To assist law enforcement in preventing criminals from using anonymous shell companies as vehicles to launder illicit funds and finance criminal operations, Congress recently enacted the Corporate Transparency Act, included as Title LXIV of the National Defense Authorization Act for Fiscal Year 2021. The Corporate Transparency Act (the Act) requires certain companies to report the identities of their beneficial owners and organizers to the U.S. Department of Treasury's Financial Crimes Enforcement Network (FinCEN).
What Do You Need To Know Today?
- What the Act Requires. The Act requires certain U.S. companies, called "reporting companies," to submit a report to FinCEN identifying their "beneficial owners" and the persons who organized such companies, called "applicants."
- There is No Filing Requirement Today. You do not need to do anything today. Rather, the filing requirement will commence upon the effective date of the implementing regulations developed by the secretary of the treasury. Such regulations will be adopted on or before Jan. 1, 2022.
- We Don't Know What We Don't Know. Prior to the adoption of the implementing regulations, there are many questions we cannot address. For example, we do not know where and how the filing will be made. The filing could be made electronically directly to FinCEN or FinCEN may partner with the states to permit filings in connection with organizational filings. We simply do not know.
- Who Must Report? The definition of reporting company is very broad and includes corporations, limited liability companies, or similar entities formed by filing a document with a secretary of state's office — or equivalent — or a foreign entity that is registered to do business in the U.S.
- Who Is Exempt? There are many exceptions to the definition of "reporting company" that exclude certain businesses from the Act's reporting requirements. Two types of companies are most likely to be excluded: (a) companies that are U.S.-owned with a real, physical operating presence, including more than 20 employees, in the U.S.; and (b) companies in heavily-regulated industries (e.g., banks, credit unions, registered brokers or dealers, and publicly-traded companies).
The Act will not be effective until the adoption of the implementing regulations by the secretary of the treasury, which is to occur no later than Jan. 1, 2022.
The secretary of the treasury will develop and adopt the implementing regulations through the ordinary-course rulemaking process for federal regulations, which includes releasing draft regulations, publishing draft regulations in the Federal Register, conducting a public notice and comment period between 30-180 days, further revising the proposed regulations, and publishing the final regulations in the Federal Register — which will establish the effective date.
Each reporting company formed prior to the effective date will have two years from the effective date to make its initial report. Each reporting company formed after the effective date will need to make its initial report at the time of its formation. If there are changes in beneficial ownership of a reporting company, the reporting company must file an updated report with FinCEN within one year after the date the change occurred.
Penalties for Noncompliance
The Act imposes civil and criminal penalties for willfully providing false or fraudulent beneficial ownership information or willfully failing to report complete or updated beneficial ownership information to FinCEN.
Scope of the Act
A. Reporting Company
All U.S. and foreign companies registered to operate in the U.S. that fall under the definition of a "reporting company" are subject to the Act, unless an exception applies. Under the Act, a "reporting company" is broadly defined as a corporation, limited liability company, or other similar entity that is:
- Created by the filing of a document with a secretary of state or a similar office under the law of a U.S. state or Indian tribe; or
- Formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or a similar office under the laws of a U.S. state or Indian tribe.
The Act expressly excludes certain entities from the definition of a "reporting company." Entities excluded from the definition of "reporting company" include, but are not limited to:
- Companies operating in highly-regulated industries such as banks, credit unions, registered brokers or dealers, etc.;
- Publicly traded companies;
- Tax-exempt entities; and
- Companies that: (i) employ more than 20 employees on a full-time basis in the U.S.; (ii) have annual aggregate gross receipt or sales greater than $5,000,000 as evidenced by a federal income tax return; and (iii) have an operating presence at a physical office within the U.S.
B. Beneficial Owner
A "beneficial owner" is defined as any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- Exercises substantial control over the entity; or
- Owns or controls not less than 25% of the ownership interests of the entity.
Notably, neither the terms "substantial control" or "ownership interests" are defined under the Act.
Further, a minor child, 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 company, an individual whose only interest in the reporting company is through inheritance, or a creditor of a reporting company are all expressly excluded from the definition of "beneficial owner" under the Act.
An "applicant" is defined as any individual who:
- Files an application to form a corporation, limited liability company, or similar entity under the laws of a state or Indian tribe; or
- Registers or files an application to register a corporation, limited liability company, or other similar entity formed under the laws of a foreign country to do business in the U.S. by filing a document with the secretary of state or similar office under the laws of a state or Indian tribe.
Information Disclosed to FinCEN
A reporting company is required to file a report with FinCEN that identifies each beneficial owner and applicant by:
- Full legal name;
- Date of birth;
- Current residential or business street address; and
- A Unique Identifying Number (i.e., non-expired passport issued by the U.S., non-expired personal identification card, or non-expired driver's license issued by a state) or FinCEN Identifier.
All beneficial ownership information submitted to FinCEN will be maintained in a secure and private database. Although beneficial owners will remain anonymous to the general public, U.S. law enforcement authorities may access beneficial ownership information submitted to FinCEN for national security, law enforcement, and intelligence purposes.
Beneficial ownership reporting obligations may deter criminals who have benefitted from the anonymity American shell companies have historically provided. The new compliance costs and administrative burdens, however, will be shouldered by all entities, including legitimate corporations and limited liability companies, and bona fide business owners.
We will closely monitor any advancements with the Act and analyze the implementing regulations once they are promulgated by the secretary of the treasury.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.