Preparing for the Corporate Transparency Act: Risk & Compliance Solutions

By: Judd A. Genda & Robert C. Procter | Axley Brynelson, LLP

January 1, 2024, marked the effective start date of the Corporate Transparency Act (CTA). The federal government enacted the CTA in 2021 to:

1. Combat money laundering and terrorism.
2. Create a central register of entity ownership information to assist with these combative efforts.
3. To join in a global effort to collect entity ownership information.

The CTA requires certain business entities to report information to the Financial Crimes Enforcement Network (FinCEN)—a bureau of the United States Department of the Treasury—about themselves, each of their qualifying beneficial owners, and, for recently created entities, their company applicants. Substantial civil and criminal penalties are imposed for non-compliance with the CTA.

The CTA imposes its reporting obligation on corporations, limited liability companies, and other entities formed by filing documents with a secretary of state or a similar office of a state (Reporting Companies). Reporting Companies created or registered before January 1, 2024, and not dissolved or terminated before that date must report their company information and the information of their beneficial owners to FinCEN before January 1, 2025. Reporting companies created or registered on or after January 1, 2024, and before January 1, 2025, will have 90 days from the date their company's formation is effective to report. On January 1, 2025, the time to report is reduced to 30 days after company formation.

The CTA includes 23 exemptions to its reporting requirements for entities. Two of these exemptions apply to the insurance industry. Exemption No. 12, Insurance Company, applies to an entity organized as an insurance company whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies, and which is subject to supervision by the insurance commissioner or a similar state official or agency. Exemption No. 13, State-Licensed Insurance Producers, applies to an entity that meets the following two criteria: (i) it is authorized by a State as an insurance producer and is under the supervision of the state’s insurance commissioner or a similar state official or agency, and (ii) it has an operating presence at a physical office within the United States.

Many discussions about the CTA assume that insurance agencies automatically fall under Exemption No. 13. However, there’s a complication: the CTA appears to presume that entities acting as insurance producers are licensed, consistent with most states’ requirements. Most states mandate that businesses operating as insurance producers obtain a license and are, thus, under the supervision of the State’s insurance commissioner or a similar official or agency. However, in Wisconsin, this is not a requirement. While corporations, limited liability companies, and other legal entities may choose to obtain a license from the Wisconsin Office of the Commissioner of Insurance (OCI), it is not mandatory. As a result, many Wisconsin insurance agencies, structured as entities like corporations or limited liability companies operate without insurance licenses. Instead, the individual producers who own or work for these agencies are the ones that are licensed. This licensing system creates a potential issue with the application of Exemption No. 13, concerning unlicensed insurance agencies in Wisconsin. Without a license, insurance agencies in Wisconsin may not be considered authorized to act as insurance producers and are not directly overseen by OCI, unlike individual licensed producers.

There are differing viewpoints on the interpretation of Exemption No. 13. Some argue that it should apply to insurance agencies even if the entity itself is not licensed because OCI indirectly supervises unlicensed entities through its oversight of the licensed producers. Others contend that if an insurance agency is not licensed, it is not authorized by the State and the necessary oversight that is the basis for the exemption does not exist. Therefore, the agency cannot realize the benefits afforded under Exemption No. 13. FinCEN has not yet provided official guidance on how it will apply Exemption No. 13 to insurance agencies where the entity itself lacks a license.

Until FinCEN clarifies this issue, it may be prudent for entities not licensed with OCI to manage their risk by fulfilling the reporting requirements under the CTA to ensure compliance.

This information is provided for the convenience of PIAW members, but cannot be construed as legal advice. Members of PIAW may call (608) 200-4221, or email their questions to insurancehotline@axley.com, to work with an attorney and receive legal information specific to your situation.