The Corporate Transparency Act (“CTA”), enacted by Congress to curtail money laundering, tax fraud and other nefarious criminal activities that are often carried out using shell companies, will go into effect on January 1, 2024. The CTA will apply to certain foreign and domestic entities deemed to be reporting companies (“RC”). Beginning January 1, 2024, RCs will be required to submit information on the company, beneficial owner(s) (“BO”), and additional parties in a report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCen”). Reports will be filed with FinCen through a secure, online platform called the Beneficial Ownership Secure System (“BOSS”). What are the specific requirements and how may it affect companies in aviation and their clients?
What is a Reporting Company?
While there is no exact definition of a RC, the CTA lists factors to consider when determining whether an entity is a RC. RC entities are characteristically smaller, minimally regulated and created via filing with a state government. RCs will include, but are not limited to, limited liability companies, limited liability partnerships, certain trusts (including many statutory trusts that have to file documents with a secretary of state), and limited partnerships. RCs may include entities formed outside the United States if they are registered to do business in any jurisdiction in the U.S.
In contrast, entities that are generally not considered to be RCs include sole proprietors, general partnerships, unincorporated associations, certain common law trusts, and foreign entities not registered to do business in the U.S. Additionally, the CTA lists 23 types of entities that are exempt from the CTA reporting requirements. Exempted entities are typically larger or more heavily regulated businesses and include “large operating companies”, Governmental entities, highly regulated entities, tax-exempt entities, or entities owned and/or controlled by exempt entities. Large operating companies are further defined, in part, as having: (i) more than 20 full-time employees; (ii) Federal income tax returns from the previous year demonstrating more than $5,000,000 in gross receipts or sales in the aggregate from U.S. sources; and (iii) which have an operating presence at a physical office within the U.S.
Who is a Beneficial Owner?
The CTA describes a BO as an individual that meets one of two tests. The first test is the Substantial Control Test. Individuals with substantial control generally include (i) senior officers, managers, directors, trustees (under certain trust structures) and general counsel; (ii) any individual able to appoint and remove certain officers; or (iii) individuals with substantial influence in decision-making for the entity. The second test is the 25 Percent Ownership Test. This test requires an examination of ownership interest such as stock shares, percentage of voting rights, or ownership percentage. Only one of these tests has to be met for an individual to be considered a BO. For example, while an individual may not have 25 percent ownership interest in an entity, they could still exert substantial control over the entity. FinCen has stated an expansive approach will be taken when considering a BO and that they expect every entity to identify at least one BO under the Substantial Control Test, even if there are none under the Ownership Test.
What are the Reporting Requirements?
RCs will be required to report multiple items including (“BOI”): (i) basic company information including the type of entity, business address, employer identification number, etc; (ii) personal information of the entity’s BO(s) including the BO(s) full name, current address, date of birth, and a copy of a unique identifying number from an acceptable jurisdiction with a photograph of the individual (i.e. government issued driver’s license or passport); and (iii) RCs formed on or after January 1, 2024, are additionally required to include personal information for the Company Applicant (“Company Applicant”). The Company Applicant is the individual or individuals (however, no more than two per entity) who directly files the creation or registration document for the RC with the secretary of state or similar office and, if one or more individual is involved in the filing, the individual primary responsible for directing or controlling the filing 1.
When are the Reports Required to be Filed?
Reporting requirements differ based on when the RC is formed. RCs formed before January 1, 2024, will have until January 1, 2025, to file their initial report, and their report should include basic information regarding the company and its BO(s). However, RCs formed on or after January 1, 2024, will have only 90 days to file their initial report, which should include the same basic information as the former RCs, but also include information on the Company Applicant. RCs formed on January 1, 2025 and thereafter will only have 30 days to file their initial report. Once the RC files its initial report, any changes to the RC concerning the filed information must be updated within 30 days from the day the change took place. Further, if a RC discovers information that was filed is or has become inaccurate, the RC has 30 days from the day the mistake was identified to correct any mistakes.
Confidentiality
The good news is BO and Company Applicant information will not be publicly available on BOSS, and BOSS is expected to maintain this information at the highest level of security allotted under the Federal Information Security Management Act. However, FinCEN is authorized to disclose reported BO information to: (i) U.S. federal agencies engaged in national security, intelligence and law enforcement activities; (ii) state, local and tribal law enforcement agencies with court authorization; (iii) certain foreign law enforcement agencies and certain other foreign authorities who submit qualifying requests for the information through a U.S. federal agency; and (iv) the U.S. Department of Treasury. As CTA authorizes disclosure to the Department of Treasury, it is likely that information gathered will be shared with the IRS.
Further, with the consent of the RC, FINCEN may also disclose reported BO information to financial institutions to help them comply with customer due diligence requirements under applicable law. There is little guidance to date as to how such consent is to be obtained. However, Lender’s should consider including consents to release BOI in their loan documentation. Lenders should also consider including representations, warranties and covenants regarding customer compliance with, or exemption from, CTA requirements.
Penalties
Failure to comply with the CTA may subject those involved to both civil and criminal penalties. The CTA applies civil and criminal penalties for willfully (i) failing to report complete or updated BOI or (ii) providing false or fraudulent BOI. Civil penalties include a daily $500 fine for a continuing violation, up to a maximum of $10,000. Criminal penalties include up to two years' imprisonment. FinCen has further indicated (i) senior officers of an entity that fails to file a required BOI report may be held accountable for that failure, (ii) providing false or fraudulent beneficial ownership information could include providing false identifying information about an individual identified in a BOI report and (iii) a person may be subject to civil and/or criminal penalties for willfully causing a company not to file a required BOI report.
FAA CARES Act Upgrades
As required by the FAA CARES Act, the FAA Aircraft Registry is in the process of updating its processes and technology for registering aircraft. As mandated by the Government Accountability Office, the Registry will be requiring more information on each individual and legal entity (not publicly traded) that owns more than 25 percent of the aircraft. Much of this information will likely be duplicative of the BOI required to be submitted under the CTA. It is yet to be seen if the Registry and FinCen will work together so that these reporting requirements are not overly burdensome.
Many Entities in Aviation will have to Report
Aircraft ownership structures often use special purpose entities, trusts or smaller entities that may have to report as RCs. Although common law trusts are exempt from reporting, many statutory or other trusts formed by filing documents with a secretary of state will have to report. Lenders and other aviation advisors may want to ensure their clients are aware of the reporting requirements for entities in the aircraft ownership structure.
Conclusion
Growing pains are expected as the CTA is rolled out. The reporting requirements under the CTA will certainly impact on a large majority of business aircraft owners and operators. There is also considerable overlap between the CTA and the 2016 Customer Due Diligence Rule (CDD) imposed on covered financial institutions. The CTA requires FinCEN to revise the CDD by January 1, 2025, to, among other things, bring the rule into conformance with the CTA and reduce unnecessary or duplicative burdens on financial institutions and customers in light of the CTA.
This article was published by NAFA on December 12, 2023.