On January 1, 2021, the Corporate Transparency Act (included as Title LXIV of the National Defense Authorization Act for Fiscal Year 2021), which is designed to prevent money laundering, serious tax fraud, the financing of terrorism, and other similar illicit activities, became public law. The Corporate Transparency Act (the Act) will take effect on the effective date of implementing regulations to be promulgated by the Secretary of the Treasury, which must be promulgated by January 1, 2022.
The Act applies broadly to any corporation, LLC, or similar entity that is formed in the U.S., or formed under the laws of a foreign country but is registered to do business in the U.S. (i.e., reporting companies). However, there are important exceptions, including (but not limited to) banks and bank holding companies, money transmitters already registered with the Treasury, entities registered with the SEC pursuant to the Securities Exchange Act of 1934, and entities with more than 20 full-time employees in the U.S. that filed U.S. tax returns in the previous year showing more than $5 million in gross receipts or sales.
Under the Act, a reporting company must file certain information regarding its beneficial owners with FinCEN. Reporting companies already in existence before the implementing regulations take effect must file this information in a timely manner, and not later than two years after the implementing regulations take effect. New reporting companies must file this information at the time of formation or registration. Changes in reportable information must be made in a timely manner, and not more than one year after the date of change.
A “beneficial owner” means an individual person who, directly or indirectly: (i) exercises substantial control over the reporting company; or (ii) owns or controls at least 25% of the reporting company’s ownership interests. There are exemptions for certain classes of individuals, including an individual who acts solely as an employee of a reporting company and whose ability to control the reporting company derives solely from that employment.
The information that must be reported regarding a beneficial owner consists of: (i) his or her full legal name; (ii) his or her date of birth; (iii) his or her current (as of the date of the report) residential or business street address; and (iv) a unique identifying number from an acceptable identification document (such as a nonexpired driver’s license or a nonexpired U.S. passport), or a FinCEN identifier. If an exempt entity obtains a direct or indirect ownership interest in a reporting company, only the exempt entity’s name needs to be reported.
When effective, the public identification of such beneficial owners as required by this legislation may affect the manner in and extent to which those who, for example, invest and control private equity and investments funds (assuming that such funds do not otherwise fall under one of the exemptions to being considered reporting companies) participate in the highly regulated U.S. residential mortgage space. Identified individual participants in that space already are closely vetted, examined, and approved by regulators. That scrutiny may soon be extended to their previously unidentified beneficial owner counterparts, through the public FinCEN database of them required to be established by this Act.