On January 1, 2024 the Corporate Transparency Act (“CTA”) goes into effect. The CTA is broad and is intended to cover many businesses, including tribal businesses.

The CTA was enacted to prevent and combat money laundering, terrorist financing, corruption, tax frauds, and other illicit activity. The CTA requires that certain small and medium sized businesses, such as corporations, limited liability companies or other similar entities (“reporting companies”), file reports (initial and updating reports) with FinCEN (the Financial Crimes Enforcement Network). A “reporting company” can be created under the laws of a State or Indian Tribe.

Although a tribal business may be included in the CTA, the CTA provides a number of exemptions, some of which may apply to tribal businesses, which is discussed below. With respect to Alaska Native Corporations, we will be publishing a separate article.

If the CTA applies, the initial report must be filed by January 1, 2025 for reporting companies in existence before January 1, 2024, and for businesses created on or after January 1, 2024, within 30 days of formation or registration. Reporting company reports must include information such as legal names and trade names or DBAs, addresses, the jurisdiction of formation or registration and TINs. Beneficial owners and company applicant reports are provided at the individual level and must include legal name, birthdate, address (in most cases, a home address), an identifying number from a driver’s license, passport, or other approved documents, and an image of the approved document. In most instance, the information must be updated any time reported information is changed. This process can be somewhat simplified by applying for a FinCEN identifier, which requires submitting the reportable information directly to FinCEN.

The information is confidential. However, the information will be accessible by federal agencies and state, local and tribal government agencies for national security, intelligence or law enforcement purposes and to financial institutions, under limited circumstances.

Violations of the reporting obligations can be met with penalties of $500 per day and a fine of $10,000 and prison sentences of up to two years. The statute and regulations do, however, limit violations to willful conduct.

WHAT TO DO NOW: To prepare for the CTA, tribal businesses should, in consultation with their lawyers, review their existing business structure, and determine if the CTA will apply. First, look at the entity type and determine if the business is (a) 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 (b) formed under the law of a foreign country and registered to business in the United States by the filing of a document with the secretary of state or a similar office under the law of a State or Indian Tribe. If not, the business does not need to comply with the CTA. If so, go to step two and check to see if one of the 23 statutory exemptions apply. If none of the exemptions apply, and the CTA does apply, consider the process for gathering the information and how it will be filed in a timely manner. There are many open questions about this Act and we expect further guidance in the future. Businesses should consult with a lawyer of their choosing regarding whether the CTA will apply.

DISCLAIMER: At this time, our firm is evaluating how it will assist clients with their reporting obligations, and any obligation to assist with the CTA will require a separate engagement. If your company is an existing client of our firm and a reporting company, please note that our current scope of work DOES NOT INCLUDE compliance with this CTA. If your company is an existing client and wants legal advice from Schwabe regarding the CTA, you will need to establish a separate engagement for that purpose.

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Below are some frequently asked questions relating to the CTA and tribal businesses:

Was the tribal business created by the filing with a secretary of state or similar office under the law of a State or Indian Tribe?

The CTA only applies to a corporation, limited liability company, or other similar entity that is:

1. 1. 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
   2. formed under the law of a foreign county and registered to do business in the United States by the filing of a document with the secretary of state or a similar office under the law of a State or Indian Tribe.

Federally chartered entities, such as entities formed under Section 17 of the Indian Reorganization Act of 1934, do not fall within the reporting requirements of the CTA. Therefore we do not expect that Section 17 corporations will be required to report. There is no filing if the Act does not apply.

Does the tribal business fit within any exemption?

There are 23 statutory exemptions. 20 of those are for regulated entities, and one regulated entity exemption is for “government authorities.” As such, potential exemptions for tribal businesses created under the law of a State or Indian Tribe are for (a) a governmental authority; (b) “large operating companies”; or (c) “subsidiaries of certain exempt entities.”

Does the tribal business fit within the “governmental authority” exemption?

The CTA and the rules provide that a “governmental authority” is “[a]ny entity that (A) is established under the laws of … an Indian tribe, ….; AND (B) exercises governmental authority on behalf of …. such Indian tribe….” 31 U.S. Code §5336(a)(11)(B)(ii) and 31 C.F.R. §1010.380 (c)(2)(ii)(B). The term “Indian tribe” has the “meaning given the term ‘Indian tribe’ in section 102 of the Federally Recognized Indian Tribe List Act of 1994 (25.U.S.C. 5130), and section 102 provides that: “The term ‘Indian tribe’ means any Indian or Alaska Native tribe, band, nation, pueblo, village or community that the Secretary of the Interior acknowledges to exist as an Indian tribe.”

The CTA rules and supplementary information do not provide further guidance on what constitutes “exercising governmental authority.” However, since the wording in the CTA and rules parallels the wording in 31 CFR §1010.350(4)(i) “Reports of foreign financial accounts”, we expect that FinCEN will look for guidance in that rule:

For this purpose, an entity generally exercises governmental authority on behalf of the United States, an Indian Tribe, of any State, or a political subdivision only if its authorities include one or more of the powers to tax, to exercise the power of eminent domain, or to exercise police powers with respect to matters within its jurisdiction. (Emphasis added)

As such, if the tribal business is established under the laws of tribe AND has either the powers to tax, to exercise the power of eminent domain or to exercise police power, we expect that it will be exempted.

In addition, since there is no statutory guidance, we expect FinCEN to also look to the legal concept “arm of the tribe” for additional guidance. Generally, “arm of the tribe” means a commercial entity formed pursuant to tribal law, to which the tribe has extended and granted its sovereign immunity. There are generally six factors in determining an arm of the tribe. Breakthrough Mgmt. Grp., Inc. v. Chukchansi Gold Casino & Resort, 629 F.3d 1173, 1191 (10th Cir. 2010). The following questions can be helpful in verifying whether a business is an arm of the tribe:

1. ‎Creation. Was the business created under tribal law?‎
2. ‎Use. Is the business used for a tribal purpose? Does it perform a tribal function? Is the ‎business acting on behalf of the tribe?‎
3. Control. How much control does the tribe have over the business? How is the tribe ‎involved with the structure, ownership, and management?‎
4. Intention. Did the tribe intend for the business to have tribal sovereign immunity?‎
5. Finances. What is the financial relationship between the tribe and the business? How much ‎financial autonomy does the business have?‎
6. Purpose. Are the purposes of tribal sovereign immunity served by granting immunity to the ‎business?‎

Tribally-chartered businesses owned by tribes are more likely to meet these requirements than state chartered businesses owned by tribes. If a business has been incorporated under state law, there is a chance it may not be considered an arm of the tribe under the six factor test outlined above.

Does the tribal business fit within the “large operating company” exemption?

A tribal business is a “large operating company” if the business:

• Has more than 20 full-time employees in the United States,
• Has an operating presence at a physical office in the United States, and
• Filed a Federal income tax or information return in the United States for the previous year demonstrating more than $5,000,000 in gross receipts or sales.

Many tribal entities are not subject to Federal income tax and, as such, do not file any Federal income tax information. The Federal income tax or information return is statutory wording in the CTA and at this time, it is uncertain whether FinCEN will have authority to change it. With that said, we expect that FinCEN will issue some guidance for tribal entities about meeting the federal income tax prong of this exception.

What if the tribal business is a subsidiary of an entity exempt from reporting under the CTA?

For purposes of the CTA, subsidiaries of entities that are exempt from reporting under the CTA are also exempt, including entities exempt under the governmental authority and large operating entity exemptions of the CTA. However, the entity’s “ownership interests” must be “controlled or wholly owned, directly or indirectly” by the exempt entity. “Ownership interests” include a variety of equity like interests and “any other instrument, contract, arrangement, understanding, relationship, or mechanism used to establish ownership.” From the rules and supplementary information, the interest must be wholly owned and not majority owned, and holding companies or parents do not qualify for this exemption. The rules define many attributes of control. See legal counsel to view this aspect.

Does the CTA apply to Alaska Native Corporations and their subsidiaries?

Generally, Alaska Native Corporations (“ANCs”) are formed under state law and would be subject to the Act, and exemptions may be available. Given the differing laws applicable to ANCs, we will publish a separate article addressing compliance of ANCs and their subsidiaries with the CTA and rules.

What if the tribal business is subject to the CTA?

If the business does fall within the CTA and does not fall under any exemptions—or if it is unclear—it should timely file a report with FinCEN. As a reminder, the report must include the identifying information of the reporting company and all “beneficial owners” of the business. For purposes of the CTA, “beneficial owner” means (i) ownership or control of at least 25% of the ownership interests of the company; or (b) exercise of “substantial control” over the company (regardless of any actual ownership of the legal entity). See legal counsel to review this aspect. Filing a report is free and can be completed starting January 1, 2024. At this time, the portal is not available and the proposed forms have not been finalized.

Pre-existing businesses have until January 1, 2025 to file. For businesses created or registered on or after January 1, 2024, the initial report will need to be filed within 30 days of formation or registration.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney. Further guidance is expected in the future, so this information may become dated and decreasingly relevant after July 26, 2023.  

We also acknowledge the contributions of Amanda Kohls, one of our 2023 summer associates, in the development of this article.