By Marta Lillo
The Corporate Transparency Act (CTA) took effect on Jan. 1, 2024, requiring all reporting companies operating in the U.S. to identify their ultimate beneficial owners (UBO) and company applicants for national security and other legal matters.
The new regulation applies to domestic and foreign reporting companies registered in the U.S.
The new law requires these businesses to file uniform beneficial information (BOI) reporting with the U.S. Department of the Treasury’s Financial Crime Enforcement Network (FinCEN).
“Generally, the goal of the CTA is to enhance transparency in the beneficial ownership information of corporate entities in an effort to battle money laundering, terrorism financing, and other illegal activities,” says Rogelio Carrasquillo, managing shareholder of Carrasquillo Law Group and chair of its EB-5 Immigrant Investor Program Services and Compliance and Securities practices.
Immigration attorneys explain the new regulation impacts EB-5 investment depending on the type of ownership structure they have, whether it’s direct or through a regional center, and the number of EB-5 investors involved in case of the latter.
“As is apparent, all U.S. entities formed that conduct business activities related to the EB-5 program need to comply. Foreign entities may likewise have to comply if they have a U.S. presence, as described above. Fortunately, this will not apply to foreign EB-5 investors that neither have control nor ownership to make them beneficial owners. There could be unintended consequences under the RIA [EB-5 Reform and Integrity Act of 2022] and the rules and regulations promulgated thereunder for non- compliance,” explains Ronald Fieldstone, partner at Saul Ewing LLP.
Who could the CTA affect in the EB-5 process?
The new law affects direct and regional center EB-5 investors, New Commercial Enterprises (NCE), Job Creating Entities (JCE), Regional Centers, and securities attorneys differently.
According to Carrasquillo, all EB-5 participants, from investors to Regional Centers, must assess their corporate structure to ensure compliance with CTA. “This will include identifying and reporting the individuals who are the UBOs of the investment entities. Existing projects and Regional Centers need to evaluate their ownership structure based on the CTA parameters. New projects with entities created after Jan. 1, 2024, should request this information from the beginning.”
Under the CTA, a UBO exercises substantial control or control of at least 25% of a reporting company. It is important to note that EB-5 investors who invest directly in a new commercial enterprise (NCE), and not through a regional center, could qualify as such, depending on their ownership percentage or management role.
However, compliance with the CTA differs when it’s a regional center EB-5 investor and the ownership structure of the NCE they create.
Regional center EB-5 investors pool their investment with other applicants to create an NCE. Whether they have to file BOI reporting or not will depend on the number of investors and whether the NCE manager controls ownership of 25% or more.
Consequently, some NCEs could fall under the definition of a ‘reporting company’ as per the CTA, while others not.
Ignacio Donoso, an EB-5 immigration attorney and managing member at Donoso & Partners LLC, confirms that “the definition of ‘reporting company’ under the CTA is sufficiently broad that it encompasses most NCEs.”
Carrasquillo cautions that “the new rules under the CTA may have an effect in NCEs where the manager or general partner does not own equity and have 4 or less EB-5 investors. In such situation, the EB-5 investors would own 25% or more of the NCE and will be considered UBOS under the CTA. As a result, managers or general partners of NCEs need to carefully look at existing structures to determine if any EB-5 investors would be considered UBOs. Also, we may see new NCEs providing equity to their managers or general partners to avoid qualifying new EB-5 investors in those projects as UBOs and requiring the reporting of their information.”
According to Edward Beshara, managing attorney of Beshara GM Law, if the NCE enters into a loan agreement with the Job Creating Entity (JCE) also makes a difference.
“As stated under the EB-5 Regional Center Loan model, the EB-5 investors who are committing their funds to the [NCE] become owners of the new commercial enterprise. The [NCE] as an entity then will enter into a loan agreement with the [JCE]. The Job Creating Entity will be required to repay the loan to the NCE according to the loan agreement. The JCE is the entity that owns the EB-5 project land and the buildings. Further, the EB-5 investors are not committing their funds to the JCE individually and are not the owners of the JCE,” Beshara says.
In this case, the EB-5 investors do not have control over the JCE. Therefore, they do not qualify as UBO and don’t report under the CTA.
Meanwhile, for regional centers, CTA requires similar ownership reporting rules under RIA,” Donoso adds. “Regional Center operators should update their internal operations manuals to require sponsored NCEs and any affiliated JCEs to confirm that they will comply with CTA reporting requirements.”
The CTA also involves company applicants, which include attorneys and other legal professionals who have a limited role in assisting clients in complying with the CTA. They “hereby may assume a corresponding liability for reporting client BOI accurately and in a timely manner,” says Shae Armstrong, a corporate attorney and partner at Bradley Arant Boult & Cummings, LLP.
This legal counsel includes attorneys assisting forming a corporate entity for a client or submitting a CTA filing on behalf of the company they represent.
In the case of EB-5 legal counsel, this applies to “only EB-5 securities lawyers structuring the EB-5 projects and forming the necessary entities for EB-5 developers,” Armstrong insists.
According to securities attorney Robert Cornish, enforcement of the CTA “will more likely than not complicate proof of funds issues for EB-5 investors, given that beneficial ownership of entities will require at least some modicum of review. As one might expect, USCIS more likely than not will be seeking whatever FinCen submissions for LLCs and other corporate entities as part of its ongoing review of projects early in the I-956 stage. Going forward, RFEs [Requests for Evidence] and NOIDs [Notice of Intent to Deny] that seek to deny EB-5 benefits on ‘material change’ grounds may rely on FinCen reporting on meaningful changes in control and ownership of entities involved in EB-5 projects. One thing to note is that there are some limited trust exemptions in the CTA that may provide some relief to both investors and developers if used properly.”
Exemptions for filing BOI reporting under CTA must be reviewed, says Samuel Newbold, chair of the Immigration Law Group at CSG and a member of CSG’s Alternative Capital Group. “For example, pooled investment vehicles are exempt from BOI reporting, and therefore NCEs may not need to report. Additionally, any company that reported more than $5 million in gross receipts or sales in the previous year and satisfies other exemption criteria may not need to report the required BOI. Some regional centers or operating JCEs may qualify for this exemption. However, neither engaging solely in passive activities like holding rental properties or real estate assets, for example, nor being unprofitable necessarily exempts an entity from the BOI reporting requirements.”
What do EB-5 companies need to do to comply with CTA?
Besides UBO ownership or control, Osvaldo Torres, EB-5 securities lawyer and principal attorney at Torres Law, adds that EB-5 investments that meet CAT conditions will be required to deliver to FinCEN a report containing the reporting company’s: “(i) full legal entity name, including trade names; (ii) current address; (iii) the jurisdiction it was formed in or jurisdiction in which a foreign company first registers; (iv) the Internal Revenue Service Taxpayer Identification Number and Employer Identification Number. Importantly, reporting companies must also provide to FinCEN the following information about each beneficial owner and company applicant of the reporting company: (i) full legal name; (ii) date of birth; (iii) current business or residential address; (iv) unique identifying number (such as passport, driver’s license, etc.) or FinCEN identifier.”
The reporting applies to U.S. companies originally created in the U.S. and entities that became a foreign reporting company in the country before Jan. 1, 2024; they must file a report by Jan. 1, 2025. However, reporting companies created between Jan. 1, 2024 and Jan. 1, 2025, must file within 90 calendar days since they receive notice of their creation. Meanwhile, companies created on or after Jan. 1, 2025 must file a report within 30 calendar days after receiving notice.
For EB-5 projects starting after Jan. 1, 2024, EB-5 offering documents and Regional Center policy guidelines should incorporate CTA requirements to allow full compliance, Carrasquillo adds.
Noncompliance with the new UBO reporting requirements may result in monetary and criminal penalties. “There are updates to reports that also need to be filed in a timely manner and certain financial and criminal penalties for a failure to comply. The process involves imputing information and ongoing compliance,” Fieldstone adds.
“A false, fraudulent, or incomplete beneficial ownership report will be deemed a reporting violation if it is the willful act of an individual,” Torres insists.
Future implications of the CTA in EB-5 investments
“This is definitely another regulatory requirement that clearly impacts the [EB-5] industry and cannot be overlooked,” Fieldstone cautions.
Carrasquillo says that until there’s more clarity to the CTA applications, stakeholders in the EB-5 program must review and ensure that they meet the program’s obligations and the CTA rule when applicable. “We believe that compliance with the CTA’s provisions will be crucial for maintaining the integrity of EB-5 investments.”
He also adds that the new law is consistent with the increased transparency and disclosure requirements set forth by RIA since 2022.
However, the new regulation could end up expanding the information required in the EB-5 process. “These changes could affect how these projects are structured and how ownership and control is allocated, to comply with the CTA’s requirements. At the same time, the CTA’s new reporting and disclosure obligations may impact the costs for investors in EB-5 Projects, as compliance with these rules will require additional resources from covered entities.”
Christian Triantaphyllis, partner at Jackson Walker, expects the new beneficial ownership reporting requirements imposed by the CTA to make it even sponsors and developers of EB-5 projects “engage knowledgeable counsel when structuring offerings and investment vehicles. Our team is being called upon to analyze the availability of certain CTA exemptions, structure vehicles so as to minimize CTA reporting obligations, and draft governing documents that help sponsors facilitate CTA compliance.”
National security, intelligence, and law enforcement agencies will use the UBO information to reinforce U.S. security. As to how CTA could impact the privacy of EB-5 investors’ information, “FinCEN has indicated that it will implement measures to ensure the confidentiality and secure storage of the UBO information provided by covered entities. However, authorized government agencies, such as law enforcement and regulatory authorities, may access the information for anti-money laundering and counter-terrorism financing purposes,” Carrasquillo says.
However, questions over requirements and practical applications could lead to changes in the CTA, Armstrong explains. “One of the challenges of the CTA is that its interpretation and application is a moving target, as FinCEN continues to modify the applicable regulations in response to stakeholder feedback,” he concludes.
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