certain domestic and foreign companies, requiring them to disclose personal information about their beneficial owners and company applicants to FinCEN.

Grounds for the Constitutional Challenge

Isaac Winkles, a small business proprietor, alongside the National Small Business Association (NSBA), an entity advocating for small business interests, initiated a legal challenge against the constitutionality of the CTA. Together, Winkles and the NSBA filed a lawsuit against the Treasury Department, Treasury Secretary Janet Yellen, and Acting Director of FinCEN Himamauli Das in their official roles. They contended that the CTA’s compulsory reporting obligations surpass the legislative powers granted to Congress under Article I of the Constitution and infringe upon the First, Fourth, Fifth, Ninth, and Tenth Amendments. This lawsuit was filed six weeks following the September 2022 issuance of the final reporting regulation. In the recently filed court case, it was noted that the Government cites three constitutional bases for Congress’ passage of the CTA:

1. Its power over foreign affairs,
2. Its authority derived from the Commerce Clause, and
3. Its legitimate use of its taxing power.

The plaintiffs contested these justifications, and Judge Burke reflected their objections in his conclusion that the CTA unconstitutionally surpasses the powers explicitly allocated to Congress by the Constitution.

District Court Rules CTA Unconstitutional: What Are the Implications?

The court’s ruling has left many wondering about the ongoing obligations and how they apply to their entities under the CTA, given the uncertainty it introduces. In regards to the entities that are immediately affected, it extends to NSBA’s estimated 65,000 members, effectively prohibiting the government from applying the CTA’s reporting mandates to any member entity.

What Should Business Owners Do?

Despite the ruling, business owners with pending deadlines for Beneficial Ownership Information (BOI) reports under the CTA are advised to continue filing these reports when due, as entities associated with the NSBA members are the only parties directly affected by this ruling. Remember, companies formed in 2024 must file an initial BOI report within 90 days of formation, while entities formed prior to 2024 have until December 31, 2024, to file. Failing to file could result in civil penalties of $591 per day of non-compliance. 

Looking Ahead: The Appellate Process

It is anticipated that the government will appeal the court’s decision, but the court’s declaration will remain effective unless overturned by a granted ‘stay’. For a stay to be considered, the government needs to file a motion with the district court, which will assess:

1. The appeal’s potential success,
2. The irreparable harm the government might face without a stay,
3. The effect of a stay on other involved parties, and
4. Its alignment with public interest.

Should the district court deny the stay, the government has the option to seek one from the Eleventh Circuit Court of Appeals in Atlanta. The government has 60 days to file an appeal, and a decision on the stay could be made soon. However, based on past timelines for resolution, it is expected that the Court of Appeals could take more than nine months to resolve an appeal.

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BOI Reporting Violation Penalties Increase

The beginning of this year marked a pivotal shift in the financial regulatory environment with the implementation of requirements for the reporting of beneficial ownership information (BOI). This development is accompanied by a significant rise in civil monetary penalties for breaches related to BOI reporting and the unauthorized dissemination or usage of such data. The changes are encapsulated in the annual final rule released by the Financial Crimes Enforcement Network (FinCEN), which for the first time incorporates penalties for failing to comply with BOI reporting rules. The recent updates, officially documented in the Federal Register, stem from the obligatory inflation adjustments outlined by the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended. These adjustments have escalated the penalties for BOI reporting failure and for the unauthorized use or disclosure of BOI to $591 per day from the previous $500, effective January 25, 2024. This increase traces to the Corporate Transparency Act (CTA) of 2021, under which the requirements for BOI reporting were established. Despite the CTA becoming law in 2021, the regulations necessitating BOI submissions by FinCEN were not immediately active, leading to a delay in the publication of associated penalties. This adjustment is not solely for BOI violations; the final rule also escalates penalties for a range of other infractions, including willful or grossly negligent recordkeeping breaches and deliberate offenses against the Bank Secrecy Act (BSA) requirements. While the final rule extensively details the adjustments in civil penalties, it’s crucial to note that there are also significant criminal penalties associated with BOI reporting violations and unauthorized use or disclosure of BOI. These criminal penalties, which were not covered in the annual final rule, underscore the gravity of compliance failures.

Are You Prepared to File?

Failure to report BOI can lead to criminal charges with penalties reaching up to $10,000, and unauthorized redisclosure of BOI may incur penalties of up to $250,000. These stringent criminal repercussions highlight the critical need for adherence to the reporting requirements and the severe consequences for violations beyond the scope of civil fines.

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Update Alert: New Answers from FinCEN FAQs

FinCEN recently updated their FAQs about the Corporate Transparency Act (CTA), which offers crucial insights for company applicants – individuals involved in the filing of creation or registration documents for reporting companies.

These clarifications are significant in defining who is considered a company applicant and the reporting responsibilities that come along with it.

Let’s dive into the details of these FinCEN FAQs and their implications.

Understanding the Company Applicant in Scenarios

The CTA specifies two types of company applicants:

1. The individual who directly files the formation documents with a secretary of state or similar office.
2. The individual chiefly responsible for directing or managing the filing of the entity formation documents.

There can be a maximum of 2 company applicants reported on a Beneficial Ownership Information Report (BOIR), and a minimum of 1. If more than 2 individuals fall under the definition of company applicant, the two who played the greatest role in the filing process would be reported. Consider these examples:

Scenario 1: An attorney prepares the company creation documents for a client and then directs a service provider to file the document. In this case, the attorney and the individual at the corporate service provider who directly filed the document are both company applicants.

Scenario 2: Assume the previous scenario, but a paralegal assists the attorney with creating the formation documents. The attorney directing the filing and the individual at the corporate service provider are the company applicants, as they played the greatest roles in the filing process.

Scenario 3: The client requests the completed formation documents from the attorney and directly instructs a service provider to file them. The client and the individual at the corporate service provider would be the company applicants as the client does the directing and the individual service provider actually files the documents.

Also covered in the updated FinCEN  FAQs was the use of automated incorporation services (i.e. LegalZoom, Rocket Lawyer, etc.) and who plays the role of company applicant.

If a business formation service offers only software, online tools, or general written guidelines to assist in filing registration documents for a reporting company, without direct involvement of its employees in the document filing process, then these employees are not considered company applicants.

For instance, a person might use an automated incorporation service to independently prepare and file documents for establishing their own reporting company. In such a scenario, the reporting company would only list that individual as a company applicant on its BOIR.

Clarification on third-party couriers as company applicants were also provided in the FAQs. In fact, a third-party courier or delivery service employee merely delivering documents is not a company applicant.

Implications for Company Applicants

This updated guidance under the CTA brings clarity to the process of identifying company applicants. For individuals and entities involved in the filing process, understanding these nuances is crucial. It ensures compliance and aids in the transparent and accurate reporting of company formation.

The scenarios provided in the FinCEN FAQs are particularly helpful, offering concrete examples of how the rules apply in real-world situations.

These clarifications are invaluable for attorneys, corporate service providers, and individuals using automated services for company creation, ensuring they accurately identify and report company applicants as required by the CTA.

In essence, the role of a company applicant is determined not only by action but by the level of responsibility and decision-making in the entity formation process.

Reminder: Only entities established on or after January 1, 2024, are mandated to report their company applicants on its BOIR. Those formed prior to this date are not required to submit any company applicant information to FinCEN. 

Additionally, those new reporting companies are not obligated to inform FinCEN of any changes in company applicant information following their initial BOI filing.

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On December 12, 2023, the U.S. House of Representatives passed a bill that might delay some initial Beneficial Ownership Information (BOI) reports required under the Corporate Transparency Act (CTA). The bipartisan bill introduced by Rep. Zachary Nunn (R-IA) is called the “Protect Small Business and Prevent Illicit Financial Activity Act”. The House voted 420-1 to amend the standing BOI rule to adjust certain deadlines. Although the final rule remained essentially unchanged for almost three years, as the initial implementation date of January 1, 2024 comes near, commenters are uneasy about the effect this new law will have on small businesses and have been pushing for change.

Proposed Changes

The proposed changes to the current rule would be as follows:

• Entities established before January 1, 2024, now have until December 31, 2025 to file their initial BOI reports, rather than December 31, 2024 as the final rule currently stands. In other words, the existing entities as of January 1, 2024 would have two full years to comply, instead of one as the law currently stands.
• For entities established on or after January 1, 2025, the initial filing deadline is extended to 90 days following their formation – the current rules have a 30 day deadline.
• All reporting companies will have 90 days to file any updates to their BOI reports if previously reported information has changed. The current rules have a 30 day deadline.

What Hasn’t Changed

There are a few aspects of the rule would remain standing even if this new bill ultimately becomes law:

• Entities established on or after January 1, 2024, and before January 1, 2025 have 90 days to file their initial BOI report. This timeframe is unchanged from an amendment to the final rule from November 29, 2023.
• Corrected reports must be filed within 30 days of when the company becomes aware, or should have become aware, of any erroneous information previously reported.

It’s important to realize that the Senate and POTUS still need to vote on this bill for the amendments to be final. 

It was a landslide vote in the House, but it doesn’t necessarily mean the same will happen when the Senate votes, or that the Senate will even take the matter up. The Senate was scheduled to recess Dec. 15, 2023, for the holidays, but the break was pushed back a week to address an array of other pressing topics. It was a landslide vote in the The Corporate Transparency Act is still current law, so it’s still very important to be ready for 2024 reporting requirements and deadlines as they currently stand. Under current rules, reporting companies established in 2024 will have 90 days to file their initial BOI reports and existing companies need to prepare by December 31, 2024, to report their information to FinCEN. Stay tuned this week for updates! See the bill here: Text – H.R.5119 – 118th Congress (2023-2024): Protect Small Business and Prevent Illicit Financial Activity Act | Congress.gov | Library of Congress

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What Is the BOI Report Deadline Extension?

In a significant development for financial regulation, the Financial Crimes Enforcement Network (FinCEN) has finalized a rule that extends the deadline for certain reporting companies to submit their initial Beneficial Ownership Information (BOI) reports, issued on November 29, 2023. This decision follows a notice of proposed rulemaking, which sought to amend the existing BOI Reporting Rule.The FinCEN final rule stipulates that reporting companies created or registered between January 1, 2024, and January 1, 2025, will now have 90 calendar days to file their initial BOI reports. For reporting companies established on or after January 1, 2025, the original 30-day deadline for submitting initial BOI reports remains in effect.FinCEN received 50 comments in response to the proposed rule, predominantly supporting the extension. These comments came from corporate professionals, small business owners, trade groups, and individuals.While many agreed with the proposed 90-day deadline, some suggested alternatives like a 120-day deadline or aligning the BOI report deadline with tax filing dates. A few commenters advocated for applying the 90-day timeframe to all entities created or registered after January 1, 2024. However, FinCEN concluded that their proposed rule provided sufficient time for entities to adjust to the new reporting requirement.Reminder of Deadlines – Are You Prepared To File?

• Reporting companies created on or after January 1, 2024 and before January 1, 2025 have 90 days from the earlier of receiving notice from secretary of state or similar office that creation is confirmed or when there is public notice of the company’s creation in the U.S. to file their report.
• Reporting companies created on or after January 1, 2025 have 30 days from the earlier of receiving notice from secretary of state or similar office that creation is confirmed or when there is public notice of the company’s creation in the U.S. to file their report.
• Reporting companies created before January 1, 2024 have until December 31, 2024 to file their report.

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The Financial Crimes Enforcement Network (FinCEN) has recently announced the finalization of a rule that outlines the circumstances under which a reporting company may utilize an entity’s FinCEN identifier instead of providing information about individual beneficial owners.

What is a FinCEN Identifier in the BOIR?

A FinCEN identifier is a unique number issued by FinCEN upon request, following the submission of required information.Although obtaining a FinCEN identifier is not mandatory, it can significantly streamline the reporting process for entities and individuals, allowing them to provide required identifying information directly to FinCEN.The finalized rule, an amendment to FinCEN’s Beneficial Ownership Information (BOI) Reporting Rule, addresses concerns about the potential for reporting entity FinCEN identifiers to obscure the identities of beneficial owners, potentially leading to greater secrecy or incomplete and misleading disclosures.To address these concerns, the final rule establishes clear criteria that must be met for a reporting company to report an intermediate entity’s FinCEN identifier instead of individual beneficial owner information. The effective date of the final rule is set for January 1, 2024, aligning with the effective date of the BOI Reporting Rule.Specifically, the final rule applies to situations where another reporting company, let’s call it “the entity,” serves as a beneficial owner of another, “the reporting company.”In such cases, the reporting company is only required to report the entity’s FinCEN identifier and legal name in the beneficial owner section of their BOI report if the following conditions are met:

1. The entity has obtained a FinCEN identifier and provided it to the reporting company.
2. An individual is or may be a beneficial owner of the reporting company by virtue of an ownership interest in the reporting company held through the entity.
3. The beneficial owners of both the entity and the reporting company are the same individuals.

If all these conditions are not satisfied, the individual beneficial owners of the entity must be reported in their entirety in the BOI report.This new approach aims to balance the facilitation of reporting processes with the need for transparency in disclosing beneficial ownership information.

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