On January 1, 2024, the federal Corporate Transparency Act (CTA) took effect. The CTA requires a host of both domestic and foreign entities to disclose their beneficial ownership to the Treasury’s Financial Crimes Enforcement Network (FinCEN). Compliance with the CTA is required for all businesses, including those in the cannabis industry. In this post, I’ll overview some (but not all) key requirements of the CTA, and some of the implications for the cannabis industry.
What is the CTA?
The purpose of the CTA is to combat illegal activities like money laundering by disclosure of information concerning “beneficial owners” to FinCEN. Beneficial ownership essentially means the individuals who own or control a company (more on that below). FinCEN and other domestic governmental authorities can use this beneficial ownership information in certain contexts for law enforcement purposes. Detailed FAQs on the CTA are available here.
Who must report?
Corporations, limited liability companies, and other business entities are considered reporting companies for purposes of the CTA. Certain sole proprietors may not count as reporting companies, and CTA exempts 23 classes of entities, such as governmental bodies, banks, and certain large operating companies.
Figuring out whether a business qualifies for an exemption can in some cases be complicated, and businesses can flow in and out of exemptions over time. So it’s a good idea for businesses to confer with counsel to determine whether they are compliant.
When must reporting happen?
Reporting is done by submitting an initial beneficial ownership report (BOIR) with FinCEN via an electronic portal called the Beneficial Ownership Secure System, located at FinCEN.gov, free of charge. There are some key reporting deadlines, which change based on when a company was formed (for domestic companies) or registered in the US (for foreign companies) as follows:
- Entities created or registered before January 1, 2024, must submit their initial BOIR by January 1, 2025.
- Entities registered in 2024 are required to file within 90 calendar days of their registration becoming effective.
- For registrations from January 1, 2025, onwards, the deadline is 30 calendar days post-registration notice.
CTA also has requirements to periodically update beneficial ownership information after changes occur. Failure to comply with CTA can lead to monetary penalties and even criminal liability.
What must be reported?
Reporting companies must disclose individuals with substantial control or those owning at least 25% of the entity. Substantial control includes abilities like appointing or removing directors, making significant business decisions, or other forms of major influence. For example, question D8 on FinCEN’s FAQs addresses how management companies could be considered beneficial owners of a reporting company. Sound familiar?
Disclosure itself is not dissimilar to state-level cannabis regulatory disclosures. Beneficial owners must provide their legal name, date of birth, address, and an identifying number (e.g., SSN).
How will this affect the cannabis industry?
In case you were wondering, CTA applies to cannabis businesses. There is no exemption for reporting by state-legal cannabis companies.
A lot of cannabis companies will probably get squeamish at the thought of making detailed beneficial ownership disclosures. That’s especially the case where CTA by its terms allows FinCEN to share beneficial ownership information with other federal agencies engaged in law enforcement activities, or federal agencies that supervise financial institutions.
So, expect to see owners of cannabis businesses engage in all kinds of corporate changes to obscure beneficial ownership or reduce equity and control rights to get out of disclosures. In some cases, this will not work and people will face penalties.
Also expect to see a lot of cannabis companies (and non-cannabis companies for that matter) make a good-faith effort to comply with CTA initially but fail to update information as required by law. This is just going to happen, the way CTA is set up. Whether or not people are actually penalized for late disclosures or updates absent some kind of misfeasance remains to be seen.
Conclusion
CTA is complicated and has already been a headache for many businesses – so much so that at least one group of businesses brought a challenge to its constitutionality and won. Fortunately or unfortunately (depending on how you look at it) the court did not issue a nationwide injunction but only enjoined enforcement of CTA against the specific plaintiffs. It’s possible that in different litigation or future appeals, the law itself is enjoined on a nationwide level. But for the time being, it’s the law of the land.
