The (Uncertain) Application Of The Corporate Transparency Act To Tribal Entities

Highlights

• The Financial Crimes Enforcement Network (FinCEN), a unit of the U.S. Department of the Treasury charged with administering the Corporate Transparency Act (the CTA), on Aug. 1, 2024, held a Tribal webinar (Webinar) on the CTA's beneficial ownership information reporting (BOIR) requirements.
• The Webinar, together with several FAQs posted on FinCEN's BOI (Beneficial Ownership Information) webpage, provides insight into FinCEN's interpretation of the application of the BOIR requirements to entities owned by Tribal governments. Although helpful, the guidance provided to date is incomplete, leaving numerous unanswered questions and substantial uncertainties as to how Tribal governments and their entities should comply with the CTA.
• The CTA is a new federal regulatory reporting law that entered into force on Jan. 1, 2024, and has widespread impact on certain types of entities used in business and personal activities. Certain Tribal entities may be covered by the CTA, while others may fall within an exemption. Tribal governments need to become aware of the types of entities that trigger CTA compliance, the resultant implications and the consequences of noncompliance.

The Financial Crimes Enforcement Network (FinCEN), a unit of the U.S. Department of the Treasury (Treasury Department) charged with administering the Corporate Transparency Act (the CTA), on Aug. 1, 2024, held a Tribal webinar (Webinar) on the CTA's beneficial ownership information reporting (BOIR) requirements.

The Webinar, together with several FAQs posted on FinCEN's BOI (Beneficial Ownership Information) webpage, provides insight into FinCEN's interpretation of the application of the BOIR requirements to entities owned by Tribal governments. Although helpful, the guidance provided to date is incomplete, leaving numerous unanswered questions and substantial uncertainties as to how Tribal governments and their entities should comply with the CTA.

This Holland & Knight alert provides background on the CTA, what it means to Tribal governments and what may be required of them to be in compliance.

What Is the CTA in Nutshell?

The Corporate Transparency Act (CTA) is a first-of-its-kind legislation in the United States that authorized the establishment of a national registry of beneficial ownership information about the individuals (U.S. and foreign) who directly own or control a company (U.S. and foreign) within the scope of the CTA, called Reporting Companies. A Reporting Company is within scope of the CTA irrespective of whether it was formed or registered to do business prior to, or after, Jan. 1, 2024.

Congress enacted the legislation in part to address "malign actors [that] seek to conceal their ownership of corporations, limited liability companies, or other similar entities in the United States to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States."

FinCEN maintains a nonpublic registry, which is a secure database using rigorous information security methods and controls to protect nonclassified sensitive information systems at the highest federal security level and administers the BOIR regime of the CTA.

The CTA is not a one-and-done regime. Rather, it requires an initial report, as well as updated and corrected reports to ensure that the information FinCEN maintains is up-to-date and thereby useful to law enforcement, intelligence and national security interests. So, reporting companies will need to initially gather the required information and adopt policies and procedures to learn of, gather, and timely, correctly and completely update and/or correct the information required to be reported.

When Is a Tribal Entity Subject to the CTA?

Reporting Companies. Under the CTA, "Reporting Companies" are entities subject to reporting under the CTA, unless out of scope or exempt. The threshold criteria to determine whether an entity is covered under the CTA is whether an entity was:

• created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe or
• formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe

Thus, tribally chartered entities formed by filing a document with a Tribal office or agency whose routine functions include creating such entities are covered by the CTA unless out of scope or an exemption applies. Entities such as corporations and limited liability companies are within scope, unless an exemption were to apply.

Entities Out of Scope. Some Tribal entities are outside the scope of the definition of a Reporting Company. Generally, it appears that a domestic entity formed through any means other than by filing a document with a secretary of state or similar office of the law of a State or Indian Tribe would be outside the scope of the CTA.

For instance, those Tribal corporations formed under federal law through the issuance of a charter of incorporation by the secretary of the U.S. Department of the Interior are not covered by the CTA; these types of entities include those created under:

• Section 3 of the Oklahoma Indian Welfare Act (25 U.S.C. 5203) or
• Section 17 of the Indian Reorganization Act of 1934 (25 U.S.C. 5124)

Entities Exempt from Reporting. There are 23 entity exemptions from the CTA. Notable exemptions for Tribes are "governmental authorities," "large operating companies" and certain "subsidiaries" of certain types of exempt entities. Each is discussed below.

Governmental Authorities Exemption

"Governmental authorities" are not required to report beneficial ownership information under the CTA. A "governmental authority" for purposes of the CTA means an entity that is:

1. established under the laws of the United States, an Indian Tribe, a State or a political subdivision of a State, or under an interstate compact between two or more States, and that
2. exercises governmental authority on behalf of the United States or any such Indian Tribe, State or political subdivision

Thus, a Tribal entity that is a "governmental authority" is not covered by the CTA. Governmental authorities would include tribally chartered corporations and state-chartered Tribal entities, if these corporations or entities exercise governmental authority on a Tribe's behalf. However, FinCEN has not issued formal guidance on the types of activities for an entity to "exercise governmental authority" in this context, and neither the FAQs to date nor the Webinar clarified the meaning of this term. Until FinCEN issues further guidance, a Tribe's reliance on this exemption could present risk and uncertainty.

Large Operating Companies Exemption

Certain "large operating companies" are also exempt from the BOIR requirements of the CTA. This exemption is the most important exemption available to closely held for-profit entities with limited liability. To qualify for this exemption, the entity must satisfy three requirements:

• employ more than 20 full-time employees in the United States
• have reported more than $5 million of gross receipts from U.S. sources on a federal income or information return for the previous year
• have an operating presence at a physical office in the United States

The FAQs do not address the application of the large operating company exemption to Tribal entities, which typically do not file federal income returns.

Subsidiary Exemption

In addition, subsidiaries that are fully, 100 percent owned or 100 percent controlled by certain types of exempt entities (that include governmental authorities and large operating companies) are also exempt from the CTA. For example, if an entity qualifies for the large operating company exemption, lower-tier subsidiaries whose ownership interests are 100 percent owned or 100 percent controlled by the entity qualify for the subsidiary exemption. The subsidiary exemption also applies if more than one exempt entity of a certain type wholly owns, or wholly controls, directly or indirectly, a lower-tier entity.

The FAQs elaborate on the application of the subsidiary exemption as it applies to governmental authorities and confirm that an entity qualifies for this exemption if its ownership interests are controlled (in their entirety) or wholly owned, directly or indirectly, by a governmental authority.

Who Is Required to Report and What Information Is Reported Under the CTA?

The CTA requires entities to report beneficial ownership information, i.e., identifying information about the individuals who directly or indirectly own or control a company, to FinCEN.

A Reporting Company must report basic information about itself as an entity, as well as information about its "Beneficial Owner(s)" and "Company Applicant(s)."

A. Who Is a Beneficial Owner?

A Beneficial Owner is an individual who, directly or indirectly, exercises substantial control over a Reporting Company or owns or controls at least 25 percent of the Ownership Interests of a Reporting Company.

Because a Tribal government is not an individual, it cannot be listed as the Beneficial Owner. Consequently, if the CTA were to apply to a Tribal entity, the entity must undertake the additional burden of determining which individuals should be reported as beneficial owners – a concept that many Tribal governments may find intrusive and opposed to the concept of Tribal ownership.

For entities that are partially owned by a Tribe and otherwise are not exempt, the FAQs confirm that the entity should report as Beneficial Owners all individuals exercising substantial control over the entity, including individuals who exercise substantial control on behalf of an Indian Tribe or its governmental authority. Such an entity generally should also report any individuals who directly or indirectly own or control at least 25 percent or more of ownership interests of the Reporting Company.

B. Who Is a Company Applicant?

Company Applicant reporting only applies to Reporting Companies formed in 2024 and thereafter. Reporting Companies created/registered before Jan. 1, 2024, are not required to report Company Applicant information.

At most, there can be two individuals who are Company Applicants. These are:

• Company Applicant 1. The person who directly files the document with a secretary of state or similar office, and
• Company Applicant 2. If more than one person is involved in the filing of the document, the individual primarily responsible for directing or controlling the filing

When Are Reports Due?

Initial reports are due in accordance with the following schedule:

Updated reports are due when there is a change to previously reported information about the Reporting Company itself or its Beneficial Owners, but not about its Company Applicants. These reports are due within 30 calendar days after a change occurs.

Corrected reports are also required when previously reported information was inaccurate when filed and remains inaccurate. Corrected reports are due within 30 calendar days after the Reporting Company become aware or has reason to know of an inaccuracy.

Reports filed require the attestation that the information contained in the report is "true, correct and complete."

What Are the Penalties for Not Complying?

The CTA imposes civil and criminal penalties for 1) the willful failure to report, 2) the willful failure to update Beneficial Ownership information and 3) the willful failure to correct inaccurate Beneficial Ownership information.

• Civil Penalties. $500 ($591 increased for inflation) per day in civil monetary penalties (no maximum amount)
• Criminal Penalties. $10,000 fine, imprisonment for no more than two years, or both

While the Reporting Company is obligated to file the report with FinCEN, penalties may also apply to an individual who caused a failure to correctly, timely and properly report. Penalties could also be imposed on "Senior Officers," which term includes a company's president, chief financial officer, chief executive officer, chief operating officer, general counsel or any officer who performs a similar function.

As a general matter, FinCEN does not expect that an inadvertent mistake by a Reporting Company acting in good faith after diligent inquiry would constitute a willful failure or fraudulent violation.

Holland & Knight Insights

• Given the significant penalties associated with the CTA, it is essential for Tribal governments to understand how the CTA may apply to their entities. While some Tribal governments have assumed that the CTA does not apply to their entities, that is not necessarily the case. Tribes should conduct an analysis of each of their entities to determine whether one of the exemptions discussed above could apply or if CTA reporting is required.
• Tribal governments should also press FinCEN to work with the Treasury Department's Office of Tribal and Native Affairs on additional guidance addressing unresolved issues involving the application of the CTA to Tribal entities.
• Better yet, Tribal governments should encourage the Treasury Department, with the written concurrence of the U.S. Attorney General and the secretary of the U.S. Department of Homeland Security, to exercise its authority to exempt Tribal entities from the CTA reporting regime altogether. Specifically, under the CTA, authority exists to exempt classes of entities that the Treasury Department (with the concurrence of the aforementioned government agencies) has determined should be exempt because requiring beneficial ownership information from them "(1) would not serve the public interest; and (2) would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes." A wholesale Tribal exemption should be considered because Tribal entities – formed by sovereign governments to operate businesses such as casinos that are often highly regulated – clearly are not the "malign actors" that Congress had in mind when it enacted the CTA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.