Since January 1, millions of small entities have been required to report sensitive personal information to the U.S. government like never before. These entities include limited liability companies (LLCs) and trusts that often hold title to aircraft for their sole, ultimate beneficial owners (UBOs).
The Corporate Transparency Act (CTA) is the disclosure law, and the Department of the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) is the chief enforcer. This law imposes potentially significant civil and criminal penalties for the failure or refusal to correctly and timely report all required information. Importantly, the CTA intersects with aviation regulations that may compound penalties.
Did the CTA Veer Off Course?
The reporting obligation was clear until March 1, when an Alabama federal district court in the case of National Small Business United v. Yellen (National) decided that the CTA was unconstitutional. The court halted the Department of the Treasury and FinCEN from enforcing the CTA against the National plaintiffs. In a press release on March 4, FinCEN stated that “the government will not currently enforce the CTA against the plaintiffs.”
Because National seems to apply only to the plaintiffs, UBOs and covered entities may decide on a “better to be safe than sorry” approach. To make that decision and avoid violations of the law, it is critical to understand the technical CTA rules and how to comply with them.
CTA Target Individuals and Entities
Unless exempt, the CTA imposes the obligation on “reporting companies” to submit to FinCEN “information about the reporting company [and] beneficial owner information” (BOI) for each “beneficial owner” of the reporting company plus information about the “company applicants.” Let’s unpack these elements that together sum up the CTA’s process and affected parties.
Reporting companies. Reporting companies can be domestic and foreign LLCs, corporations, statutory trusts, business trusts, and other entities, each of which can own aircraft. U.S. entities must be created by filing a document with a Secretary of State or any similar office or Indian Tribe. For entities formed in a foreign country, the reporting company status attaches if the entity is registered to do business in any U.S. state or Tribal jurisdiction by the filing of a document with a Secretary of State or any similar office.
Beneficial owners. FinCEN’s main target is the “beneficial owner.” That term refers to individuals who directly or indirectly exercise “substantial control” over a reporting company or hold “ownership interests” of at least 25 percent of a reporting company.
Individuals with substantial control include individuals who have the authority to appoint or remove certain officers or a majority of directors, the entity’s senior officers, and individuals who can influence important decisions of the reporting company. In the context of aviation, LLCs and trusts that qualify as reporting companies will frequently own aircraft for their UBOs, making them FinCEN targets.
Company applicants. A “company applicant” (with certain exemptions discussed below) refers to the individual who files the document, such as an LLC certificate of formation, to form a domestic entity or register a foreign entity to do business in the U.S. This term also refers to the individual who is primarily responsible for directing or controlling the filing.
For example, a law firm partner and a supervisor at corporate services providers will be responsible to FinCEN for their firm’s employees (filers) who willfully report untrue information even if the reporting company provides the information to the filer.
Information To Be Reported and Timing
One-time reporting with updating. Unless exempt from qualifying as a reporting company, each entity must electronically file with FinCEN a one-time, non-public, Beneficial Ownership Information Report (BOI report). The filing is free; the CTA developed a simple reporting form; and the beneficial owner, lawyers, or other service providers can make the filing.
Each reporting company must update the BOI report within 30 days after a change to the required information about the reporting company or the beneficial owners, including an update of a BOI report for new LLC members or just changing the beneficial owner’s address.
Information to be reported. The initial BOI report requires the following disclosures: reporting company’s name, EIN, and business address; the company applicant’s full legal name, birth date, and current residential or business address, and a copy of a valid government-issued ID (or the company applicant can simply enter his or her unique “FinCEN identifier” number).
The BOI report for beneficial owners differs from a reporting company. The beneficial owner reports must include their full legal name, birth date, current residential address, and a copy of a valid government-issued identification.
Reporting deadlines. Reporting companies created or registered to do business and companies formed outside the U.S. that register to do business in the U.S. before Jan. 1, 2024, must file their initial BOI report by Jan. 1, 2025. Reporting companies created or registered to do business in the U.S. on or after Jan. 1, 2024, have 90 calendar days (30 days starting on or after Jan. 1, 2025) to file their initial BOI report after receiving notice that their company’s creation or registration is effective.
Exemptions from Reporting
The CTA contains 23 exemptions for various types of entities from filing a BOI report. Determined on a company-by-company basis, exemptions apply, for example, to “large operating companies,” which refers to companies with 20 full-time employees and $5 million in gross receipts or sales with an operating presence and physical location in the U.S.; publicly traded companies; “inactive companies;” and financial institutions such as certain insured banks and insurance companies. Determining whether the CTA exempts a company may be complex but is an essential threshold legal analysis to escape reporting.
Access to Information and Privacy
To protect information reported to FinCEN, effective Feb. 20, 2024, the CTA regulations implement strict security, confidentiality, and privacy processes and protocols under the Final Access Rule.
FinCEN can and will provide BOI to specific domestic and foreign governmental agencies and Tribes for use consistent with the purposes of the CTA. Financial institutions such as banks, among others, may, with the consent of the reporting company, obtain BOI. However, the public cannot access the reports directly or through the Freedom of Information Act (FOIA), which does not apply to the CTA.
Civil and Criminal Penalties
No one should doubt the significant risk and power of FinCEN to impose civil and criminal penalties. FinCEN’s arsenal includes three adjustable civil monetary penalties and substantial criminal penalties:
First, if a person willfully provides or attempts to provide false or fraudulent BOI or fails to report complete, corrected, or updated BOI to FinCEN; a fine of $500 per day (up to $10,000) until the violation is corrected, or imprisonment for up to two years, or both;
Second, if any person, who without the owner’s consent or in any other violation of the CTA, knowingly discloses BOI, a fine of $500 per day (up to $250,000) and imprisonment for up to five years, or both; and
Finally, if a person commits a CTA violation while breaking another U.S. law, like a Federal Aviation Regulation (FAR), or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, a fine of up to $500,000, imprisonment of not more than 10 years, or both. To illustrate with a question, can FinCEN impose a $500,000 fine on a beneficial owner for CTA violations if the beneficial owner also conducts illegal charter operations (violating the FARs)?
Last Thoughts
The CTA is not just another one-and-done government filing rule. It is complex, faces constitutional questions, and intersects with other laws like the FARs that can result in greater penalties. FinCEN has been given broad jurisdiction over aircraft owners and others. It can and likely will cut through aircraft ownership structures from the simple to the complex, including double LLC and double trust structures, to find and punish violators.
It is, therefore, critical to understand and comply with the CTA despite its challenges and invasiveness. Consulting knowledgeable legal counsel should help comply correctly and timely, avoid many pitfalls, and limit expensive encounters with FinCEN. It is, at best, imprudent to fail or refuse to report to FinCEN as required by the CTA. For Star Trek fans who remember the aliens called the Borg, they warn their targets, “Resistance is futile.” And so it is with the CTA.
This blog is not intended, nor should it be construed or relied upon, as legal advice. The comments, recommendations, and analysis expressed in this blog are those of the individual author, David G. Mayer, are purely informational and may not reflect the opinions of AIN Media Group. The use of this blog does not create an attorney-client relationship between you and the author or his law firm. If specific legal information is needed, each person should retain and consult an attorney with knowledge of the subject matter.