As previously discussed, the Agricultural Foreign Investment Disclosure Act (“AFIDA”) (7 U.S.C. §§ 3501–3508) contains reporting requirements mandating that certain foreign and domestic entities disclose their interests in U.S. agricultural land to the U.S. Department of Agriculture (“USDA”). However, this may not be the only reporting requirement that these businesses are responsible for. A newly implemented regulation, written under the authority of the Corporate Transparency Act (“CTA”), may add further disclosures.
On January 1, 2024, the CTA went into effect. Many entities, particularly small businesses, operating within the U.S. are now required to disclose information about their ownership structure to the United States Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
However, a federal district court in Alabama recently ruled that the CTA was unconstitutional in the case of National Small Business Association v. Yellen (Case No. 5:22-cv-01448). On March 1, 2024, the U.S. District Court for the Northern District of Alabama determined that Congress surpassed constitutional boundaries when it enacted the CTA. The court permanently enjoined the government from enforcing the CTA against the National Small Business Association. After the court’s ruling, FinCEN issued a press release stating that as long as the court’s order remains in effect, it is not enforcing the reporting requirements against the plaintiffs of the case, which includes the National Small Business Association and its members. As a result, it is likely FinCEN will continue enforcing the CTA’s reporting requirements against all other business entities required to disclose their ownership structure.
While the CTA applies to certain domestic businesses, certain foreign entities that are registered to do business in the U.S. are also subject to the law’s reporting requirements. Further, interests held by a foreign individual or entity in a U.S. business may also require disclosure to FinCEN as part of the CTA’s reporting requirements. Foreign investors and entities that fail to satisfy the CTA’s and AFIDA’s reporting requirements may be subject to civil and criminal penalties.
Background
Enacted under the National Defense Authorization Act for Fiscal Year 2021 (P.L. 116-283)—which is a bicameral appropriations bills that specifies the annual budget for the U.S. military and national security programs—the CTA seeks to “help prevent and combat money laundering, terrorist financing, corruption, tax fraud and other illicit activity while minimizing the burden on entities doing business in the United States.” See 87 FR 59498 (Sept. 30, 2023) (to be codified at 31 C.F.R. 1010.380). Because the CTA is designed to identify situations were an entity may be concealing criminal activity through shell companies, the types of entities required to report under the law are mainly smaller businesses.
Reporting Companies
In general, the CTA requires all reporting companies to report their beneficial owners. Further, companies established after January 1, 2024 must also report their company applicants. A “reporting company” is a (1) domestic entity that is formed by filing a document with the secretary of state or a similar office under the laws of a state, U.S. territory, or Indian Tribe, or (2) foreign entity (i.e., entities formed under the laws of a foreign country) that registers to do business in the U.S. Accordingly, most corporations, limited liability companies, limited partnerships, and trusts that are established by filing a document with a state authority qualify as reporting companies under the CTA.
For more on reporting companies under the CTA, visit Iowa State University’s Center for Agricultural Law and Taxation here.
While most business entities qualify as reporting companies under the CTA, certain entities are exempt from the law’s reporting requirement. Specifically, many of the entities that are exempt from the CTA’s reporting requirement are highly regulated by the federal government or are required to disclose details about their ownership under some other reporting regime. Some of the exempt entities include banks, security brokers and dealers, investments companies, insurance companies, pooled investment vehicles, public accounting firms, inactive companies, tax-exempt entities, government entities, and subsidiaries of certain exempt entities. Also, large operating companies that have more than 20 full-time employees and report greater than $5 million in gross receipts or sales, among other requirements, are exempt from the CTA’s reporting requirement. Overall, most small businesses operating in the U.S. are unlikely to meet an exception and are required to satisfy the CTA’s reporting requirement.
A complete list of entities exempt from the CTA’s reporting requirements can be found on FinCEN’s website here.
Foreign Entities as Reporting Companies
The core consideration for whether a foreign entity is a reporting company under the CTA depends on whether the entity must file a document with a state authority before it may legally conduct business within that state. Generally, states require foreign entities to “qualify” before they can do business within their state by registering their entity with a state agency, such as the secretary of state. However, what constitutes “doing business” depends on a particular state’s laws, which means there are some activities and transactions foreign entities may conduct without having to register with a state. If a foreign entity’s activities within a state does not constitute “doing business” within the state, they likely do not have to register with the state and are likely not a reporting company under the CTA.
Some states also require certain foreign business entities to register with the state because of the type of business structure of the entity. For example, Arkansas requires foreign business trusts, which is a trust created to hold and manage assets for the benefit and profit of a business, to register the trust with the state’s secretary of state if the trust desires to transact business within the state. See Ark. Code Ann. § 4-31-402. Overall, a foreign entity is generally a reporting company under the CTA when its activities or business structure requires prior authorization from a state authority before it can conduct business within the state.
Disclosure Requirements
Reporting companies must disclose beneficial owners. The CTA defines “beneficial owner” of an entity as any individual who, directly or indirectly, either (1) owns or controls at least 25% of the ownership interest of a reporting company or (2) exercises substantial control over a reporting company. Individuals gain an “ownership interest” in a reporting company through many types of arrangements, such as equity or stocks ownership, capital or profits interests, or through some other type of contract or relationship. In some instances, trustees of a trust holding assets of a reporting company may be a beneficial owner and required to report under the CTA. Further, a person that exercises “substantial control” over a reporting company includes a president, CEO, CFO, general counsel, or other individual that has authority to exercise a significant degree of control over the operations of the reporting company.
The CTA makes clear that beneficial owners are individuals, not other entities that may have an ownership interest in the reporting entity. In other words, individuals that hold an ownership interest in a reporting company through another entity must be named as beneficial owners to the reporting company. For example, if a foreign entity conducts business in the U.S. solely through a U.S. entity that qualifies as a reporting company under the CTA, that U.S. company will be required to disclose personal information (such as name, date of birth, and residential or business address) of the beneficial owners to FinCEN, which will most likely include some, if not all, the owners and operators of the foreign entity.
Aside from disclosing beneficial owners, reporting companies created after January 1, 2024, must also disclose company applicants. Under the CTA, a “company applicant” is an individual who (1) directly files the document that creates the entity, (2) for foreign entities, directly files the document that first registers an entity to do business in the U.S., or (3) is primarily responsible for directing or controlling the filing of the relevant document by another. As a result, this means law firms or other business formation professionals may be a reporting company’s applicant. For example, if an attorney directly files documents to register their client’s foreign entity to do business in a state, the foreign entity must report the attorney as a company applicant. Reporting companies that have multiple company applicants are only required to disclose two applicants in their disclosure.
A more in-depth discussion of the CTA’s disclosure requirements is available on Iowa State University’s Center for Agricultural Law and Taxation here.
Compliance and Penalty
Foreign reporting companies authorized to do business in the U.S. before January 1, 2024, have until January 1, 2025, to report their beneficial ownership. A foreign entity that becomes a reporting company on or after January 1, 2024, but before December 31, 2025, has 90 days to report their beneficial ownership and company applicants from the earlier date (1) it receives actual notice it is authorized to do business or (2) public notice provided by the secretary of state or similar office that the foreign entity is authorized to do business. A foreign entity that becomes a reporting company after January 1, 2025, will have 30 days to report beneficial ownership and company applicants.
The CTA also requires reporting companies to update beneficial ownership information within 30 days of the change. For example, if an individual obtains a 25% ownership interest in a reporting company or the reporting company employs a new president or CEO, they must update their filing with FinCEN within 30 days. Reporting companies must also correct information within 30 days of discovering inaccurate information in their report. Entities that file a correction within 30 days of discovering the incorrect information and within 90 days of the initial submission of the inaccurate report will not be liable for the penalties provided under the CTA.
Reporting companies are not required to use legal or tax professionals to submit the required information to FinCEN. Instead, FinCEN permits anyone the reporting company has authorized to act on its behalf, such as a manager or employee of the company, to file a report. The online portal for submitting information is available on FinCEN’s website here. Guidance for submitting a report is available here.
Reporting companies that provide false or fraudulent information or fail to report complete or updated information may face a civil penalty of up to $500 for each day the violation continues. Reporting companies in violation of the CTA may also be subject to a criminal fine of up to $10,000 and up to 2 years imprisonment.
Conclusion
In general, the CTA requires reporting companies—both newly established and already existing—to report specified information within a limited timeframe. While the CTA reporting requirements applies to certain domestic entities, it also applies to certain foreign entities that are registered to do business within the U.S. Because the CTA primarily applies to small businesses, many farm entities in the U.S. will be required to report ownership information about the company to FinCEN. Domestic and foreign entities that fail to timely or accurately file these reports may face civil and criminal liability.
Although the federal district court in National Small Business Association v. Yellen ruled that the CTA is unconstitutional, the court’s ruling applies only to the plaintiffs in the case. Please consult with an attorney in your jurisdiction to learn more about the specifics of your situation and how to effectively and accurately comply with the CTA reporting requirements.
To read the CTA, click here.
To read the CTA final rules published by FinCEN, click here, here, and here.
For FinCEN’s Small Entity Compliance Guide, click here.
For more details on the CTA’s reporting requirements, read this article published by Iowa State University’s Center for Agricultural Law and Taxation.
NALC resources on AFIDA and foreign ownership of U.S. land is available here.
Subscribe to NALC’s bi-weekly newsletter The Feed for recent legal developments affecting agriculture, including foreign ownership of agricultural land here.
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