Effective on January 1, 2024, the Corporate Transparency Act (CTA) will require all nonexempt entities to report certain identifying information of its beneficial owners (as defined below) and company applicants (as defined below) to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).
II. The CTA
The CTA is a part of the National Defense Authorization Act, which was enacted on January 1, 2021, to provide corporate transparency and assist law enforcement efforts to thwart money laundering activity, terrorism, drug trafficking, and other illicit activity. The CTA requires all reporting companies (as defined below) to file a report with FinCEN, disclosing certain information of the beneficial owners and company applicants of the reporting companies. Ultimately, FinCEN will use this disclosed information to create and maintain a national registry that will provide authorized users (i.e., law enforcement agencies) access to the identities of such beneficial owners and company applicants. Although cannabis companies are no strangers to heightened disclosure requirements, it is particularly important that cannabis-industry reporting companies review and comply with the new disclosure requirements and processes described in the CTA.
III. Reporting Companies
Pursuant to the CTA, all domestic U.S. entities (i.e., limited liability companies, corporations, limited partnerships) and any foreign entities registered to do business in the U.S. (individually, a “reporting company”, collectively, “reporting companies) must comply with the disclosure requirements.
Not all entities are reporting companies pursuant to the CTA. The following categories of entities are exempt from the CTA: securities reporting issuer; governmental authority; bank; credit union; depository institution holding company; money services business; broker or dealer in securities; securities exchange or clearing agency; other Exchange Act registered entity; investment company or investment adviser; venture capital fund adviser; insurance company; state-licensed insurance producer; Commodity Exchange Act registered entity; accounting firm; public utility; financial market utility; pooled investment vehicle; tax-exempt entity; and entity assisting a tax-exempt entity.
Additionally, any entity is also exempt from the CTA if it: (i) is owned or controlled by certain exempt entities, or (ii) (a) employs more than 20 full-time employees in the U.S., (b) has an operating presence at a physical office within the U.S., and (c) reported more than $5 million in gross receipts or sales from U.S.-sources only on its prior year federal tax return.
IV. Beneficial Owners
Pursuant to the CTA, reporting companies must provide certain information regarding their beneficial owners. A “beneficial owner” is someone who exerts substantial control over a reporting company, or someone who owns at least 25% ownership interest in a reporting company. According to FinCEN guidance, an individual has substantial control over a reporting company if they direct, determine, or exercise substantial influence over the reporting company’s important decisions.
V. Company Applicants
Similar to beneficial owners, reporting companies must also provide certain information regarding their company applicants. A “company applicant” is the individual who directly files and is primarily responsible for filing the formation document of the reporting company.
VI. Disclosure Requirements
Although cannabis companies are no strangers to heightened disclosure requirements, it is particularly important that cannabis-industry reporting companies review and comply with the new disclosure requirements and processes described in the CTA. Pursuant to the CTA, reporting companies are required to report the following information for the beneficial owners and company applicants: (i) legal name; (ii) residence or business address; (iii) date of birth; and (iv) an identifying number from an identification document such as a passport or driver’s license.
The disclosed identifying information will be filed through an electronic interface with the online Beneficial Ownership Secure System. Similar to the treatment of information reported to the Colorado State Licensing Authority by medical marijuana or retail marijuana licensees pursuant to C.R.S.A. § 44-10-204, the information reported pursuant to the CTA will be stored by FinCEN in a nonpublic, secured, private database. Federal law enforcement agencies; state, local, and tribal law enforcement agencies; federal agencies on behalf of a foreign country; and financial institution (authorized by a reporting company) conducting customer due diligence will have access to this database.
Reports will be accepted by FinCEN beginning on January 1, 2024 (the effective date). All reporting companies created or registered before the effective date, are required to report by January 1, 2025. All reporting companies created or registered on or after the effective date, are required to file within 30 calendar days of receiving an actual or public notice from the secretary of state or similar office that the reporting company has been created or registered. If at any time a reporting company discovers an inaccuracy in a previously filed report, or if previously reported information changes, the reporting company must file an updated or corrected report with FinCEN within 30 days.
Although neither criminal nor civil penalties apply to negligent violations of the CTA, willful violations (i.e., filing a false report/false information) of the CTA may be subject to civil and criminal penalties, including fines up to $10,000 ($500 per day of noncompliance), and up to two years in prison. As such, it will be important for cannabis companies to pay special attention when gathering and reporting such required information regarding their beneficial owners and company applicants.