The National Defense Authorization Act for 2021 was enacted on January 1, 2021. While this Bill appears to apply only to the Defense Department, Division F deals with money laundering and contains Title LXI, the Corporate Transparency Act. This legislation will have a broad reach affecting the creation of legal entities used in a variety of business contexts. The purpose of the Corporate Transparency Act ("Act") is to disclose the individuals behind faceless legal entities to try to inhibit money laundering, putting new reporting requirements in place for legal entities that often have few employees and nebulous ownership information formed as single purpose entities (SPEs) - a commonly favored entity in the real estate sector and other business activities.
Real estate attorneys have been living with disclosure requirements imposed by the Financial Crimes Enforcement Network of the Department of the Treasury ("FinCEN") for many years requiring disclosure of the principals of legal entities involved in acquiring real estate in certain areas of the country. The Act is broader based and is not tied to any purchase but rather to the formation of legal entities. Many states, including Florida and the most popular entity formation state, Delaware, do not require any public record of ownership for entities being formed. The Act changes this to a limited degree and would apply to special purpose entities formed solely for the purpose of a single transaction.
The Act requires reporting to FinCEN of the individuals having an ownership or control interest in a legal entity. This information is required for: (a) an individual exercising "substantial control" over the entity and (b) individuals owning 25% or more of the equity in the legal entity. The reporting must be made for U.S. entities and for foreign entities qualifying to do business in the United States but only if they fit certain requirements and are not otherwise exempted. Reporting is required only if the entity has 20 or less employees and $5,000,000 or less in gross receipts. Even if the company meets these reporting requirement they may still be exempted from reporting if they are a financial institution, insurance company or an institution otherwise regulated under some federal or state act. Although reporting to FinCEN is required, the information reported is not intended to be a generally available public record. It will be available to FinCEN, certain other governmental agencies and to banks in fulfilling their obligation to know their customers.
The reporting requirement calls for four pieces of information for the applicable individuals: the individual's (a) full legal name, (b) date of birth, (c) residence or place of business address and (d) driver's license or passport number or number on any state or local government ID.
The Act requires FinCEN to adopt regulations for reporting within one year from the adoption of the Act or January 1, 2022. Prior to the adoption of the regulations, no reporting is required. But, upon adoption, reporting for entities formed both prior to or following the regulations will be required. The reporting period for entities formed subsequent to the adoption of the regulations will be at the time of formation. Existing entities at the time the regulations are adopted will have a period of two years to report. Any changes in reporting information will need to be made in one year from the changes.
Since substantial penalties are imposed for noncompliance, monitoring of the adoption of the regulations will be essential for those companies required to report, especially for those parent companies with a substantial number of separate single asset companies.