The Corporate Transparency Act (the “CTA”) was adopted on January 1, 2021, to combat the laundering of illicit funds through anonymous “shell” companies.
The CTA will require certain corporations and limited liability companies to file reports with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), identifying all of the reporting entity’s “beneficial owners.”
Time for Compliance
Although the CTA already is in effect, companies still have time to learn and understand the reporting requirements — they begin only after final implementing regulations are promulgated by the Secretary of the Treasury. These rules are supposed to be in effect no later than January 1, 2022, and maybe effective sooner given overwhelming bipartisan support for the CTA. Existing companies will have two years to file initial reports, while newly formed companies (or those newly registered to do business in the US) will be required to file an initial report upon formation or registration. In both cases, changes in company beneficial owners must be reported within one year.
Subject to certain exceptions, a “beneficial owner” is defined in the CTA as “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” Although the CTA does not define “substantial control,” FinCEN probably will clarify that phrase with implementing regulations or other guidance.
Note that “applicants” who file an application to form an entity covered by the CTA (or register a covered foreign company to do business in the U.S.) must report the same information as beneficial owners.
Information Required: The information to be reported for each beneficial owner is simple:
- full legal name;
- birth date;
- residential or business street address; and
- a unique identifying number from an acceptable identification document;
- U.S. passport;
- state driver’s license;
- another state-issued identification document; or
- a current non-U.S. passport for individuals who do not hold any U.S.-issued identification documents.
Exclusions: As the CTA is primarily targeted at shall companies, it excludes broad categories of publicly traded, regulated, nonprofit and government entities. It also excludes any company that:
- employs more than 20 full-time employees in the United States;
- annually reports more than $5 million in gross receipts or sales to the IRS; and
- has an operating presence at a physical office within the U.S.
No information FinCEN collects is to be made publicly available. The CTA even imposes penalties for unlawful disclosure of reported information. In keeping with its purpose, however, the CTA allows FinCEN to disclose beneficial ownership information, upon request, to:
- federal law enforcement agencies, including those requesting information on behalf of a non-U.S. law enforcement agency;
- with the consent of the reporting company, to certain financial institutions; and
- state, local, and tribal law enforcement agencies pursuant to court order.
Willful failure to report, or the submission of a report containing false or fraudulent information, is subject to a penalty of $500 per day, and/or a maximum penalty of $10,000 and up to 2 years imprisonment. Even if incorrect information is reported, however, no penalty will be imposed if such information is “voluntarily and promptly” corrected within 90 days.
If you have questions regarding whether your company will be required to comply with the CTA, the time to act is now.