Beginning on January 1, 2024, Texas POAs will find themselves subject to a new reporting procedure intended to aid in the identification and prosecution of financial crimes. The Corporate Transparency Act (the “Act”) is part of the most significant overhaul of the United States’ bank secrecy and anti-money laundering rules since the Patriot Act. The Corporate Transparency Act is intended to combat money laundering, terrorist financing, tax fraud and other illicit activities.
The Act requires certain entities to file a report with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). FinCEN will then maintain the reported information in a non-public database, made available only to authorized governmental authorities and approved financial institutions. Failure to comply with the requirements of the Act can carry steep monetary penalties and even jail time, so it is imperative that POAs understand how the Corporate Transparency Act impacts their operations.
Are POAs required to report under the Corporate Transparency Act?
While this was likely unintended, the Corporate Transparency Act’s reporting requirements will apply to most POAs. All entities are “reporting companies” (i.e., entities required to file compliant reports) unless they fall into one of 23 exemptions listed in the Act. Of those 23 exemptions, only one has the potential to apply to a POA. Specifically, the Act exempts “any organization that is described in Section 501(c) of the Internal Revenue Code and exempt from tax under Section 501(a) of such Code” from the Act’s reporting requirements. Some POAs, but not many, are registered as 501(c)(4) social welfare organizations. If a POA is not sure whether this exemption applies to them, the POA should consult with counsel or its CPA to confirm.
What information is a POA required to report?
1. The POA’s full entity name
2. Any registered D/B/A (also referred to as an “assumed name”)
3. The complete address for the POA’s principal place of business
4. The state in which the POA was registered
5. The POA’s IRS taxpayer identification number
6. For each Beneficial Owner (see below for a discussion of how to identify a Beneficial Owner):
a. Full legal name
b. Date of birth
c. Complete current residential address
d. Unique identifying number from one of the following nonexpired documents:
1. United States Passport
2. State, local, or tribal ID
3. State driver’s license
e. An image of the identification document from which the unique identification number was obtained
Individuals who qualify as a Beneficial Owner for multiple reporting companies have the option of applying for a FinCEN ID number, which requires disclosure of this same information. For Beneficial Owners who have obtained a FinCEN ID number, a POA can simply report the FinCEN ID number since it is already tied to the supporting information.
Who qualifies as a Beneficial Owner?
In the case of a POA, this is determined based on the “Substantial Control Test.” A person exerts substantial control over a reporting company if the individual:
1. serves as a senior officer of the reporting company;
2. has authority over the appointment or removal of a majority of the Board or similar body; or
3. directs, determines, or has substantial influence over important decisions of the reporting company, such as decisions regarding the nature and scope of the company’s business, major expenditures, the sale or lease of principal assets, incurrence of significant debt, approval of the company’s operating budget, entry into or termination of significant contracts, amendment of any of the reporting company’s substantial governance documents, etc.
POAs should consult with their attorney to identify all Beneficial Owners but, board members and officers may be considered Beneficial Owners for purposes of the Corporate Transparency Act.
When must the report be filed?
A POA formed before January 1, 2024, has until January 1, 2025, to file its initial report.
A new POA formed after January 1, 2024, must file an initial report within 90 days of the earlier of:
1. the date it receives actual notice that the POA’s creation has become effective; or
2. the date the Secretary of State first provides public notice that the POA has been created.
A POA formed after January 1, 2025 must file an initial report within 30 days.
In addition to the initial report, an updated report must be filed within 30 days of any change to the reported information regarding the POA or its Beneficial Owners. Examples of such changes include:
1. Removal or addition of a Beneficial Owner (e.g., the election or appointment of a new director, or the removal or resignation of a previously reported director);
2. Change to Beneficial Owner’s name, address, or “unique identifying number”; or
3. Changes to the document of which a copy was filed with the initial report (e.g., if a copy of the Beneficial Owner’s driver’s license was provided, an updated copy would need to be provided if the driver’s license is replaced, renewed, or otherwise reissued).
Penalties for Violation
The Corporate Transparency Act carries steep penalties for a variety of offenses. For example, the Act allows for civil and criminal penalties, including a fine of up to $10,000, imprisonment for up to two years, or both, for any person who willfully:
1. provides or attempts to provide false or fraudulent Beneficial Owner information; or
2. fails to report complete or updated Beneficial Owner information.
These penalties extend to reporting companies and individuals who: (i) cause a reporting company not to report, or (ii) are officers at the time of the reporting company’s failure to fulfill its obligation to accurately report or update its Beneficial Owner information.
This sounds scary since we all know mistakes can and will happen. Fortunately, there is a safe harbor available in the event inaccurate information is mistakenly reported, so long as a correction is filed within 30 days of the POA becoming aware of, or having reason to know of, the inaccuracy. However, there is no safe harbor for corrections made more than 90 days after the filing of an inaccurate report, even if a POA files a correction promptly after becoming aware of the inaccuracy. Additionally, there is no safe harbor available for corrections where the inaccurate information was reported for the purpose of evading the reporting requirements, or where the inaccuracy was known to the person who submitted the report at the time it was submitted.
Finally, Beneficial Owners who are concerned about their information falling into the wrong hands can rest assured that there are also penalties for persons who knowingly disclose or use the Beneficial Owner Information reported to FinCEN in an unauthorized manner.
Takeaways
Whether it was intended to or not, the Corporate Transparency Act adds another layer of regulatory requirements for most POAs. Given the potential for harsh civil and criminal penalties, POAs should work closely with counsel to ensure their initial reports are timely, complete, and accurate. Additionally, POAs and managers should familiarize themselves with the various events that may trigger the need to file an updated report and calendar the deadline for doing so in the event one of those triggering events occurs.
As the effective date for Corporate Transparency Act nears, the U.S. Treasury Department may issue further guidance on procedures for submitting information. The attorneys of RMWBH will be monitoring for the guidance and provide further updates via our blog, LinkedIn, newsletter and webinars as warranted.
