On January 1, 2021, Congress passed the National Defense Authorization Act for Fiscal Year 2021, which includes the Corporate Transparency Act (the CTA).1 The CTA requires all U.S. businesses to file “beneficial ownership” information with the Financial Crimes Enforcement Network (FinCEN). In sum, the CTA is designed to ban the anonymous shell companies that criminals and certain foreign officials use to hide and move corrupt proceeds and other illicit financing.
The CTA is the first significant update to the U.S. anti-money laundering laws in 20 years and gives FinCEN significant authority to adopt necessary regulations to implement the provisions of the CTA.
The CTA’s Key Provisions
The CTA requires companies in the U.S. to file a report that provides the name, date of birth, current address, and unique identification number (from a passport or driver’s license, for example) of the company’s “beneficial owner(s)” to FinCEN, a bureau of the U.S. Treasury Department. This information must be updated every year to reflect any changes.
For purposes of the CTA, the reporting requirements are broad and apply to existing corporations, LLCs, and other similar entities as well as to new entities when they are formed. The CTA, however, provides exemptions for larger companies, heavily regulated companies, and companies that already provide information to a relevant government agency. The CTA explicitly exempts:
- Companies that employ more than 20 people, report revenues of more than $5 million on tax returns, and have a physical presence in the United States;
- Most financial services institutions, including investment and accounting firms, securities trading firms, banks, and credit unions that report to and are regulated by government agencies such as the Securities and Exchange Commission, the Office of the Comptroller of the Currency, or the FDIC; and
- Churches, charities, and other nonprofit organizations.
Under the CTA, a “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- Exercises substantial control over an entity; or
- Owns or controls at least 25% of the ownership interests in an entity.
There are five exceptions from the term “beneficial owner”:
- A minor child, if the child’s parent’s or guardian’s information is otherwise is reported properly;
- An individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
- An individual acting as an employee whose control is derived solely because of employment status;
- An individual whose only interest in the entity is through a right of inheritance; and
- A creditor of the entity, unless the creditor meets the requirements of a beneficial owner.
The CTA defines “applicant” broadly as an individual who “files” an application to form an entity in the U.S. or, for a foreign entity, an individual who “registers or files” an application for the foreign entity to do business in the U.S. The terms “file” and “register” are not defined in the CTA, and this is an area where FinCEN is expected to provide relevant guidance.
Timing for Compliance
The CTA contemplates different timing requirements for compliance based on the stage of entity formation and changes in beneficial ownership. The timing requirements are as follows:
- Entities formed after the FinCEN regulations are effective must file this information at the time of formation or registration;
- Entities existing before the date the regulations are effective must report this information, in a timely manner, and not later than two years after the effective date of the regulations; and
- A reporting company must update the information provided to FinCEN upon a change in beneficial ownership.
Data Storage and Access
The CTA contains numerous provisions regarding FinCEN’s data protection. FinCEN must store the information received in a private database not accessible to the public. Under the CTA, this information may only be released to:
- A federal, state, local, or tribal law enforcement agency conducting an active
- A federal agency making the request on behalf of a foreign law enforcement agency under mutual legal assistance protocols; and
- A financial institution conducting due diligence under the Banking Secrecy Act or USA PATRIOT Act – with customer consent.
The information is not available to the general public, nor can it be queried under the Freedom of Information Act. The information may only be used for law enforcement, national security, or intelligence purposes.
Violations of the CTA carry civil penalties of up to $500 for every day the violation continues and criminal fines up to $10,000 and/or imprisonment for up to two years. The unauthorized disclosure of information collected under the Act carries the same $500-per-day civil penalty but includes a higher criminal penalty of up to $250,000 and/or a higher maximum term of imprisonment of five years. Unauthorized disclosure includes both a disclosure by a government employee and disclosure by a third-party recipient of information under the CTA.
What Does This Mean For Me?
The CTA will impose new burdens on many entities operating in the U.S and is likely to have significant implications for foreign and domestic businesses. Clients should be aware of these new requirements and continue to monitor FinCEN’s regulations to further understand the full extent of their reporting obligations. Required compliance with the CTA does not start until January 2022, the deadline for Congress to enact the regulations. All companies potentially subject to the CTA should assess their application and, where appropriate, enhance their compliance processes to verify that the required information is being collected and reported to FinCEN in accordance with the CTA.