The Corporate Transparency Act (CTA) was passed by Congress on January 1, 2021, as part of the National Defense Authorization Act of 2021. The CTA is the most significant update to the U.S. anti-money laundering laws since the passage of the USA PATRIOT Act twenty years ago. When implemented, the CTA will require certain businesses domiciled or registered to do business in the United States to report “beneficial ownership” information with the Financial Crimes Enforcement Network (FinCEN) of the United States Treasury Department (Treasury).
The CTA’s primary purpose is to bring transparency to so-called “shell” companies and to aid law enforcement in combating money laundering, terrorism financing, organized crime and other financial crimes, but the CTA’s obligations will have a significant impact on many legitimate operating companies. In particular, the CTA’s obligations are likely to directly impact small and newly formed businesses that have few employees or that lack significant revenue.
The reporting requirements under the CTA are not yet effective, but are expected to go live when Treasury’s implementing regulations take effect. While there is no specific guidance on when this will occur, the CTA requires Treasury to finalize the rules prior to January 1, 2022. Once effective, existing reporting companies will have up to two years to submit reports on their beneficial owners, and new reporting companies will need to report at the time of formation or registration.
Reporting Companies – Who needs to report?
The CTA defines a “reporting company” as any corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe or (ii) formed under the law of a foreign country that is registered to do business in the United States.
The scope of the definition as it relates to “other similar entities” will be further defined in Treasury’s final CTA regulations, but it is expected to also include limited partnerships, business trusts, and possibly some general partnerships, consistent with FinCEN’s existing customer due diligence requirements under the Bank Secrecy Act.
In light of the purpose of the CTA, Congress has established exemptions from reporting for several categories of entities that are already required to disclose beneficial owners or that are unlikely to be used for illicit purposes.
The exemption with perhaps the broadest impact will be for large private companies. Companies will not be subject to the reporting requirements if they:
- have more than 20 employees on a full-time basis,
- report gross receipts or sales of more than $5 million in the previous year’s tax returns (subsidiaries and operating affiliates), and
- have a physical presence in the United States.
In addition to the exemption for large private companies, the CTA also exempts the following types of business from reporting:
- public companies,
- banks, bank holding companies, and savings and loan holding companies,
- federal and state credit unions,
- entities registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 including broker dealers, and exchange or clearing agencies,
- registered investment companies and investment advisors,
- insurance companies,
- public accounting firms registered with the Public Company Accounting Oversight Board,
- public and financial market utilities,
- pooled investment vehicles operated or advised by certain entities that are exempt from reporting under the CTA,
- nonprofit organizations exempt from tax and described in Section 501(c) of the Internal Revenue Code of 1986, including certain charitable trusts, non-profits and political organizations,
- certain inactive entities in existence for over one year that are not directly or indirectly owned by a non-US person, and
- entities owned or controlled by one or more entities exempt from reporting.
The primary purpose of the CTA may be to target illicit shell companies, but the impact will be widely felt by many small businesses, which are unlikely to fall within the scope of the current list of exceptions.
Who is a Beneficial Owner?
The CTA defines “beneficial owner” to mean, with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationships, or otherwise:
- exercises “substantial control” over the entity, or
- owns or controls not less than 25% of the “ownership interests” of the entity.
A beneficial owner does not include:
- a minor child, if the information of the parent or guardian of the minor child is reported,
- an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual,
- an individual acting solely as an employee of a reporting person and whose control over the economic benefits from such entity is derived solely from the employment status of the person,
- an individual whose only interest in a reporting company is through a right of inheritance, or
- a creditor of a reporting person, unless the creditor exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests.
Under the CTA, any “reporting company” will be required to report the following information to FinCEN for each of the reporting company’s “beneficial owners” and for the individual who filed the application forming or registering the reporting company:
- the full legal name,
- date of birth,
- current address, and
- unique identification number from an unexpired passport, driver’s license, other acceptable identification document, or FinCEN identity number.
Once reported, the information will need to be updated within a year of any changes. The information will not be publicly accessible, but will be available to federal, state and international law enforcement agencies and to financial institutions for customer due diligence.
Failure to comply with the CTA could result in (i) civil penalties of up to $500 for each day that the violation continues, and (ii) a fine of up to $10,000 and imprisonment for up to two years or both. The unauthorized disclosure of information collected under the CTA carries the same civil penalty, but carries a higher criminal penalty of up to $250,000 and up to 5 years of imprisonment or both.
Attention now turns to Treasury to draft regulations implementing the CTA. While Treasury has been instructed to implement the CTA in a manner that minimizes the burdens on reporting companies to the greatest extent practical, there is no doubt that this legislation will have a great impact on many businesses.