The US Corporate Transparency Act (“CTA”) will come into effect on January 1, 2024 and may impact many Israeli businesses, investors, and business leaders. The goal of the CTA is to combat money laundering, tax fraud, and terrorism financing by making it more difficult for criminals and terrorists to hide their identities behind shell companies and complex entity structures. For the first time, the US has enacted a regime that will penetrate shell companies and complex, multi-layered entity structures and require the disclosure to a government agency of the individuals who exercise ultimate beneficial ownership of US entities and entities doing business in the US.
The CTA and its associated beneficial ownership regulations (“BOI Regulations”) require companies and other legal entities that fall under the definition of “Reporting Companies” to file reports with the US Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) disclosing information regarding Reporting Companies and their Beneficial Owners. In addition, Reporting Companies formed, or registered to do business, in the US on or after January 1, 2024 will be required to disclose the identity of the individuals who directly file the document that creates or registers a Reporting Company and the identity of the individual who is primarily responsible for directing or controlling such filing (“Company Applicants”).
Why Israelis Should Care?
Though Israeli companies are already required to provide information identifying their shareholders to the Registrar of Companies, the CTA goes further in requiring that identifying information be provided regarding the ultimate individual (i.e., human) Beneficial Owner, even if that individual does not directly hold shares of a Reporting Company. In addition, even though the CTA is a US law, it will affect a broad swath of Israeli companies and investors. America is not alone in pursing transparency in corporate structures as a tool in the fight against money laundering and criminal activity. Israel’s Ministry of Justice recently published a document titled Fundamental Principles for the Establishment of a Registry of Ultimate Beneficial Owners for comments by the public as it considers proposing the adoption of legislation dealing with many of the same problems as the CTA was enacted to contend with. Now is the time to begin thinking about the impact of the CTA and to introduce a CTA compliance program because the penalties for non-compliance can be substantial.
What is a Reporting Company?
Only Reporting Companies are required to comply with the CTA, and so the first step in any CTA analysis is to determine whether an entity is a Reporting Company.
There are two categories of Reporting Companies, domestic and foreign. A “Domestic Reporting Company” is an entity created by the filing of a document with a secretary of state or similar office under the laws of a US state, territory, or tribal jurisdiction (“State”), unless exempt. A “Foreign Reporting Company” is an entity formed under the laws of a country other than the US and which registered to do business in the US by the filing of a document with a secretary of state or similar office under the laws of a State, unless exempt. The types of entities that may qualify as Reporting Companies, foreign or domestic, include corporations, companies, LLCs, limited partnerships, limited liability partnerships, and certain trusts. The key is that for the entity to be a Reporting Company, it must be created by filing a document with a secretary of state or similar office of a State if it is organized in the US, or the entity must register to do business in the US by a filing with a secretary of state or similar office of a State if it is not organized in the US.
The CTA and BOI Regulations create a number of exemptions which, if applicable, will exclude an entity from being a Reporting Company. Exemptions have been created for entities that are already regulated, such as banks, insurance companies, federal credit unions, broker dealers, public companies, registered investment companies, and registered investment advisers. In addition, an exemption has been created for “large operating companies” which are entities that employ more than twenty full-time employees in the US, have an operating presence at a physical office in the US, and reported more than five million dollars in gross receipts or sales from sources in the US in its previous year’s US federal tax return. A pooled investment vehicle that is operated or advised by a bank, federal credit union, broker dealer, registered investment company or investment advisor, or a registered venture capital fund adviser, will also be exempt from being a Reporting Company, though certain foreign pooled investment vehicles which otherwise meet the foregoing exemptions are required to provide certain information to FinCEN with respect to an individual who exercises Substantial Control over them. Some tax exempt entities are also exempt under the CTA.
Who is a Beneficial Owner?
An individual who, directly or indirectly, by contract, arrangement, understanding, relationship, or otherwise either exercises “Substantial Control” over a Reporting Company or who owns or controls at least 25% of the “Ownership Interests” in a Reporting Company is a “Beneficial Owner”.
An individual may exercise “Substantial Control” over a Reporting Company if s/he serves as a “Senior Officer” in the Reporting Company (president, CFO, general counsel, CEO, COO, or any other officer who performs a similar function), has authority over the appointment or removal of senior officers or a majority of the board of directors, directs, determines or has substantial influence over important decisions made by the Reporting Company, or has any other form of substantial control over the Reporting Company.
The term “Ownership Interests” is defined broadly and includes equity, stock, shares, or similar instruments, interests in a joint venture, any capital or profit interest in an entity, instruments convertible into the foregoing, warrants, options, and rights to the foregoing, and any other means of establishing ownership. The Small Entity Compliance Guide published by FinCEN (“FinCEN Guide“) during September 2023 includes examples to determine whether an individual meets the 25% threshold. One of the examples is of an individual who meets the 25% threshold because the individual owns 70% of the stock of a company which, in turn, holds 50% of the stock of the Reporting Company. Under the example, the individual indirectly owns 35% of the Reporting Company’s stock (70% × 50% = 35%). In another example, an individual does not meet the 25% threshold because the individual owns 25% of the stock of a company which, in turn, owns 50% of the stock of a Reporting Company. In this example, the individual indirectly owns 12.5% of the Reporting Company’s stock (25% × 50% = 12.5%).
The BOI Regulations contain a number of exceptions with respect to individuals who would otherwise qualify as Beneficial Owners, including minor children (provided that a parent or legal guardian is reported as a Beneficial Owner), nominees, intermediaries, custodians, and agents, employees (excluding Senior Officers), persons who will inherit an interest in the Reporting Company in the future, and certain creditors.
What Information Needs to be Disclosed?
Reporting Companies need to file reports with FinCEN containing information about the Reporting Company itself, its Beneficial Owners and its Company Applicants (collectively, “Beneficial Ownership Information” or “BOI”), though Company Applicant information is required only for Reporting Companies formed or registered on or after January 1, 2024. Please note that the duty to report BOI to FinCEN is borne by the Reporting Company itself although it will be dependent on the Beneficial Owners and Company Applicants to provide the necessary information.
1. Reporting Company. A Reporting Company must provide the entity’s full legal name, trade name or “doing business as” name, current address, the State or foreign jurisdiction of formation, the State where it first registers (for a Foreign Reporting Company), Internal Revenue Service Taxpayer Identification Number, and its Employer Identification Number.
2. Beneficial Owner. Reporting Companies must identify each of their Beneficial Owners and provide each Beneficial Owner’s full legal name, date of birth, current residential address, a unique identifying number appearing in one of the following forms of identification: a valid US passport, a valid identification document issued by a State or local government, a valid driver’s license issued by a State, or, if the individual does not possess any of the previously listed forms of identification, a valid passport issued by a foreign government, and an image of the document from which the unique identifying number was obtained.
3. Company Applicant. The Reporting Company must provide the same information as required with respect to a Beneficial Owner for up to two Company Applicants, provided that the address provided may be their business address if the applicant formed or registered the entity in the course of the applicant’s business.
When Are CTA Reports Due?
Initial Reports. The initial report of Reporting Companies formed or registered on or after January 1, 2024 are due within thirty days of the earlier of (i) the date a Reporting Company receives actual notice that its creation or registration has become effective, or (ii) the date on which a secretary of state or similar office first provides public notice, such as through a publicly accessible registry, that the Reporting Company has been formed or registered. However, on November 29th FinCEN adopted rules extending the filing deadline from thirty days to ninety days for Reporting Companies formed or registered during 2024 to give those Reporting Companies additional time to understand the new reporting obligation and collect the necessary information to complete their filings. Reporting Companies formed or registered on or after January 1, 2025, will continue to have thirty days to file their initial reports with FinCEN. Reporting Companies formed or registered before January 1, 2024 are required to file their initial reports by no later than January 1, 2025.
Updated Reports. Reporting Companies are required to file updated reports within thirty days of any change to information previously filed with FinCEN concerning a Reporting Company or its Beneficial Owners.
Corrected Reports. If a report filed with FinCEN was inaccurate when filed and remains inaccurate, the Reporting Company is required to file a corrected report within thirty days of the date the Reporting Company becomes aware or has reason to know of the inaccuracy.
What are the Penalties for Noncompliance?
The CTA and BOI Regulations imposes both a civil penalty of up to $500 for each day that a violation continues and criminal liability punishable by a fine of up to $10,000 or imprisonment of not more than two years, or both, on any person who willfully provides, or attempts to provide, false or fraudulent Beneficial Ownership Information to FinCEN or willfully fails to report, complete, or update Beneficial Ownership Information to FinCEN. Penalties, both civil and criminal, may be imposed on any person who caused the failure or was a Senior Officer of the Reporting Company at the time of the failure.
What will FinCEN do with Beneficial Ownership Information?
FinCEN is required to hold BOI relating to a Reporting Company for at least five years from the termination of the Reporting Company. FinCEN is required to keep BOI confidential and it may only disclose it in the circumstances allowed under the BOI. FinCEN is permitted to disclose BOI: (i) to federal national security, intelligence, and law enforcement agencies; (ii) to a State law enforcement agency, if a court or has authorized the law enforcement agency to seek the information in a criminal or civil investigation; (iii) upon a request from a federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country; (iv) to a financial institution subject to customer due diligence requirements, with the consent of the Reporting Company; and (v) to a federal regulator.
What Steps Should I Take to Prepare for Compliance?
1. If you are planning to create new US entities or register foreign entities in the US, register them by December 31, 2023, if possible.
2. If you are a Senior Officer of an entity that is incorporated, organized, or registered in the US, ensure that a CTA compliance officer is appointed.
3. Determine which of those entities will be Reporting Companies.
4. Determine the identity of any Beneficial Owners of Reporting Companies, both in terms of ownership and substantial control.
5. Ask Beneficial Owners of Reporting Companies to provide BOI.
6. Implement processes to monitor the ongoing accuracy of BOI (e.g., sett reminders regarding the expiration of a Beneficial Owner’s passport, etc..) and file updated reports, as necessary.
7. Update the entities’ foundational documents (e.g., articles of association, certificate of incorporation, operating agreement, limited partnership agreement, etc..), shareholders’ agreement, and Senior Officers’ employment and consulting agreements to require Beneficial Owners (including Senior Officers) to provide BOI, if necessary. Even entities organized outside the US which are not Reporting Companies may need this information if they become Reporting Companies or are or become Beneficial Owners of Reporting Companies.
8. Consult with counsel to ensure that you hold BOI in compliance with applicable privacy laws.
9. Be prepared for due diligence reviews for corporate transactions to include a CTA compliance review.
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This update is intended to bring the CTA to your attention and is provided for informational purposes only and does not serve to replace professional legal advice. This is a summary only, and you may wish to consult with us for legal advice before you report.
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For further information, please get in touch with your regular contact at Goldfarb Gross Seligman or with:
Dr. Ayal Shenhav, Chairman and Co-Head of the International and Hi-Tech Department
Eli Barasch, Partner, International and Hi-Tech Department
