The Corporate Transparency Act Mandates Disclosure of Beneficial Ownership Details to FinCEN, but Excludes Many Financial Institutions and Others: Will Your Business be Affected?

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The Corporate Transparency Act (the “CTA”), enacted by Congress on January 1, 2021 as part of The National Defense Authorization Act, mandates the establishment of a national registry requiring companies to disclose the identity of their beneficial owners to the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The aim of the CTA is to prevent money laundering and the financing of terrorism through the use of shell companies. To do this, the CTA will require “corporations, limited liability companies and other similar entities” formed or registered to do business in the U.S. (“business entities”)—which previously could be created, registered and operated in many states without disclosing the identity of the persons who own or control them—to provide information regarding their beneficial ownership to FinCEN for law enforcement use. These new requirements are expected to create new administrative and compliance burdens for businesses, and many will require legal advice to come into compliance with the new rules.

Overview

The CTA will establish an information collection and management system to track beneficial ownership of business entities to be created and maintained by FinCEN. The Department of the Treasury is required to issue final regulations to implement the main provisions of the CTA by January 1, 2022. Until that time, the exact details of how the new regime will operate remain to be seen. The following reflects anticipated details with respect to the type of information that will be collected, who will be affected, and how existing business entities will be brought into compliance. 

What type of information will be collected? 

The CTA mandates the collection of a “disclosure report” listing each “beneficial owner” (as described under Who is a “beneficial owner”? below) of every business entity that is not otherwise exempt as described below (each a “reporting company”) and containing the following information about each such beneficial owner:

  • full legal name;
  • date of birth;
  • a current residential or business address; and
  • an identification number (e.g., non-expired ID, driver’s license or passport number) or a FinCEN identifier number (which can be obtained upon request). 

The person who submits the formation documentation to the applicable state authority for a reporting company must also provide this information with respect to himself or herself.

The CTA currently requires that disclosure reports be updated within a year of any change in the beneficial ownership details of a reporting company, but the Secretary of the Treasury is authorized to decide whether to require updates within a shorter amount of time and update the implementing regulations accordingly. 

Who is a “beneficial owner”? 

The CTA defines a “beneficial owner” as a natural person who directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

  • exercises substantial control over a reporting company; or
  • owns or controls 25% or more of the ownership interests of a reporting company.

While the second prong establishes a clear threshold for ownership or control, interpretation of the first prong will require additional guidance from the Department of the Treasury in the regulations. The treatment or quantification of warrants and other non-stock securities is also unclear.

The CTA specifically excludes creditors (but only in their capacity as such) and persons or business entities who act solely as a custodian or agent on behalf of another individual from the definition of “beneficial ownership.”

Are all business entities subject to the beneficial ownership reporting requirements?

No. The CTA provides for a substantial list of business entities that will not be subject to the beneficial ownership reporting requirements. For example, public companies, registered broker dealers, and certain investment companies, investment advisers, banks, bank holding companies, credit unions, money-transmitting businesses, commodity trading companies, pooled investment vehicles, inactive business entities and insurance companies will not be required to submit their beneficial ownership information.

In addition, and perhaps most relevant to clients contemplating non-public M&A deals, business entities in the two following groups will be exempted from disclosing beneficial ownership details: 

  • any business entity that (i) employs more than 20 employees on a full-time basis in the U.S.; (ii) files income tax returns in the U.S. demonstrating more than $5,000,000 in gross receipts or sales (including the receipts or sales of subsidiaries and other entities through which such entity operates), and (iii) has an operating presence at a physical office within the U.S.; or 
  • any business entity owned or controlled by a business entity that is itself exempt from the beneficial ownership disclosure requirements of the CTA, with some limited exceptions.

While the application of these exemptions is subject to the forthcoming final regulations, it is likely that many larger companies and their subsidiaries will be exempt from having to disclose beneficial ownership details. 

Do exempt business entities have any filing requirements under the CTA?

Generally, no, a business entity that is exempt from beneficial ownership disclosure will not need to submit a disclosure report unless it ceases being exempt. Certain exempt pooled investment vehicles are still required to submit a disclosure report with respect to any individual who exercises substantial control over such business entity. 

Other than corporations and limited liability companies, what other entity types will be covered by the CTA? 

Partnerships and most trusts are not explicitly covered by the CTA, but since they are not carved out among the other exempt business entities, they are likely to be considered “other similar entities” and therefore subject to the disclosure requirements. In the case of trusts specifically, the CTA contains an exemption for some limited categories, implying that they are otherwise included within the scope of the CTA. This is expected to be clarified in the pending regulations. 

Will existing business entities be subject to the new rules or just newly formed business entities? 

Once the regulations are in place, newly formed reporting entities will immediately be subject to the beneficial ownership reporting requirements. Reporting entities formed prior to the promulgation of the regulations will have a two-year period to come into compliance. 

Who will have access to the information submitted to FinCEN?

Once provided to FinCEN, the information required to be disclosed under the CTA will not be generally available to the public. The intended audience for this information is the domestic and international law enforcement community and access will only be given to members thereof in accordance with protocols that are mandated to be established to ensure that disclosed information is only used for law enforcement, national security, or intelligence purposes. Employees of the Department of Treasury will also have access to such information if their official duties require it; they may also obtain access specifically for “tax administration purposes.” The CTA also provides for disclosure of beneficial ownership information to financial institutions, but only upon customer consent (in any event, financial institutions are already required to gather information about beneficial ownership of their customers pursuant to existing laws and regulations). The CTA does not address whether the beneficial ownership information disclosed to FinCEN will be subject to Freedom of Information Act (“FOIA”) requests, but it is likely that government disclosure of beneficial ownership details of reporting companies would run afoul of personal privacy rules, so that information is expected to be exempted from disclosure pursuant to FOIA requests. 

What are the penalties for non-compliance with the disclosure requirements?

For non-compliance, the CTA contemplates civil penalties of up to $500 for each day that a violation continues or has not been remedied, and criminal penalties ranging from fines to up to two years imprisonment for willfully filing false reports or failing to file.

Key Takeaways

While the passage of the CTA represents an important and noteworthy change to business practice, its true impact on businesses and the scope of the new requirements will not be known until the implementing regulations are prepared over the next year. That said, undoubtedly the law will create a new compliance regime which is expected to require many previously unregulated businesses to prepare and make filings to FinCEN. For many businesses, a fact-intensive legal review may be required to determine the exact nature of the required disclosure. 

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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