Are private fund managers and their portfolio companies impacted by the Corporate Transparency Act? If so, how can they ensure compliance and avoid penalties?
The Corporate Transparency Act (CTA) legislation introduces beneficial ownership reporting requirements for new and existing entities. Its objective is to make corporate ownership more transparent to help combat money laundering, terrorist financing, and other illicit activities. Unless exempt, newly formed entities, created or first registered on or after January 1, 2024, and before January 1, 2025, must report required information to the Financial Crimes Enforcement Network (FinCEN) within 90 days of formation. Newly formed entities, created or first registered on or after January 1, 2025, must report required information to FinCEN within 30 days of formation. Reporting companies in existence prior to January 1, 2024 have until January 1, 2025 to report.
While many private fund entities will be exempt from beneficial ownership information (BOI) reporting requirements, there are exceptions. Special purpose vehicles, holding companies, aggregators, and blockers related to fund and portfolio structuring may not be exempt.
As a private fund manager, it can be difficult to navigate the CTA and its numerous exemptions. We’ve outlined the considerations and relevant exemptions to assist you in determining the CTA’s impact on your business.[1]
Who’s required to report?
As a corporation, limited liability company (LLC), or similar entity, you may be required to report your BOI.
Companies required to report BOI are called reporting companies and fall into two categories, domestic or foreign. Domestic reporting companies include corporations, LLCs, or similar entities formed by filing a document with a secretary of state or similar office under the law of a state or tribal jurisdiction. Foreign reporting companies are corporations, LLCs, or similar entities established under the law of a foreign country and admitted and qualified to do business in any state or tribal jurisdiction.
Considerations for private funds and portfolio companies
There are 23 types of entities exempt from BOI reporting requirements including registered investment advisers (RIAs), venture capital fund advisers, pooled investment vehicles, tax-exempt entities, broker-dealers, and some subsidiaries. Parent companies aren’t necessarily exempt from reporting obligations, even if they only hold exempt entities.[2] This means that, while some entities within a fund structure may qualify for exemptions, others may still have reporting requirements.
Many investment advisers will have entities in their organization structure, or those they advise, that will not fall under an exemption. This includes entities that act as an intermediary between a private investment fund and a portfolio company, such as blockers, splitters, aggregators, and holding companies.
It’s important to carefully evaluate the reporting obligations of all entities within a company structure. FinCEN suggests companies carefully review qualifying criteria before concluding that they’re exempt.
Initial steps for fund managers
Where should fund managers begin? Start by identifying the ownership structure of all entities to determine whether each is subject to the CTA. The determination as to which entities are exempt must be made entity-by-entity, and then reporting information needs to be gathered for each non-exempt entity. Many fund managers will partner with specialized service providers to leverage entity management systems and other solutions that provide a secure and structured approach to complying with the CTA as well as to prepare for upcoming regulatory and compliance changes.
What information must be reported?
Reporting companies must disclose their BOI to FinCEN, as well as certain personal information about each beneficial owner. A beneficial owner is any individual who exercises substantial control over the reporting company or who owns or controls at least 25% of the ownership interests of the reporting company.[3]
According to the FinCen filing guide, reporting companies must provide:
- Full legal name
- Any trade name or doing business as (DBA) name
- Complete current U.S. business address
- State, tribal, or foreign jurisdiction of formation
- Internal Revenue Service (IRS) taxpayer identification number (TIN), including an employer identification number (EIN) (or, if a foreign reporting company has not been issued a TIN, the reporting company’s foreign tax identification number and the name of the issuing jurisdiction)
Entities must report the following information about beneficial owners:
- Full legal name
- Date of birth
- Complete current residential address
- Unique identifying number and issuing jurisdiction from, and image of, one of the following non-expired documents:
- U.S. passportState driver’s license
- Identification document issued by a state, local government, or tribe
Entities created or registered to do business in the U.S. on or after January 1, 2024 must also report company applicants to FinCEN. Each reporting company that’s required to report company applicants will have to identify and report at least one company applicant, and at most two. All company applicants must be individuals. There are two categories of company applicants—the direct filer (the individual who directly filed the document that created or registered the reporting company), and the individual who directs or controls the filing action (whoever is primarily responsible for directing or controlling the filing of the creation or registration document).
What are the penalties for non-compliance?
The penalties for non-compliance with the CTA are substantial.
The willful failure to report complete or updated BOI to FinCEN, or willfully providing false or fraudulent beneficial ownership information, may result in civil or criminal penalties, including civil penalties of up to $500 for each day the violation continues, and criminal penalties, including imprisonment for up to two years and a fine of up to $10,000.
How CSC can help
CSC can provide valuable guidance and support to private funds and their managers as they navigate CTA compliance. Many fund managers partner with CSC to leverage CSC Entity ManagementSM, our secure and structured approach to complying with the CTA, as well as other regulatory and compliance deadlines.
In addition to these core services, CSC currently offers Beneficial Owner Filing services in 12 international jurisdictions with requirements similar to the CTA. Our full-service framework and industry-leading team of experts will ensure compliance with the CTA allowing you to focus on your strategic business priorities.
Our team of experts will securely collect required beneficial owner and company applicant information, manage the outreach necessary to obtain BOI and supporting documents, and prepare and file BOI reports with FinCEN.
Looking to understand if the CTA applies to the entities in your portfolio? CSC’s eligibility quiz can help determine whether your company may generally be required to file a beneficial ownership report with FinCEN. However, the determination of whether any particular entity must report requires consultation with legal counsel.
For news, reports, events, webinars, guides, special offers, and more, subscribe to our blog and get the latest from CSC delivered to your inbox.
Why CSC
CSC offers a global solution for subsidiary governance, fund strategies, and capital markets transactions, with tools to help fund managers navigate the ever-changing compliance and regulatory environment that they face.
With capabilities in more than 140 jurisdictions, we’re able to do business wherever our clients are—and we accomplish that by employing experts in every business we serve.
[1] CSC DOES NOT PROVIDE LEGAL ADVICE OR COUNSEL. YOU MUST CONSULT LEGAL COUNSEL TO DETERMINE THE APPLICABLILITY OF THE CTA TO A PARTICULAR ENTITY.