Legal Consult

We live in an era rife with reports of financial skullduggery—from the Panama Papers, through Bernie Madoff and now the FTX revelations—where money laundering, fraud, and other forms of criminal behavior have led to much outrage and some regulation. For the most part, the response has been to impose greater levels of transparency on the “malefactors of great wealth.” For small and medium-sized enterprises, including medical and other health care practices, these efforts have been of some interest but of little practical import. Not anymore. The new Corporate Transparency Act (CTA) and its accompanying regulations will impose ownership disclosure obligations on even the smallest practices, beginning January 1, 2024. Owners of these practices can be forgiven if they greet this news with less than overwhelming enthusiasm, but as a practical matter the new requirements are not onerous. However, the penalties for non-compliance are severe and there are nuances that may make compliance difficult in some circumstances.

Basically, the CTA requires most privately owned corporations, LLCs and other entities, to file a Beneficial Ownership Interest, or “BOI Report” with the Financial Crimes Enforcement Network (“FinCEN”) of the U. S. Department of the Treasury which includes certain information about the entity’s “beneficial owners.” Beneficial owners include persons who hold at least 25% of the ownership interests in the organization, or who otherwise exercise “substantial control” over the entity. The information to be provided about each beneficial owner is the individual’s name, date of birth, residential or business address, and an identification number from a source such as a driver’s license.

There are a number of exemptions, which if applicable, will provide the entity respite from having to file the BOI Report. However, most of the exemptions are for entities that file reports with the Securities and Exchange Commission (SEC) or other regulatory authorities such as publicly traded companies, banks, credit unions, money services businesses, securities brokers and dealers, tax-exempt entities, insurance companies, state-licensed insurance producers, pooled investment vehicles, public utilities, and accounting firms.

The exemptions that might be most applicable to Massachusetts health care provider entities are the following:

• Entity is a tax-exempt entity,
• Entity that operates exclusively to provide assistance to tax-exempt entities,
• Entity that (a) employs more than 20 full-time employees in the U.S., (b) has an operating presence at a physical office within the U.S., and (c) reported more than $5 million in gross receipts or sales from U.S. sources only on its prior year federal tax return, or
• Entity which is a wholly-owned or controlled subsidiary of an exempt entity.

Existing organizations have until January 1, 2025 to file their first report. New organizations must file a report no later than 30 days after formation. However, there is a current proposal in the works by FinCEN, which if implemented, would extend the submission deadline for the new entities from 30 days to 90 days. All organizations must report any changes in beneficial ownership no later than 30 days after such a change. Organizations that fail to file such reports or file false ownership information are subject to a civil monetary penalty of $500 per day that the violation has not been remedied, plus a possible fine of up to $10,000 and imprisonment for up to two years.

One reassuring aspect of the CTA is that BOI Report information will not be available for public view – this information will be maintained by FinCEN in a secure, nonpublic database. FinCEN can only disclose the reported information upon request from certain governmental agencies and regulators or financial institutions who obtain the consent of the reporting company for customer duediligence purposes.

Apart from the added burden of making these new BOI Reports, the new law poses some compliance issues. The first is whether any of the exemptions apply. Another is understanding who exercises “substantial control” in a medical practice and whose personal information thus must be reported. “Substantial control” under the CTA regulations can refer to the control exercised by anyone from a senior officer, person having authority to remove a senior officer or board of directors, important decision maker or person having “any other form of substantial control” over the company. The regulations further define a person exercising substantial control as one who “has substantial influence over important decisions” of the practice. Does this include the office manager? The regulations also state an individual may exercise “substantial control” indirectly through “arrangements or financial or business relationships, whether formal or informal . . . or any other contract, arrangement, understanding, relationship, or otherwise.” Does this mean accountants? Billing companies? Practices seeking guidance on such questions may have recourse to some FinCEN resource materials and clarificatory Q&A which are available on the FinCEN website - https://www.fincen.gov/boi.

Apparently, the public policy rationale for this new law was that larger organizations already are subject to a variety of reporting obligations, such as to the SEC or as is required of banks, insurance companies, accounting firms and public utilities. The “Sense of Congress” accompanying the CTA noted, apparently with some alarm, that “(1) more than 2,000,000 corporations and limited liability companies are being formed under the laws of the States each year; (2) most or all States do not require information about the beneficial owners of the corporations, limited liability companies, or other similar entities formed under the law of the State.” The CTA is intended to remedy this perceived gap in information by pulling in much smaller organizations than those currently with beneficial owner disclosure obligations.

The government’s seemingly unending thirst for previously private information may not be slaked by this statute, which includes a provision whereby the Secretary of the Treasury may make administrative or legislative recommendations to Congress to apply the law to previously exempted organizations if the Secretary finds such entities have “been involved in significant abuse relating to money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or any other financial crime.” Physicians and others who have labored long and hard to establish and maintain medical and other types of practices to provide health care to their communities may not appreciate the notion that the federal government seems to think owners of these practices are liable to behave like money launderers, tax cheats, terrorists, and financiers of weapons of mass destruction. But such is the state of our not entirely happy Union, and world.

Peter J. Martin, Esquire, is a partner in the Worcester office of Bowditch & Dewey, LLP, his practice concentrating on health care and nonprofit law.

Aastha Sharma, Esquire, an Associate at Bowditch, focuses her practice on corporate finance, mergers and acquisitions, joint ventures, venture capital, and early-stage investment transactions.