Background
In the continuing effort to combat money laundering, terrorism finance and other illegal financial activities through the use of corporate structuring, Congress has passed the Corporate Transparency Act (the CTA). The CTA requires certain defined corporate entities to provide information about their beneficial owners to the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN). Under the CTA, the Secretary of the Treasury is required to prescribe regulations putting the CTA into formal effect by no later than December 31, 2021 (the Effective Date).
A new reporting regime
Scope
The CTA requires corporations, limited liability companies, and similar entities that are formed under the laws of a state of the United States, or the laws of a foreign country that is registered to do business in the United States, to report the beneficial ownership of such entities. The CTA defines a “beneficial owner” of a company as a natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (1) exercises substantial control over such company, or (2) owns 25 percent or more of such company.
Reporting requirements
Reporting companies will be required to provide the following information to FinCEN with respect to each of their “beneficial owners”:
- full legal name;
- date of birth;
- current residential or business street address; and
- unique identifying numbers from acceptable identification documents, including a U.S. passport, personal identification card or driver’s license.
These potentially burdensome reporting requirements are already causing privacy concerns, among others, for entities which have legitimate and legal purposes. As currently written, the CTA does not state precisely how such standards will be calculated or interpreted, and any company potentially within the scope of the CTA should monitor guidance from the Secretary of the Treasury as the regulation takes shape later this year.
Exemptions
The CTA provides for a number of exemptions from the new reporting requirements, including, notably: (1) companies that employ more than 20 full-time employees in the United States, (2) companies that reported gross revenues of over $5 million in their most recent income tax returns, and (3) companies that have an operating presence at physical offices in the United States. Exemptions are also available for companies that are already subject to certain regulatory regimes, including certain banks, credit unions, investment companies, accounting firms, securities trading firms, and other financial services institutions. Exemptions are also provided to charitable, religious, or political organizations. Any such company that is both within scope of the CTA and is not able to avail itself of one or more of the exemptions will be considered a “reporting company.”
Also expressly exempted from the CTA’s definition of “beneficial owners” are the following categories of individuals:
- a minor child;
- a nominee, intermediary, custodian, or agent acting on behalf of another person;
- an employee of the company, acting solely in their capacity as such, and whose control over, or economic benefits from, such entity are derived solely from their employment status;
- a person whose only interest in a company is through a right of inheritance; and
- a creditor of a company, unless the creditor exercises substantial control over the entity, or owns or controls more than 25 percent or more of such entity.
Timing
Any reporting company that is formed following the Effective Date will have to provide the required disclosures on the date of its formation or registration. Reporting companies existing as of the Effective Date must provide the disclosures no later than two years after the Effective Date. FinCEN must be notified of changes to any of the required information within one year of the date of such change.
Access to and storage of beneficial ownership information
Beneficial ownership information submitted by reporting companies to FinCEN must be stored in a private database and will not be available to the general public. Under the CTA, FinCEN may only disclose beneficial ownership information upon request by: (1) a federal agency engaged in national security, intelligence, or law enforcement activity, (2) a state, local, or tribal law enforcement agency, (3) a federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country, (4) a financial institution subject to customer due diligence requirements, with the consent of such reporting company, or (5) a U.S. federal function regulator or other appropriate regulatory agency.
Beneficial ownership information provided by a reporting company shall be maintained by FinCEN for not less than “5 years after the date on which the reporting company terminates.”
Criminal and civil penalties
The consequences for violating the CTA are not insignificant: any person who willfully provides false information or fails to report (or update) a company’s beneficial ownership information will be subject to civil penalties of up to $500 a day (for as long as the violation continues) and/or criminal penalties of up to $10,000 and two years’ imprisonment.
Consequences are even more severe for unauthorized disclosures of beneficial ownership information by government employees or third-party recipients of such information: a civil penalty of up to $500 a day and/or a criminal penalty of up to $250,000 and five years’ imprisonment.
Bottom line
While further guidance will be required from the Secretary of the Treasury and FinCEN, companies should begin to prepare for compliance with this new reporting regime by considering whether they fall within the scope of the CTA (or an exemption) and, if they do, determining which individuals in their organization qualify as “beneficial owners” and obtaining necessary information from such individuals to provide to FinCEN.
Client Alert 2021-050
