In January 2021, Congress passed the Corporate Transparency Act of 2019 (the “CTA”) as part of the 2021 Defense Bill. Initially introduced in 2019, the CTA requires private companies to disclose their “beneficial owners” to the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
Nearly two million corporations and LLCs are formed nationwide each year, and most states, including Maryland and Virginia, do not require information about the beneficial owners (of these entities when they are formed. The District of Columbia does require information about beneficial owners. States that do not require reporting of beneficial owner information allow the beneficial owners of these companies to conceal their identities. This feature is often used to protect the owners’ privacy or for strategic reasons. Probably the most famous case of using anonymous corporations is Walt Disney, who used them to acquire vast swaths of land in Central Florida that was ultimately used to construct Walt Disney World. However, Congress and the law enforcement community were concerned that anonymous ownership of corporations and LLCs aided criminals in the commission of crimes like terrorism, money laundering, piracy, tax evasion, and securities fraud. The lack of beneficial ownership information makes it more difficult for law enforcement to investigate and prosecute these crimes. The CTA was passed in order to address this information gap and provide transparency in corporate ownership to law enforcement.
The CTA generally defines “beneficial owners” as natural persons who, directly or indirectly, exercise substantial control over, owns 25% or more of the equity interests in, or receives substantial economic benefits from the assets of a corporation or an LLC. The act requires corporations and LLCs to file annual reports with FinCEN that identifies each such beneficial owner by name, date of birth, and address and must include an ID number from a passport, identification card, or driver’s license. The identifying documentation should be from the United States, but foreign documents are acceptable if domestic documentation does not exist. When such beneficial owners are from abroad, covered companies are required to verify an owner’s identity, full legal name and address and identifying documentation and retain proof of such verification for five years after the company terminates.
There are some exemptions to the reporting requirements in the CTA. Minors, agents acting on behalf of other people, employees, creditors, and people who obtained ownership solely through inheritance are not considered “beneficial owners”. Additionally, several categories of entities are excluded from the act’s requirements, including publicly traded corporations; banks, credit unions, and other financial institutions; public utilities; and nonprofits. Additionally, corporations and LLCs with more than 20 full-time employees and more than five million in gross receipts that have a physical presence in the United States are also exempt. Exempt entities are required to certify to FinCEN that they are exempt from the reporting requirements of the CTA.
FinCEN will retain beneficial ownership information for five years following termination of the covered entity and will provide a FinCEN ID number upon request to individuals who have reported their information under the act. The CTA requires FinCEN to establish protocols to protect the privacy of the information contained in the reports, including authorization and training of users, tracking of requests, annual audits, and annual reports to Congress. However, there are obvious privacy concerns given the Federal and various state governments’ track record of data breaches. The information contained in the reports could be used by criminals to target executives for identity theft and home invasion and to defraud their companies. Additionally, the CTA raises Fourth Amendment concerns by permitting beneficial ownership information to be disclosed to Federal, state, local, and even foreign law enforcement agencies when there is merely an “existing investigatory basis” for requesting such information.
The CTA also requires certain studies to be conducted which may expand the reporting requirements, including evaluating of the feasibility of requiring companies to update their beneficial owner information when it changes, instead of just yearly; expanding the reporting requirements to partnerships, trusts, and other legal entities; and assessing the effectiveness of the CTA generally.
The CTA reporting period begins once the implementing regulations are published by the Secretary of the Treasury, which is to occur not later than January 1, 2022. Corporations and LLCs formed after this date that are subject to this act are required to comply with it on formation. Corporations and LLCs already in existence will have up to two years after the issuance of the regulations in which to report. Fraudulently reporting information and willfully failing to report are subject to civil penalties of up to $10,000 and a criminal penalty of up to three years in prison. The complete text of the act can be found here: https://www.congress.gov/bill/116th-congress/house-bill/2513/text.