The Corporate Transparency Act

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A new federal law will require certain U.S. entities to report the personal information of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury.

TAKEAWAYS

  • “Reporting companies” will be required to disclose to the Federal government the personal information of beneficial owners, including name, address, date of birth and unique identification number from an acceptable document (such as driver’s license or passport number); the Act is effective as of the effective date of the regulations issued by the U.S. Treasury (not later than one year after the passage of the Act on January 1, 2021).
  • Personal information disclosed to FinCEN under the Act will be retained by FinCEN for not fewer than five years, but such information will be disclosed only to government authorities for authorized purposes.
  • Certain entities will be exempt from the Act’s reporting requirements, including publicly traded companies, tax-exempt entities and entities that are already closely regulated (such as banks, broker-dealers, investment advisors, private funds, insurance companies and public utility companies).

The Corporate Transparency Act (the Act), enacted on January 1, 2021, will impose beneficial ownership reporting obligations on many corporations, limited liability companies, and other “similar entities,” which the Act defines as a “reporting company.” The stated intent of the Act is to establish federal legislation for the collection of beneficial ownership information to protect U.S. “national security interests; protect interstate and foreign commerce; better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activity,” among other goals. Many U.S. private companies will be reporting companies subject to the Act’s requirements, but certain entities are expressly exempt. The term “reporting company” excludes certain entities that are closely regulated (which may already be subject to beneficial ownership reporting), such as banks and bank holding companies, broker-dealers, investment advisors, private funds, insurance companies; tax-exempt entities; insurance companies; public utility companies; wholly owned subsidiaries; and, most notably, publicly traded companies. The Act also excludes from the definition of a reporting company, any corporation, limited liability company or similar entity that employs more than 20 persons full-time in the U.S., filed in the previous year a federal income tax return showing more than $5 million in gross receipts or sales, and has an operating presence at a physical office within the United States.

The key requirement of the Act is that a reporting company must disclose to FinCEN, a bureau of the U.S. Department of the Treasury, personal information regarding its beneficial owners (as well as information about the beneficial owners of such beneficial owners). Information to be disclosed includes each such person’s full legal name, residential or business address, date of birth and a personal identification number (such as a drivers’ license number or a passport number). The Act defines a “beneficial owner” as an individual who, directly or indirectly (through any contract, arrangement, understanding relationship or otherwise): exercises substantial control over a reporting company or who owns or controls not less than 25 percent of the ownership interests of the reporting company. A “beneficial owner” does not include a minor child (the information of the parent or guardian must be reported instead), an individual acting as a nominee, intermediary, custodian or agent of another individual, an individual solely acting as an employee of a reporting company, or a creditor of a reporting company. The beneficial ownership information disclosed will be stored and maintained within FinCEN and may only be used for national security, intelligence and law enforcement activities, or national security purposes, and to confirm information provided to financial institutions to facilitate compliance with anti-money laundering laws. Nevertheless, the Act raises Fourth Amendment privacy concerns for many commentators, given the highly sensitive nature of the personal information being disclosed.

After the Treasury regulations are implemented, reporting companies will be required to file beneficial ownership reports upon formation of an entity subject to the Act or, if formed prior to the enactment of the regulations, within two years of the effective date of the Treasury regulations. Following submission of the initial report, reporting companies must report changes to their beneficial ownership timely and not later than one year after the change. The Act also requires changes to the Federal Acquisition Regulation (FAR) to be implemented within two years of the effective date of the Act, to provide that “any contractor or subcontractor” subject to the Act disclose its beneficial ownership information as part of any bid or proposal for a contract valued above the simplified acquisition threshold (currently $250,000, subject to certain exceptions). This will expand current requirements under the FAR, which requires prime contractors to provide certain information about corporate ownership in bids or proposals.

Noncompliance with the Act can result in significant civil and criminal penalties. Penalties for the intentional failure of a reporting company to comply with the Act or to provide false beneficial ownership information will subject the reporting company to fines of up to $500 per day, with aggregate fines up to $10,000, a prison term of not more than two years, or both. Any party that unlawfully knowingly discloses any beneficial ownership information may be subject to fines of up to $500 per day, or up to $250,000 in the aggregate, a prison term of up to 10 years, or both. Notably, the failure to comply with the Act will not invalidate the formation of an entity or prohibit it from conducting business.

The Act raises many questions which we hope will be addressed in the implementing regulations. Numerous details regarding application and administration of the Act are not covered in the initial legislation passed.

In summary, the Act will impose significant new beneficial reporting obligations on many U.S. private companies. U.S. entities should review the Act and its requirements now to determine if they will have to comply with these new reporting obligations and, if subject to the Act, to plan how to obtain the information needed from beneficial owners to timely file the reports required.

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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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