Congress passed the Corporate Transparency Act (“CTA”) on Jan. 1, 2021, as part of the National Defense Authorization Act (“NDAA”) for fiscal year 2021. The purpose of CTA is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity” by creating a national registry of beneficial ownership information for “reporting companies.” CTA requires every limited liability company, corporation, or similar entity to report the beneficial ownership of an entity to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) unless the entity qualifies for one of the CTA’s 24 exemptions.
The information will not be publicly available, but FinCEN is authorized to disclose the information to the following:
- U.S. federal law enforcement agencies
- Certain other enforcement agencies
- Non-U.S. law enforcement agencies prosecutors or judges based on a request from a U.S. federal law enforcement agency
- Financial institutions and their regulators, with consent of the reporting company
The CTA represents a change in the responsibilities of financial institutions. Prior to the implementation of the CTA, the burden of collecting beneficial ownership information fell on financial institutions, which are required to identify and verify beneficial owners through the Bank Secrecy Act’s customer due diligence requirements. CTA shifts that responsibility to reporting companies.
Regulations
The CTA requires the Secretary of the Treasury to prescribe regulations by Jan. 1, 2022. The anticipated regulations will govern the timing for filing under CTA. On April 2, 2021, FinCEN issued an advance notice of proposed rulemaking (“ANPRM”). FinCEN received 241 comments, of which 215 were made public and are available for review at regulations.gov. Parties that commented included secretaries of state, legal associations, law enforcement officials, and business associations. This ANPRM was the first in a series of regulatory actions that FinCEN has undertaken to implement the CTA. There should be another comment period after FinCEN issues its proposed regulations.
What is a reporting company?
A “reporting company” is broadly defined by CTA as any corporation, limited liability company, or similar entity that is (1) created by filing a formation document with a secretary of state or similar office; or (2) formed under the law of a foreign country and registered to do business in the United States. There are 24 exemptions to what entities qualify as reporting companies.
A reporting company does not include, among other types of companies:
- An issuer of securities registered under Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”) or that is required to file supplementary and periodic information under Section 15(d) of the Exchange Act
- An entity established under the laws of the United States, a state, or a political subdivision of a state, or under an interstate compact between two or more states and that exercises governmental authority on behalf of the United States or any such state or political subdivision
- A bank
- A federal or state credit union
- A bank or savings and loan holding company
- A broker or dealer registered under Section 15 of the Exchange Act
- An investment adviser that has made certain filings with the SEC
- An insurance company as defined in the Investment Company Act of 1940
- A public accounting firm registered under the Sarbanes-Oxley Act of 2002
- A public utility
- A tax exempt Section 501(c) corporation, political organization, charitable trust or split-interest trust exempt from tax
- An entity that:
(i) Employs more than 20 employees on a full-time basis in the United States
(ii) Filed in the previous year federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales
(iii) Has an operating presence at a physical office within the United States
Who is a beneficial owner?
A “beneficial owner” under the CTA is defined as an individual who, directly or indirectly, exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity.
A beneficial owner does not include:
(i) a minor child if the information of the child’s parent or guardian is reported
(ii) an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual
(iii) an individual acting solely as an employee of the entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person
(iv) an individual whose only interest is through a right of inheritance
(v) a creditor of the entity, unless the creditor exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity
What is required to be reported and when?
Reporting companies must deliver a report to FinCEN containing the full legal name, date of birth, current residential or business street address, and unique identifying number from an acceptable identification document or FinCEN identifier. If an entity is formed before the effective date of the regulations, that entity has two years to deliver its beneficial ownership report. Entities formed after the effective date of the regulations must comply with CTA upon the formation of the entity. If there are changes to the information to be included in the report, the entity has one year after the date of the change to submit an updated report. Noncompliance with the CTA or providing inaccurate or misleading information to FinCEN can result in $500 per day penalties, not to exceed $10,000. It could result in up to two years in prison for any person committing a reporting violation.
How will beneficial ownership information be maintained?
Beneficial ownership information provided to FinCEN will be kept in a confidential national registry that will be maintained for at least five years after termination of the reporting company. The Secretary of the Treasury must maintain information security protections for all beneficial ownership information.
Takeaways
- CTA shifts certain reporting obligations away from financial institutions
- CTA largely applies to foreign-owned shell companies, but all companies should determine if they are a reporting company under CTA
- Greater access to beneficial ownership information will be granted to federal and state agencies and state and local law enforcement agencies, and such agencies will be able to share such information with international agencies to combat money laundering, financing of terrorism, and other illicit activity; and
- Companies should pay close attention to implementing regulations once promulgated.
