Key takeaways

• The Corporate Transparency Act (CTA) will create a new, confidential database of beneficial owners of private companies for use by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and other government regulators to crack down on money launderers, terrorists and other criminals.
• The CTA requires smaller, private companies to provide FinCEN with specific information regarding their large equity holders and others that substantially control their entities.
• Entities that are exempt from the CTA include:
  • U.S. operating entities with more than 20 full-time U.S. employees and at least $5 million in gross revenue.
  • Public companies.
  • Nonprofit entities.
  • Entities that are already subject to similar reporting requirements (e.g., banks, insurance companies, registered investment companies).
• The reporting requirements will not take effect until implementing regulations are promulgated by the Secretary of the Treasury, which must occur by Dec. 31, 2021.

Background

On Jan. 1, 2021, Congress enacted the CTA as part of the National Defense Authorization Act for Fiscal Year 2021 (H.R. 6395). Under the CTA, new and existing entities, unless otherwise exempt, will need to report information about their beneficial owners to FinCEN. The legislation is designed to assist law enforcement agencies to combat money laundering, the financing of terrorism and other illicit activities conducted through anonymous shell companies.

Which companies must file reports?

The reporting obligations apply to all corporations, limited liability companies and similar entities that are formed under the laws of a U.S. state or tribal government or any foreign entity registered to do business in the United States. However, the CTA expressly exempts several types of entities from its reporting obligations, including, among others:

• Active entities that (i) have more than 20 full-time employees in the United States; (ii) reported more than $5 million in gross receipts or sales, including to subsidiaries, to the IRS on their federal income tax returns; and (iii) have an operating presence at a physical office within the United States.
• Dormant entities that have no assets and meet certain other requirements.
• Public companies under the Securities Exchange Act of 1934.
• Nonprofit entities, political organizations and certain tax-exempt trusts.
• Certain other companies that are subject to supervision or have existing requirements to report to regulatory authorities (for example, banks, insurance companies, credit unions, exchanges, registered investment companies and investment advisers).

What are the reporting requirements?

Each reporting company must report to FinCEN the following information for each “beneficial owner” and “applicant” of the reporting company: (i) full legal name, (ii) date of birth, (iii) current residential or business physical address, and (iv) a unique identifying number from an unexpired passport or state driver’s license, or (once one is assigned) a FinCEN number.

The CTA defines a beneficial owner as any individual who, directly or indirectly, (i) exercises substantial control over the entity or (ii) owns or controls 25% or more of the entity’s equity. The CTA does not currently define “substantial control,” but it may be addressed in the implementing regulations.

An applicant refers to the individual who files the formation documents for an entity or registers a foreign entity to do business in the United States, even if they are not a beneficial owner.

When must the reports be filed?

Existing entities will need to file a report within two years after the effective date of FinCEN’s regulations. New entities that are formed after the effective date of FinCEN’s regulations will need to file a report at the time of formation. After an initial report has been filed, reporting companies will need to file subsequent reports within one year after any change in the previously reported information unless the FinCEN regulations prescribe a shorter deadline.

If a reporting company is a federal contractor or subcontractor, it will also need to submit this beneficial ownership information to the government in connection with certain bids or proposals, as the CTA mandates that the Federal Acquisition Regulations be amended to implement this requirement within two years (i.e., by Dec. 31, 2022).

Who will have access to FinCEN’s registry?

The registry will be maintained by FinCEN on a confidential basis and will not be publicly available. The CTA provides substantial penalties for the unauthorized use or disclosure of the registry’s collected information. FinCEN may only disclose such information upon request to (i) U.S. federal law enforcement agencies in furtherance of an authorized investigation, (ii) state and local law enforcement agencies pursuant to a court order, and (iii) with the reporting company’s consent, financial institutions in connection with their “know your customer” due diligence requirements. FinCEN will maintain the beneficial ownership information for as long as the reporting company remains in existence and for a five-year period thereafter.

What are the consequences for noncompliance?

Reporting companies that willfully provide false information, fail to provide complete information or fail to update beneficial ownership information may be subject to a fine of $500 for each day the violation continues, up to $10,000, and to imprisonment for up to two years. Reporting companies will have up to 90 days to correct any inaccurate information previously submitted, provided the inaccuracy was not intentional.

Recommendations

Work with your corporate counsel to track the effectiveness and details of the final regulations relating to the CTA and to fulfill your company’s obligations in accordance with those final regulations.