Congress took a significant step on Friday, December 11 to prevent the owners of “shell” limited liability companies, corporations and “similar entities” from using those entities to disguise their identities and transactions by passing the Corporate Transparency Act (CTA).
The CTA was part of a defense bill that was passed by Congress by what has been termed a “veto-proof margin” and is expected to be signed by President Trump in the coming days. The CTA had previously been endorsed by the Delaware Secretary of State, who called it a “fair, bipartisan compromise” that would make it the federal government’s responsibility to collect data surrounding the ownership of corporate entities, and which was better than a “piecemeal” state-by-state approach.
The CTA requires “reporting companies” to report the identities and information concerning their “beneficial owners” to the Financial Crimes Enforcement Network of the Department of Treasury (FinCEN) at the time of formation or registration of the reporting company and within one year after the date on which there is change with respect to any information previously reported. Entities that were in existence at the time of adoption of the regulations under the CTA and that qualify as reporting companies also have a reporting obligation. The effectiveness of the CTA is subject to the adoption of regulations, which is anticipated to take place within the next two years.
A reporting company is a corporation, limited liability company or other similar entity that is created by the filing of a document with the Secretary of State or similar office under the law of the State or Indian Tribe or that is formed under the law of a foreign country and is registered to do business in the United States.
A beneficial owner is an individual who, directly or indirectly, exercises substantial control over an entity, or owns or controls not less than 25 percent of the ownership of that entity, but excludes (i) minors (if the information of the parent or guardian is reported), (ii) persons acting as a nominee, intermediary, custodian or agent on behalf of another individual, (iii) individuals whose control of such an entity is derived solely from being an employee of such entity, (iv) persons whose only interest is through a right of inheritance or (v) creditors.
The law is aimed at persons who “seek to conceal their ownership of corporations, limited liability companies, or other similar entities ... to facilitate illicit activity …” and, as such, exempts numerous categories of entities from the definition of reporting company. As an example, the law excludes from the definition of reporting company any entity that (i) employs more than 20 employees on a full-time basis in the U.S., (ii) has filed in the previous year federal income tax returns in the U.S. demonstrating more than $5 million in gross receipts or sales in the aggregate, including the gross receipts of any other entities owned by the entity and other entities through which the entity operates and (iii) has an operating presence at a physical office in the U.S. It also excludes, among other types of companies, public companies, certain types of entities that already have a governmental reporting obligation, entities formed under federal law, and existing corporations, limited liability companies, or other similar entities that are now largely dormant.
Nonetheless, the breadth of the term reporting company will still require most legitimate small businesses to report to FinCEN.
Information reported to FinCEN must be kept confidential by FinCEN and may be disclosed only to: certain officers or employees of the U.S.; officers or employees of State, local or Tribal agencies; or offices or employees of financial institutions or regulatory agencies. Information may be disclosed by FinCEN only upon receipt of a request from (i) a federal agency engaged in national security intelligence, or other law enforcement activity for use in furtherance of the activity, (ii) a State, local or Tribal law enforcement agency if a court of competent jurisdiction, including any officer of such court, has authorized the law enforcement agency to seek the information for criminal or civil investigation, or (iii) a federal agency on behalf of a law enforcement agency, prosecutor or judge of another country and international treaty, agreement, convention, or official request made by law enforcement, judicial or prosecutorial authorities in the foreign countries when no treaty, agreement or convention is available, all subject to certain specified limitations contained in the CTA. The CTA imposes penalties upon lawful recipients of beneficial ownership information, if the information is misused.
The term “similar entity,” which appears to be very broad, is not defined in the CTA, leaving the scope of the term reporting company open to question. Presumably, this will be addressed in regulations.
The CTA imposes a civil penalty of not more than $500 for each day that there is a willful failure to report complete beneficial ownership information or a willful provision of or willful attempt to provide false or fraudulent beneficial ownership information. In addition, violations of those requirements may subject a person to a fine of not more than $10,000 and imprisonment of not more than two years, or both. The CTA does provide some safe harbor protections for applicants who mistakenly file inaccurate information and then voluntarily file corrections.
Given the broad sweep of this legislation – which creates reporting requirements for most small businesses – as well as the significant civil and criminal penalties that may accrue – care must be taken in order to ensure compliance. It should be anticipated that the CTA and the forthcoming regulations will place a not insignificant additional filing requirement on both domestic and foreign corporate entities.