Identify and Report “Control” Investors: The Corporate Transparency Act of 2020

We write to advise you of important legislation just enacted in the United States and proposed legislation in the United Kingdom.

The National Defense Authorization Act for Fiscal Year 2021 (NDAA) was recently passed by both houses of Congress and is in effect following a January 1, 2021 Congressional override of President Trump’s veto.

The National Security and Investment Bill (NSIB), which has goals similar to CFIUS, is wending its way slowly and painfully through the legislative process in London.

Turning to the domestic front first, buried within some 1,500 pages of the NDAA is the Anti-Money Laundering Act of 2020 (AMLA) and buried within the AMLA is the Corporate Transparency Act (CTA). The AMLA represents a giant overhaul of the country’s legislation on money laundering. Within that broad initiative, the CTA targets the use of shell companies not just to facilitate money laundering, but even to make investments in the United States by persons who are, or whose interests are considered to be, adverse to those of the United States.

The CTA is the culmination of almost a decade-long effort by the Financial Crimes Enforcement Network (FinCEN) to crack down on shell companies. Cited as "the most significant anti-money laundering reform since 2001" by Congressman Emanuel Cleaver, the law provides federal oversight in an otherwise unregulated area.

The CTA directs FinCEN to establish and maintain a national registry of beneficial ownership. This registry will not be available to the general public, although that information may be made available to federal agencies for national security, intelligence or law enforcement purposes, to law enforcement agencies upon court authorization, and, with customer consent (which likely will be demanded), to financial institutions to the extent necessary to fulfill their know-your-customer obligations.

The CTA requires certain types of legal entities in the United States—stated in the act as "a corporation, limited liability company, or other similar entity"—to report their beneficial owners to FinCEN. However, there are many exceptions to the obligation to file reports, including exemptions for publicly held companies and many types of financial entities. The legislation is focused on small entities which are not otherwise required to report their ownership. A beneficial owner is defined as an individual who, directly or indirectly, "exercises substantial control over an entity or owns more than twenty-five percent of the entity." Pending clarifying regulations, contractual “control” may suffice.

The report must be kept current and updated to reflect any change in substantial control ownership. Entities will need to report a beneficial owner’s name, address and date of birth and to provide a copy of driver’s license or other government identification. If an entity’s beneficial owner is another entity, as opposed to a natural person, it will have to report similar details about its ownership. Accordingly, laddering entities will likely not avoid compliance.

A number of questions have arisen during our preliminary review of the legislation, including the scope of various exceptions and reporting requirements. Implementing regulations, which may bring some clarity to these questions, are required to be finalized within one year. What is clear, however, is that the enactment of the CTA will necessitate process changes in many areas including transactional diligence and documentation, confidentiality undertakings, transfers of interest and ongoing compliance for entities required to report under the CTA.

The firm has a task force, consisting of lawyers in our Boston, London and New York offices, responsible for advising clients on the CTA, the NSIB and its U.S. cousin, CFIUS, as well as other laws rules and regulations relating to potentially sensitive investments in, and disclosure of beneficial ownership of, United States and United Kingdom entities. As the CTA and the NSIB wend their way through their respective administrative and legislative processes, we will keep you apprised of developments.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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