New Reporting Requirement for Small Businesses Begins January 1, 2024

The Corporate Transparency Act (CTA) will require small businesses to report ownership information to the Financial Crimes Enforcement Network of the U.S. Department of the Treasury between January 1, 2024 and January 1, 2025, and thereafter. Here is a brief summary of this legislation and its implications for insurance agencies and companies.

Background and Purpose of the CTA

The CTA was enacted in late 2020 to address concerns about money laundering, financial corruption, terrorism financing, and foreign espionage facilitated by opaque U.S. business entities. Its primary objective is to enhance transparency in business operations by mandating the disclosure of beneficial ownership information.

Key Provisions

Scope: The CTA applies to domestic and foreign Reporting Companies, defined as corporations, limited liability companies, or similar entities. Sole proprietorships are not Reporting Entities. Domestic Reporting Companies are those created by filing a document with a state’s secretary of state or similar office, while Foreign Reporting Companies are entities formed under foreign law but registered to do business in a U.S. state.

Reporting Requirements: Reporting Companies must file a Beneficial Ownership Information Return (BOIR) with the Financial Crimes Enforcement Network (FinCEN). This includes information about the company itself, the beneficial owners (those who directly or indirectly control or own the company), and the company applicants for entities formed or registered on or after January 1, 2024.

Deadlines for filing:

Commencing January 1, 2024, for any company created or registered between January 1, 2024, and January 1, 2025, the deadline is within 90 calendar days of its formation or registration.

For companies formed or registered prior to January 1, 2024, the deadline to file an initial BOIR is before January 1, 2025.

After January 1, 2025, the deadline for new companies to file is 30 days after their registration or formation.

Database: The beneficial ownership information will be stored in a secure, nonpublic federal government database managed by FinCEN.

Small businesses are required to report:

Under the CTA, most main street businesses will have to file reports. Unless otherwise an exempt entity, as listed later in this article, a small business must report unless it can show it meets all three of the following conditions:

At least twenty full-time employees in the U.S.

Physical offices in the U.S.

Over $5 million in gross receipts from U.S. sources.

Insurance agencies are exempt but many of their commercial clients are not

State-licensed insurance producers are exempt from the reporting requirements under the CTA. This exemption is specifically listed among the 23 exemptions from the CTA’s reporting obligations. To qualify for this exemption, the agency must meet two criteria:

State Authorization and Supervision: The entity must be an insurance producer that is authorized by a state and subject to supervision by the insurance commissioner or a similar official or agency of the state.

Physical Office Presence: The entity must have an operating presence at a physical office within the United States. This means that the entity regularly conducts its business at a physical location in the United States that it owns or leases, and this location must be physically distinct from the place of business of any other unaffiliated entity.

The CTA’s main aim is to increase transparency in the corporate sector, particularly targeting smaller, privately held, non-regulated entities to combat illicit activities like money laundering and financial corruption. However, since state-licensed insurance producers are already subject to state-level regulatory oversight and have a physical presence in the U.S., they are considered to have sufficient transparency and regulatory compliance to be exempt from these additional federal reporting requirements.

This exemption is important for state-licensed insurance agencies as it relieves them of the burden of filing BOIRs with the Financial Crimes Enforcement Network.

Compliance: Insurance agencies, being exempt, will not be burdened with the CTA’s reporting requirements. However, they must be aware of these requirements, especially when dealing with clients who are small or medium-sized businesses, as these entities are significantly impacted by the CTA.

Client Advisory: Insurance agencies should be prepared to advise clients, particularly small and medium-sized businesses, on their obligations under the CTA. This could include informing them about filing requirements, deadlines, and the types of information required.

Due Diligence: While insurance companies are exempt from filing BOIRs, they may still need to consider the implications of the CTA in their due diligence processes. This could involve understanding the ownership structures of their corporate clients, especially in contexts like underwriting and risk assessment.

Monitoring Developments: The insurance sector should closely monitor any changes or updates to the CTA, particularly any amendments that could impact the industry directly or indirectly

Civil and criminal penalties for noncompliance:

The CTA is not a toothless regulatory requirement that a small business can ignore once it takes effect.

The willful failure to report complete or updated beneficial ownership information to FinCEN or the willful provision of or attempt to provide false or fraudulent beneficial ownership information may result in civil or criminal penalties, including civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.

The controlling officers of an entity that fails to file a required BOI report may be held accountable for that failure.

Conclusion:

The Corporate Transparency Act marks a significant shift in the U.S. approach to corporate transparency. While insurance agencies are exempt from any reporting requirements, they play a crucial role in aiding their small business clients in understanding and navigating this new regulatory landscape. By staying informed and prepared, insurance agencies and insurance companies can effectively manage their responsibilities and provide valuable guidance to their clients affected by the CTA.

Exempt organizations:

Here is the complete list of organizations exempt from the reporting requirements under the Corporate Transparency Act:

Securities reporting issuers

Governmental authorities

Banks

Credit unions

Depository institution-holding companies

Money services businesses

Brokers or dealers in securities

Securities exchanges or clearing agencies

Other Exchange Act-registered entities

Investment companies or investment advisers

Venture capital fund advisers

Insurance companies

State-licensed insurance producers

Commodity Exchange Act registered entities

Accounting firms

Public Utilities

Financial market utilities

Pooled investment vehicles

Tax-exempt entities

Entities assisting a tax-exempt entity

Large operating companies

Subsidiary of certain exempt entities

Inactive entities

For more information:

The Small Entity Compliance Guide prepared by the Financial Crimes Enforcement Network of the U.S. Department of the Treasury is available by clicking on this link.