On January 1, 2021, the Senate voted to override former President Trump’s veto of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”), which included the Corporate Transparency Act (“CTA”).[1] The CTA requires certain U.S. businesses, absent an exemption, to file beneficial ownership information with the Financial Crimes Enforcement Network (“FinCEN”), in an attempt to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.”[2] However, many practitioners are concerned with the potentially burdensome reporting obligations that it could place on businesses. While Josh Sage discussed the CTA in a previous article,[3] this article serves as a reminder to practitioners and clients alike about the impending implementation of the CTA. Some of the key takeaways include:
- Most entities formed in the U.S. will fall under the CTA’s definition of “reporting company” and will therefore be required to report to FinCen;
- Each reporting entity will be required to provide identifying information for each individual or entity which owns at least 25% of the ownership interest in such entity or otherwise exercises substantial control over such entity;
- The Penalties for failure to comply are steep and include a $500 per day penalty (up to a maximum of $250,000) and imprisonment of up to two years; and
- The deadline for meeting these reporting obligations for existing entities will likely be January 1, 2024.
Background
The CTA represents the culmination of more than a decade of congressional efforts to implement beneficial ownership reporting for business entities and is considered by many to be the most significant update to the U.S. anti-money laundering laws since the passage of the USA PATRIOT ACT of 2001. The United States has received criticism from the Financial Action Task Force (“FATF”)[4], as far back as June 2006, for failing to comply with a FATF standard on the need to collect beneficial ownership information.[5] What followed that criticism was a decade of various proposed federal legislation which were never fully enacted by Congress. Real traction was finally made with the introduction of the Corporate Transparency Act of 2019 in May 2019 by Representative Carolyn Maloney, which would serve as a basis for the CTA.[6]
Even though the CTA has already been passed into law, its reporting requirements are set to take effect upon the issuance of implementing regulations, which are to be promulgated by the Secretary of Treasury no later than January 1, 2022. It is expected that any implementing regulations will be promulgated by FinCEN pursuant to a delegation of authority from the Secretary of the Treasury. According to Andrew Winerman of FinCEN, who spoke at the virtual New York University Tax Controversy Forum on June 25, 2021, FinCEN is aiming for a summer deadline for the first set of proposed regulations.[7] Assuming FinCEN is able to meet the summer deadline, these regulations will provide practitioners with a foundation of much needed guidance (even if such guidance is subject to revision prior to final regulations being published) on a multitude of issues left unaddressed by the CTA, as discussed below.
Who Must Report?
Generally, state law governs the formation and maintenance of business entities, but the CTA places further reporting requirements on any entity captured within its definition of “reporting company.”[8] The CTA defines a “reporting company” as any corporation, limited liability company, or other similar entity that is:[9]
- 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
- formed under the law of a foreign country that is registered to do business in the United States.
Notably partnerships are not listed in the CTA, however, given the similarities to a limited liability company, a partnership formed by the filing of a document with a secretary of state (ex. limited partnership) is likely to be considered a reporting company once regulations are issued.
There are a number of entities exempt from the reporting requirements, primarily those entities that must already disclose their beneficial owners under other laws or regulations, or those entities deemed not to be viable vehicles for money laundering.[10] The broadest such exclusion is for companies with:[11]
- more than 20 full-time employees in the United States;
- more than $5 million in gross receipts or sales; and
- an operating presence at a physical office in the United States.
Certain charitable trusts and charitable split-interest trusts, banks, insurance companies, investment funds, charities, public companies, broker dealers, public accounting firms, public utilities and pooled investment vehicles that are advised or operated by banks or registered investment advisors are also among the business entities and companies that are also from the definition of reporting company.[12]
What Information Must Be Reported?
Reporting companies will be required to report certain identifying information about each of their “beneficial owners,” including their full legal name, date of birth, address, and a unique identifying number from an acceptable identification document such as a passport, driver’s license, or other government-issued identification.[13]
“Beneficial owner” includes any individual, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise who:[14]
- exercises substantial control over the covered entity; or
- holds at least 25 percent of the ownership interests of the covered entity.
The CTA does not provide a definition for “substantial control,” nor does it discuss the details of calculating ownership interests, such as whether attribution rules apply. Once again, the aforementioned regulations are expected to clarify such details.
A “beneficial owner” does not include:[15]
- a minor child if the information of the child’s parent or guardian 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 the entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person;
- an individual whose only interest in the entity is through a right of inheritance; or
- a creditor of the entity, unless the creditor exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity.
As with substantial control, the CTA does not define or discuss associated details for “a right of inheritance.”
When Must Entities Report and Who Can Access the Information?
Reporting companies formed after the effective date of the regulations must report at the time the company is formed or registered.[16] Reporting companies which were formed or registered before the effective date of the regulations must report within two years of the effective date of the regulations.[17] Additionally, when a change in the beneficial ownership information of a reporting company occurs, such reporting company must submit an updated report to FinCEN in a timely manner, but no later than one year after the date of the change.[18]
One of the main points of the CTA is to provide law enforcement agencies with the beneficial ownership information gathered by FinCEN, however some readers might be concerned with whether other individuals and entities, such as regulatory agencies, will have access to the provided information. The CTA requires the data provided to FinCEN to be stored on a private database, not accessible to the public. Additionally, the information can only be provided to:[19]
- A federal, state, local, or tribal law enforcement agency conducting an active investigation;
- A federal agency making the request on behalf of a foreign law enforcement agency under mutual legal assistance protocols; or
- A financial institution conducting due diligence under the Banking Secrecy Act or USA PATRIOT ACT of 2001, with proper consumer consent.
What Penalties does the CTA Impose?
Violations of the CTA come with possible civil and criminal penalties. A person who willfully provides or attempts to provide false or fraudulent ownership information or who willfully fails to complete or update beneficial ownership to FinCEN may be subject to a civil penalty of not more than $500 per day the violation has not been remedied up to a maximum of $250,000 or a fine of not more than $10,000, imprisonment for not more than two years, or both.[20] There is a safe harbor to exempt a person from penalty if the person, acting in good faith, corrects inaccurate information submitted to FinCEN within 90 days of the inaccurate report.[21] In addition, significant penalties are provided for the misuse of beneficial ownership information, including a fine up to $250,000, imprisonment of up to five years, or both.[22]
Conclusion
The CTA certainly looks to impose new reporting requirements on many entities, and as evidenced by the strict penalties imposed under the CTA, both clients and practitioners need to be aware of these new requirements. Adding this reporting requirement to the playbook for forming new entities will certainly become standard procedure for practitioners, but they will also need to be diligent in ensuring that existing entities for clients meet the reporting requirements in a timely manner and that the information provided is accurate. While many of the specifics are anticipated to be addressed in the final regulations, FinCEN seems hopeful that they will be able to get a set of proposed regulations published this summer. This will give practitioners an opportunity to not only better advise their clients as to the anticipated reporting requirements, but also a chance to comment on the proposed regulations.
[1] H.R. 6395, 116th Congress, 2nd Sess.
[2] Office of Representative Carolyn Maloney, Press Release, “Maloney Celebrates Inclusion of Corporate Transparency Act in FY2021 NDAA” (Nov. 19, 2020).
[3] Josh Sage, “Pulling Back the Curtain with the Corporate Transparency Act” (Jan. 6, 2021) https://esapllc.com/corporate-transparency-act-ndaa2021/.
[4] The Financial Action Task Force is a global inter-governmental body established in 1989 with the objective of setting standards and promoting effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
[5] See Financial Action Task Force, Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism (23 June 2006).
[6] H.R. 2513, 116th Congress, 1st Sess.
[7] NYU School of Professional Studies Division of Programs in Business to Host the 13th Annual Tax Controversy Forum Remotely on June 24 and 25 (June 22, 2001), https://www.sps.nyu.edu/homepage/communications/press-releases/2021/nyu-sps-programs-business-host-13th-annual-tax-controversy-forum-remotely-june-24-25.html.
[8] All citations to certain provisions of the CTA in this article are to the specific sections of the proposed addition of 31 U.S.C. § 5336.
[9] 31 U.S.C. § 5336(a)(11)(A).
[10] 31 U.S.C. § 5336(a)(11)(B).
[11] 31 U.S.C. § 5336(a)(11)(B)(xxi).
[12] 31 U.S.C. § 5336(a)(11)(B).
[13] 31 U.S.C. § 5336(b)(2)(A).
[14] 31 U.S.C. § 5336(a)(3)(A).
[15] 31 U.S.C. § 5336(a)(3)(B).
[16] 31 U.S.C. § 5336(b)(1)(C).
[17] 31 U.S.C. § 5336(b)(1)(B).
[18] 31 U.S.C. § 5336(b)(1)(D).
[19] 31 U.S.C. § 5336(c)(2)(A).
[20] 31 U.S.C. § 5336(h)(3)(A).
[21] 31 U.S.C. § 5336(h)(3)(C).
[22] 31 U.S.C. § 5336(h)(3)(B).
