The US Government has recently passed the new Corporate Transparency Act (CTA), which will come into effect on 1 January 2024. Under the CTA, each “reporting company” is required to report certain beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the US Department of the Treasury. The primary aim of the CTA is to deter and combat money laundering, terrorism financing, tax evasion and other illicit activities, in line with the growing international trend towards greater corporate transparency.
Who should read this? Why?
The new US reporting requirements will apply to both US entities as well as foreign (non-US) entities registered to do business in the US. Therefore, New Zealand businesses that are registered to do business in the US should take note of these new reporting obligations. Notably, there are 23 types of entities that are exempt from the reporting requirements, including publicly traded companies, non-profits, and certain “large operating companies” with a physical US presence that meet specific employment and/or income tax reporting criteria.
What does it cover?
Reporting companies are required to submit to FinCEN their basic corporate information (for example, legal name, address, jurisdiction of formation or registration, tax ID).
Additionally, reporting companies must report to FinCEN specific identifying information about each “beneficial owner”. For companies incorporated on or after 1 January 2024, they are also required to report information about each “company applicant”.
The “beneficial owners” of a reporting company include an individual that, either directly or indirectly:
- has 25% of the ownership interests of the reporting company; or
- exercises substantial control over the reporting entity (including, for example, senior officers of the entity, or persons with substantial influence or authority over the majority of the board, or those who generally have substantial influence over the company’s important decisions).
The “company applicants” are, in summary, individuals primarily responsible for or involved in the formation of the reporting company.
The relevant information that must be reported about beneficial owners and company applicants (where applicable) includes their full legal name, date of birth, residential or business address, unique identifying number from an acceptable identifying document (e.g. passport or driver licence) and a copy of such document containing the identifying number.
There are significant penalties for non-compliance, including a potential civil penalty of up to USD$500 per day for each violation or ongoing non-compliance. Failure to comply may also result in fine of up to USD$10,000 and a maximum of two years imprisonment.
See FinCEN’s website for more information about these reporting requirements, including details on timing of reporting and the exemptions.
Our view
The CTA will bring the US into closer alignment with other jurisdictions, which have been moving towards greater disclosure of beneficial ownership information in recent years. While this is a positive move towards greater corporate transparency, the regime will place added reporting burdens on small companies. If you are an NZ entity that operates in the US, it is important to consider these new reporting requirements and assess whether they would apply to your business.
Relevantly, the reporting requirements under the CTA are, in broad terms, in line with an earlier proposal made by the Labour Government in March 2022, aimed at introducing a new beneficial ownership register for New Zealand's limited partnerships and companies. See here for our previous news alert on this proposal. However, the bill to enact these changes was not presented to Parliament before the 2023 election. At this stage, it is uncertain whether the National Government will see this as a priority or potentially abandon the proposal entirely.
This article was co-authored by Ken Ng, Associate (Malaysian qualified), and Samuel Turner-O'Keeffe, Summer Clerk, from our Banking and Financial Services team.
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