How to Handle Uncooperative Beneficial Owners Under the CTA

In a few weeks, newly formed corporations will need to report the identity of their beneficial owners and provide identifying documentation to the federal government. Over calendar year 2024, approximately 32.5 million business organizations who are already in existence or will be formed that year will need to reach out to their beneficial owners for identifying information. The CTA places the onus on the company and its senior officers to obtain complete and accurate information, and it imposes civil and criminal liability for willful failures to do so.

Required Information

In practice, this will require companies to, at a minimum, conduct a good-faith search for beneficial owners. Once located, the company will then need to contact the beneficial owner and request the following information:

1. name,
2. birthdate,
3. home address, and
4. driver license, passport or state ID number and image.

But what if the beneficial owner refuses to cooperate?

Liability for Both

On December 12, 2023, FinCEN published several FAQs addressing this situation. First, FinCEN noted that beneficial owners themselves could be liable for a failure to supply accurate information: “an enforcement action can be brought against an individual who willfully causes a reporting company’s failure to submit complete or updated beneficial ownership information to FinCEN. This would include a beneficial owner or company applicant who willfully fails to provide required information to a reporting company.” Second, FinCEN suggested that the reporting company “engage with their beneficial owners” and advise them of their liability for failure to cooperate.

Duty to Update

Updates to incorrect information are also required. The rule requires that changes to previously reported information must be filed within 30 days of the change occurring. Typically, a change of address, issuance of a new license or the secondary sale of securities would trigger an update requirement. FinCEN notes that both the reporting company and its beneficial owners can have liability for failure to update. FinCEN further suggests that companies “[put] in place mechanisms to ensure that beneficial owners will keep reporting companies apprised of changes in reported information.”

Steps to Help Ensure Compliance

Reporting firms therefore should consider implementing mechanisms to maximize cooperation by beneficial owners.

Identifying beneficial owners—Reporting companies should undertake, now, to identify who their beneficial owners are, and make sure that they have good contact information for them, so that the upcoming reporting process can be as smooth as possible. For some companies, this will be a simple task. For others, it will be more difficult. Complexity can arise due to many reasons, including elaborate company structures, and because the term “beneficial owner” is defined very broadly in regards to those persons who exercise “control” over the company.  A good faith effort to identify beneficial owners is a good first step in minimizing liability for a willful failure.

Documenting advice—Reporting companies who are unsuccessful in soliciting a response from beneficial owners should document their efforts including their explanation of potential liability to the recalcitrant beneficial owner. This mirror’s FinCEN’s suggestion to “engage with their beneficial owners” and advise them of their liability for failure to cooperate.

Obtaining an agreement—Reporting companies should consider obtaining a signed undertaking from beneficial owners to advise the company promptly as to any changes to previously supplied information or sales of securities. This addresses FinCEN’s comment to “[put] in place mechanisms to ensure that beneficial owners will keep reporting companies apprised of changes in reported information.”

Although FinCEN still needs to finalize the reporting form for beneficial ownership information, the form presumably will allow for reporting companies to indicate when they were unable to obtain required information. To that end, reporting companies will want to undertake procedures which reflect good-faith and reasonable efforts to obtain such information, so that they can defend their inability to obtain full information, and shift responsibility towards any non-compliant individuals.

With 32.5 million affected entities, and an estimated first-year cost of $21 billion, this will not be an easy undertaking. The threat of prosecution, which includes civil penalties of up to $500 per day and criminal penalties of up to 2 years in prison and attendant fines, means that reporting companies and beneficial owners should start focusing now.

Ballard Spahr has a dedicated team of Corporate Transparency Act lawyers, whose deal experience, business acumen and regulatory insight can help guide clients through a wide range of sophisticated transactions and regulatory requirements. 

Copyright © 2024 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.