On January 1, 2021, US Congress passed the National Defense Authorization Act (NDAA). Found within the NDAA (as Division F – Anti-Money Laundering) is the Corporate Transparency Act (the CTA), which will require corporations, limited liability companies and other similar entities to disclose beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau within the US Department of the Treasury. Companies should carefully review the CTA to determine whether they are “reporting companies” and evaluate their potential obligations under the forthcoming regulations.
Purpose of the CTA
More than two million corporations and limited liability companies are formed under the laws of the United States each year, but most or all states do not require information about the beneficial owners of these corporations, limited liability companies or other similar entities. Illicit activities such as money laundering, financing of terrorism, tax fraud, trafficking, counterfeiting and piracy are often conducted anonymously through “shell companies” to evade detection. In an effort to combat that activity, Congress has passed the CTA to enable FinCEN to establish and maintain a national registry of beneficial ownership information.
Scope of “Reporting Company”
The CTA applies to US companies and non-US companies registered to do business in the United States that fall within the definition of a “reporting company.” A “reporting company” is broadly defined as any corporation, limited liability company or other similar entity that is (i) created under the laws of a state or Indian Tribe or (ii) formed under the laws of a foreign country and registered to do business in the United States by the filing of a document with the secretary of state of or a similar office under the laws of a state or Indian Tribe.
Entities that are excluded from the definition of a “reporting company” include, but are not limited to, nonprofit companies, publicly traded companies, insurance companies, banks, broker-dealers and exchange or clearing agencies, as well as companies owned by those entities. These entities are exempt from CTA regulation because most are already subject to federal or state regulation. Given the CTA is aimed at “shell companies,” a “reporting company” also excludes companies that (i) employ more than 20 full-time employees in the United States, (ii) annually report more than $5 million in gross receipts or sales to the Internal Revenue Service and (iii) have a physical office within the United States.
The CTA requires each reporting company to submit a report to FinCEN to identify each beneficial owner and applicant of the reporting company and to provide the following information for each such individual:
- Full legal name
- Date of birth
- Current residential or business street address
- Unique identifying number from an acceptable identification number (such as a non-expired US passport, driver’s license or other identification document issued by a state or local government or Indian tribute) or a FinCEN identifier number.
“Beneficial owner” means, with respect to an entity, an individual who (i) exercises substantial control over the entity or (ii) owns or controls 25% or more of the ownership interests of the entity. Excluded from this definition are minors and any person acting as the nominee, intermediary, custodian or agent on behalf of another individual, employees, creditors or an individual whose only interest in the entity is through a right of inheritance. “Applicant” means an individual who registers or files an application to form a reporting company corporation.
Disclosure of Information
The beneficial ownership information collected by FinCEN under the CTA will not be available to the public and may only be disclosed in response to requests from government law enforcement, prosecutors, courts and national security agencies. Government officers and financial institutions who have access to such information are not permitted to disclose the information to others. Unauthorized disclosure of beneficial ownership information will be a crime punishable by up to five years imprisonment and a $250,000 fine.
Deadline to Comply
The CTA provides that the Department of the Treasury will issue regulations that contain specific reporting requirements by January 1, 2022. The particular deadline for reporting such information to FinCEN will depend on the effective date of the rules adopted by the Department of the Treasury. Any reporting company formed or registered prior to the effective date of the rules must submit beneficial ownership information to FinCEN within two years of that date. This means that the deadline to comply may not be until January 2024. However, companies and entities covered under the CTA should be aware of this new regulation and prepare to comply once the regulations are officially promulgated.