October 30, 2023 Legal Intelligencer article by Lamb McErlane Health Law attorneys Vasilios J. (Bill) Kalogredis and Sonal Parekh.

Background

Effective January 1, 2024, millions of businesses across the United States will be subject to new reporting requirements under the Corporate Transparency Act (“CTA”). With stringent penalties for violations, the CTA requires certain businesses to report to the Financial Crimes Enforcement Network of the U.S. Department of Treasury (“FinCEN”) certain information for persons with “substantial” control over the business or at least 25 percent ownership interest in the business.

The CTA was enacted as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) to end the United State’s position as a harbor for “shell” companies used to facilitate illicit activity and the commission of crimes, protect interstate and foreign commerce, and bring the U.S. into compliance with international anti-money laundering and countering the financing of terrorism standards.[1] In line with this intent, the CTA requires certain businesses, or “reporting companies,” to report direct and indirect, human, beneficial ownership, control, and service provider information to FinCEN in order to streamline criminal investigations.

The CTA is expected to impact the majority of for-profit health care businesses and provider practices that have fewer than 20 full-time employees and do not qualify for any other applicable exemption. Accordingly, health care entities should take notice of the CTA’s requirements and ensure that their respective practices are compliant with the CTA’s standards effective no later than January 1, 2024.

Who Must Report

Beginning January 1, 2024, all domestic and foreign reporting companies must file reports with FinCEN. Reporting companies include corporations, limited liability companies, and other similar entities that are created, or registered to do business, in the U.S. by the filing of a document with the Secretary of State[2] or a similar office under the law of a State or Indian Tribe.[3] It is likely further guidance will need to be issued on what will constitute a “similar entity.” Because Sole Proprietorships and General Partnerships are not usually created by filing a document with the Secretary of State, they would likely not be considered a reporting company. Accordingly, single practitioners that operate their practices as Sole Proprietorships or General Partnerships, and did not incorporate or register their practices with the Secretary of State, may be safe from reporting requirements under the CTA. On the flip side, companies structured as corporations, limited partnerships, and limited liability companies are likely to be considered reporting companies, because each of these entity types require a document to be filed with the Secretary of State in order to create, form, or register the entity to do business within that State.

Interestingly, the CTA excludes 23 types of entities from the definition of a reporting company. Particularly, the CTA excludes certain types of: (i) Regulated Entities[4] (i.e., entities that are already regulated and required to report similar information to federal authorities); (ii) Large Operating Companies[5]; (iii) Subsidiaries whose ownership interests are controlled or wholly owned, directly or indirectly, by certain exempt entities; (iv) Inactive Entities[6]; and (v) Additional Entities exempted by the Secretary of Treasury.[7] The Secretary of Treasury has not yet issued additional guidance regarding health care entities that are regulated subject to other laws and agencies. Accordingly, it is not likely that for-profit health care entities would fall under the exemption for Regulated Entities.

What to Report

Reporting companies are to include specific information (“Reporting Information”) relating to the reporting company and each Beneficial Owner on the initial report. For reporting companies formed on or after January 1, 2024, the same Reporting Information must be provided for Company Applicants[8]. Relating to the reporting company, the following must be reported: (i) the full legal name and any trade name or “doing business as” name of the company; (ii) the address of the company’s principal place of business, or primary location, as applicable; (iii) the jurisdiction of formation and where such company first registered, if different; and (iv) the Taxpayer (or Entity) Identification Number[9]. With respect to each Beneficial Owner, the report shall include the individual’s: (i) full legal name; (ii) date of birth; (iii) residential address; (iv) unique identifying number and issuing jurisdiction of a valid U.S. passport, U.S. State ID, U.S. driver’s license, or foreign passport; and (v) a picture of the identifying document.[10] On submission of an initial report, both individuals and reporting companies can obtain a “FinCEN Identifier,” which can be included in reports to FinCEN in lieu of providing the underlying information for that particular individual.[11] The Reporting Information must be kept current and accurate with FinCEN by the reporting company on an ongoing basis.

Under the CTA, a Beneficial Owner is an individual who, directly or indirectly, either exercises substantial control over the respective reporting company or owns or controls at least 25 percent of the ownership interests of the reporting company.[12] The CTA is very specific as to who is considered to be a Beneficial Owner. An individual is considered to exercise substantial control over a reporting company if the individual (i) serves as a senior officer of the reporting company; (ii) has authority over the appointment or removal of any senior officer or a majority of the board of directors or similar body; (iii) directs, determines or has substantial influence over important decisions made by the reporting company, including decisions regarding sale and transfer of principal assets; reorganization, dissolutions, and mergers; major expenditures or investments and issuances of equity; selection or termination of business lines or ventures; compensation schemes and incentive programs for senior officers; significant contracts; amendments of any substantial governance documents; among other decisions; or (iv) has any other form of substantial control over the reporting company.[13] The CTA governs any direct or indirect exercise of substantial control, whether through Board representation, ownership or control of a majority of the voting power or rights of the company, pursuant to financial or business arrangements, control over intermediary entities that exercise substantial control over the reporting company, or “any other contract, arrangement, understanding, relationship, or otherwise.”[14] The CTA regulations further describe what shall constitute as ownership interest and ownership or control of such ownership interest.[15]

However, the regulations specifically excluded from the definition of a Beneficial Owner, subject to certain conditions: (i) a minor child; (ii) an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual; (iii) an employee of a reporting company (whose substantial control over economic benefits derive solely from his or her employment status); (iv) an individual whose only interest in a reporting company is a future interest through a right of inheritance; and (v) a creditor of the reporting company.[16]

When to Report

Filings will be made through an electronic interface with the online Beneficial Ownership Secure System (“BOSS”). Businesses in existence on January 1, 2024 will have 1 year to file their initial report, which must be done regardless of any subsequent changes to the business structure or ownership. Entities that no longer meet the criteria for any exemption of reporting requirements must file a report within 30 days from the date it no longer qualifies for exemption. Any changes to the Reporting Information thereafter must be reported as a separate amendment filing 30 days after the date on which such change occurs.

Businesses formed on or after January 1, 2024, will have 30 days from the date of domestic formation (or registration to do business in the U.S.) to file their initial report, with an additional 30 days to file any corrections, updates or changes to the information.

While no update is needed for company terminations or dissolutions, updates are needed for newly exempt entities, when the estate of the deceased beneficial owner is settled, when a minor child attains the age of maturity, and any change to the name, date of birth, address, or unique identifying number changes on the provided image of an identifying document.[17] Updates to Company Applicant information need not be reported.

Penalties for Non-Compliance

There are steep, escalating fines and possible jail time for those who fail to timely and properly comply with the CTA’s requirements. Specifically, the CTA authorizes a daily civil penalty of $500 for each day that the violation continues or has not been remedied, and a fine of up to $10,000 and/or imprisonment of up to 2 years.

FinCEN has not set protections for reporting violations via negligence or non-willful conduct. However, FinCEN will consider all relevant facts to a determination of willfulness when assessing whether to pursue enforcement actions. As it stands, a person is considered to have failed to report complete or updated information if: (i) the entity is required to report the information, (ii) the reporting company fails to report such information, and (iii) such person either causes the failure or is a senior officer of the entity at the time of the failure.[18] A safe harbor is provided for persons who unknowingly submit incorrect information if the correction is made within 90 days of the original incorrect filing.[19]

What to Do Now

The CTA is expected to impact approximately 32.6 million small- to medium-size businesses in unregulated industries in its first year, and 5 million additional companies each year thereafter.[20] Health care entities may constitute a large portion of the businesses impacted. Given the comprehensive guidelines on eligibility criteria and exceptions thereto issued under the CTA, individuals and companies should start preparing now for any potential reporting requirements they may have. Specifically, individuals and reporting companies should consult with a lawyer of their choosing to determine the following:

1. Whether the business a “reporting company” or is exempt under the CTA.
2. What will need to be reported and by when.
3. For those forming new entities, which type of entity to select and whether it is advisable to form the entity in 2023 or 2024.
4. What monitoring systems and/or processes the business will need to have in place to gather the necessary information for timely updates and compliance under the CTA.
5. Whether an amendment to governance documents is advisable to ensure reporting compliance.

If you are concerned about potential obligations under the CTA, feel free to contact Vasilios J. Kalogredis, Esq. at bkalogredis@lambmcerlane.com or 610-701-4402 or Sonal Parekh, Esq. at sparekh@lambmcerlane.com or 610-701-4416.

Read the article online on Law.com/Legal Intelligencer here.

 Vasilios J. (Bill) Kalogredis, Esq. has been advising physicians, dentists, and other healthcare professionals and their businesses as to contractual, regulatory and transactional matters for over 45 years. He is Chairman of Lamb McErlane PC’s Health Law Department. Bill can be reached by email at bkalogredis@lambmcerlane.com or by phone at 610-701-4402.

Sonal Parekh, Esq., who contributed to this article, is a practicing attorney at Lamb McErlane PC who focuses on healthcare transactional matters and a broad range of healthcare regulatory-related issues on behalf of healthcare systems, physicians, dentists, and other healthcare providers and is a pharmacist by education and training. Sonal can be reached by email at sparekh@lambmcerlane.com or by phone at 610-701-4416.

 *This article is for educational purposes only and is not intended to be legal advice. Should you require legal advice on this topic or have any questions or concerns, please contact Vasilios J. (Bill) Kalogredis, Esq. or Sonal Parekh, Esq.

[1] National Defense Authorization Act for Fiscal Year 2021, tit. LXIV (“NDAA”) § 6402.

[2] “State” means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, the U.S. Virgin Islands, and any other commonwealth, territory, or possession of the United States. NDAA § 6403(a)(12).

[3] 31 C.F.R. § 1010.380(c).

[4] Subject to specific criteria laid out in NDAA § 6403 and 31 C.F.R. § 1010.380, exempted Regulated entities include certain types of: (1) securities reporting issuers; (2) U.S. governmental authorities; (3) banks; (4) Federal or state credit unions; (5) bank holding companies or savings and loan holding companies; (6) money services businesses; (7) brokers and dealers registered under the Securities Exchange Act; (8) securities exchanges or clearing agencies; (9) entities registered with the Securities and Exchange Commission (“SEC”); (10) investment companies or advisors; (11) venture capital fund advisors; (12) insurance companies; (13) State-licensed insurance producers with a physical operating presence in the U.S.; (14) entities registered under the Commodity Exchange Act; (15) public accounting firms; (16) regulated public utilities; (17) financial market utility designed by the Financial Stability Oversight Council; (18) pooled investment vehicles; (19) Internal Revenue Code (“IRC”) 501(c) entities and/or trusts exempt from tax under the IRC Sections 501(a), 527, and 4947(a)(1) or (2); and (20) entities assisting a tax-exempt entity described herein. 31 C.F.R. § 1010.380.

[5] Subject to specific criteria laid out in NDAA § 6403 and 31 C.F.R. § 1010.380, exempted Large Operating Companies are entities that: (i) employ more than 20 full time employees in the U.S., (ii) has an operating presence at a physical office within the U.S., and (iii) filed a Federal income tax or information return in the U.S. for the previous year demonstrating more than $5 million in gross receipts or sales (net of returns or allowances) on the entity’s applicable IRS form, excluding gross receipts or sales from sources outside of the U.S. 31 C.F.R. § 1010.380.

[6] Subject to specific criteria laid out in NDAA § 6403 and 31 C.F.R. § 1010.380, Inactive Entities are entities that: (i) were in existence on or before January 1, 2020; (ii) are not engaged in active business; (iii) are not owned by a foreign person, whether directly or indirectly, wholly or partially; (iv) have not experienced any change in ownership in the preceding 12-month period; (v) have not sent or received any funds in an amount greater than $1,000, either directly or through any financial account in which the entity or any affiliate of the entity had an interest, in the preceding 12-month period; and (vi) do not otherwise hold any kind or type of asset, whether in the United States or abroad, including any ownership interest in any corporation, limited liability company, or other similar entity. 31 C.F.R. § 1010.380.

[7] Carmen Calzacorta et al., Corporate Transparency Act: Reporting Beneficial Ownership Starting January 2024, Schwabe, August 9, 2023, https://www.schwabe.com/publication/corporate-transparency-act-reporting-beneficial-ownership-starting-january-2024/#:~:text=The%20Act%20and%20Final%20Rulemaking,institutions%2C%20dealers%20in%20securities%2C%20insurance.

[8] A Company Applicant is the individual who (1) directly files the document that creates the domestic reporting company, (2) first registers the foreign reporting company, or (3) is primarily responsible for directing or controlling such filing if more than one individual is involved in the filing of the document. 31 C.F.R. § 1010.380(e).

[9] Due to the applicable reporting timelines, newly formed entities will need to obtain a Taxpayer or Entity Identification Number within 30 days of formation.

[10] 31 C.F.R. § 1010.380(b). 31 C.F.R. § 1010.380(b)(2) includes special rules for reporting companies owned by exempt entities, minor children, foreign pooled investment vehicles, and company applicants for existing companies (i.e., companies that were created or registered before January 1, 2024).

[11] NDAA § 6403(b)(3).

[12] 31 C.F.R. § 1010.380(d).

[13] 31 C.F.R. § 1010.380(d)(1)(i).

[14] 31 C.F.R. § 1010.380(d)(1)(ii).

[15] 31 C.F.R. § 1010.380(d)(2).

[16] 31 C.F.R. § 1010.380(d)(3).

[17] 31 C.F.R. § 1010.380(a)(2).

[18] 31 C.F.R. § 1010.380(g)(4).

[19] 31 C.F.R. § 1010.380(b)(4)(iii)(A)(2).

[20] William E H Quick, The Corporate Transparency Act: Deniers Beware, American Bar Association, July 10, 2023, https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-july/the-corporate-transparency-act-deniers-beware/?utm_source=sfmc&utm_medium=email&utm_campaign=MK20CNTT&utm_term=MKCONTENT1&utm_id=724368&sfmc_id=45492125.