New Beneficial Owner Reporting Requirements Aim to Limit Illicit Activities
The Corporate Transparency Act (“CTA” or “the Act”) requires, among other things, that every corporation, LLC, or similar entity that meets the definition of a “reporting company” to make a filing with the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) identifying the entity’s beneficial owner(s). The Act also imposes severe penalties for a failure to comply with this new reporting obligation.
Why require beneficial owner reporting?
The Act explains that “malign actors” seek to conceal their ownership of corporations, LLCs, or similar entities in the United States to facilitate illicit activity including money laundering, financing of terrorism, tax fraud, and other acts of foreign corruption that harm national security interests. The Act further states that federal legislation providing for the collection of beneficial ownership information is needed to protect those interests and better enable efforts to counter those illegal activities.
What is a reporting company?
The Act imposes its reporting obligation on U.S. and non-U.S. “reporting companies”. A reporting company is defined as a domestic or foreign corporation, LLC, or other similar entity that is created and registered to do business in the United States by filing a document with the Secretary of State or a similar office under the laws of a state or Indian Tribe.
Which entities are exempt from reporting?
CTA includes more than 20 exemptions from the definition of a reporting company. Entities that are exempt include, but are not limited to:
- An entity that (i) employs more than 20 people, (ii) filed a tax return reporting gross receipts in excess of $5 million, and (iii) has a physical presence in the United States
- Entities already subject to close federal regulation or supervision, including public companies reporting under section 12 or section 5(d) of the Securities Exchange Act, investment companies, non-profit entities exempt from taxation under section 501(c) of the Internal Revenue Code, financial institutions, insurance companies, public utilities, and broker-dealers
- Pooled investments
- An entity owned or controlled by an otherwise exempt entity
- Dormant entities as defined by the Act
What information must be reported?
The Act states that in accordance with regulations prescribed by the Secretary of the Treasury, a report shall identify each “applicant” and “beneficial owner” of the applicable reporting company and each applicant with respect to that reporting company by the following information:
- Full legal name
- Date of birth
- Current residence or business address
- Unique identifying number from an acceptable document
An acceptable document includes a U.S. passport, a driver’s license, or other state identification document. An individual may also request and use a FinCEN unique identifying number.
If an exempt entity has or will have a direct or indirect interest in a reporting company, the reporting company need only name the exempt entity and need not report the other information.
Who is a beneficial owner?
A beneficial owner is defined as an individual who directly or indirectly, through any contract, arrangement, understanding, relations or otherwise (i) exercises substantial control over an entity or (ii) owns or controls not less than 25% of the ownership interests of an entity. The statute does not define “substantial control.”
The Act excludes from the definition of beneficial owner (i) a minor child if the parent or guardian’s information is reported; (ii) an individual acting as a nominee, intermediary, custodian, or agent of another individual; (iii) an individual acting solely as an employee whose control of or economic benefits from the entity derives solely from the person’s employment status; (iv) an individual whose only interest in the entity is through a right of inheritance; and (v) a creditor of an entity unless the creditor otherwise meets the definition of beneficial owner.
What is an applicant?
An applicant is defined as an individual who files an application to form a U.S. entity with any State or Indian Tribe or an individual that registers or files an application to register a non-U.S. entity in the United States.
When must the report be filed?
The Act states that in accordance with regulations prescribed by the Secretary of the Treasury, reports must be submitted to FinCEN as follows:
- After the effective date of the implementing regulations, newly formed or registered entities will be required to report at the time of formation or registration.
- Existing entities have to report this information within two years of the effective date of the regulations.
- A reporting company is also required, in a timely manner and not later than one year after a change with respect to the beneficial ownership information, to submit a report to FinCEN updating the information.
It should be noted that the Act does not define several important terms, nor does it provide details on the reporting process. The Act directs the Department of Treasury to promulgate implementing regulations by December 31, 2021. Regulations and further guidance from FinCEN will need to be reviewed to fully understand the scope and impact of the Corporate Transparency Act on business entities.
Who has access to the information?
FinCEN will keep the reported information in a database that will not be accessible to the public. The information will be retained for no less than five years after the date the reporting entity terminates.
FinCEN is permitted to disclose the information, upon request, to:
- A federal law enforcement agency engaged in national security, intelligence, or law enforcement activity
- A federal agency requesting information on behalf of a law enforcement agency, prosecutor, or judge of a foreign country
- A state, local, and Tribal law enforcement agency pursuant to a court order
- Financial institutions, with the reporting company’s consent, for customer due diligence purposes
- A federal functional regulator or other appropriate regulatory agency authorized to determine the compliance of financial institutions with customer due diligence laws
What are the penalties for violations?
It is unlawful for any person to willfully fail to report complete or updated beneficial ownership information to FinCEN or willfully provide false or fraudulent information. Violators are subject to a civil penalty of up to $500 for each day the violation continues, and criminal fines of up to $10,000, imprisonment for up to two years, or both. CTA also imposes penalties for the unauthorized disclosure of information, which could include imprisonment for up to ten years.
Other Notable Provisions
- The requirements of the Corporate Transparency Act take effect as of the effective date of the regulations prescribed by the Secretary of Treasury, which must be promulgated not later than December 31, 2021.
- States are required periodically, including at the time of formation or registration or when assessing an annual fee, to notify filers of the CTA’s requirements and provide access to the forms.
- The Act prohibits a corporation, LLC, or similar entity from issuing a certificate in bearer form evidencing either a whole or fractional interest in the entity.
- The Act requires the Federal Acquisition Regulation (“FAR”) be amended within two years of the Act’s effective date to require any contractor or subcontractor subject to the reporting requirements in the Act to disclose the entity’s relevant beneficial ownership information “as part of any bid or proposal for a contract” valued above the simplified acquisition threshold (currently $250,000, subject to certain exceptions).
 National Defense Authorization Act of 2021 (NDAA), Title LXIV