Upcoming changes to federal regulations will create significant additional reporting requirements for businesses formed in or registered to do business in the United States. The Corporate Transparency Act (CTA), passed in January 2021 as part of the National Defense Authorization Act of 2021 (NDA), will require certain companies to report their Beneficial Ownership information to the Financial Crimes Enforcement Network (FinCEN). The regulations will not go into effect until January 1, 2024, but since the penalties for non-compliance can be steep. Owners of companies should confirm whether the constitute a Reporting Company to which the CTA applies and the Beneficial Ownership information that must be reported under the CTA.
Background
The stated purpose of the CTA is to curtail the use of shell companies to move and shelter illegal funds in the United States. For more than a decade, Congress has made efforts to implement a corporate reporting framework that can identify illegal activity that commonly evades detection by using shell companies, e.g., money laundering and terrorist or criminal funding. Prior to the NDA, financial institutions bore the responsibility of gathering information about corporate entities. With the arrival of the CTA, this responsibility will shift to reporting companies and severe penalties may be imposed for willful non-compliance and unauthorized disclosures.
Who is required to report Beneficial Ownership information?
The CTA requires a “Reporting Company” to report Beneficial Ownership information to FinCEN. The CTA broadly defines a “Reporting Company” as any corporation, limited liability company, or similar entity that is (1) created by filing a formation document with a secretary of state or similar office; or (2) formed under the law of a foreign country and registered to do business in the United States. There are a handful of exceptions to this definition, including public companies; non-foreign-owned shell companies; and financial institutions (such as banks, credit unions, brokers, dealers, and exchange and clearing agencies), but most smaller LLCs and Corporations will be considered reporting companies that must comply with the CTA.
What is required to be reported and when?
A Reporting Company must send FinCEN a report containing the following information for each Beneficial Owner of the Reporting Company: (1) full legal name, (2) date of birth, (3) current residential or business street address, and (4) unique identifying number from an acceptable identification document or FinCEN identifier, if available. A “Beneficial Owner” is an individual who, directly or indirectly, (1) exercises substantial control over the entity, or (2) owns or controls 25% or more of the ownership interests of the entity. A Beneficial Owner does not include 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 25% or more of the ownership interests of the entity.
How soon a Reporting Company must comply with the CTA depends on whether it was formed prior to or after the CTA’s effective date of January 1, 2024. If an entity is formed before the effective date, it will have one year to send its Beneficial Ownership reports to FinCEN. If an entity is formed after the effective date, it must comply with the CTA upon formation. If any reported information changes, a Reporting Company has 30 days after the date of the change to submit an updated report to FinCEN. A willful reporting violation will subject an entity to a monetary penalty of up to $500 per day, not to exceed $10,000 in total, for every day the violation continues, and up to two years in prison
What happens to Beneficial Ownership information after it is sent to FinCEN?
According to the CTA, FinCEN will maintain all Beneficial Ownership information in a secure and confidential national registry for at least five years after the termination of a Reporting Company. The secretary of the Treasury must implement security protection for all Beneficial Ownership information reported to FinCEN. Beneficial Ownership information may only be released after adhering to specific protocols to the following entities: federal agencies working in national security, intelligence, or law enforcement; state, local, or tribal law enforcement agencies upon court order; federal agencies on behalf of a foreign agency, prosecutor, or judge under international treaty or agreement; financial institutions with consent of the Reporting Company, and federal functional regulators. Any agency that violates disclosure protocols will be subject to criminal and civil penalties.
Takeaways
All companies should review the definition of “Reporting Company” and “Beneficial Owner” and their related exceptions to determine whether the reporting requirements of the CTA will apply to them. Federal and state agencies will have greater access to certain corporate information and can share that information with international agencies if they deem it is necessary to assist in the prevention of criminal financing. There will likely be some interpretative questions about the scope of exceptions to the reporting obligations, so companies should take notice of the implementing regulations.
If you have any questions about whether the CTA applies to your company or who in your company is considered a Beneficial Owner, please contact one of our attorneys.