The Corporate Transparency Act, HR 639511 , or the “CTA”, was passed into law on January 1, 2021, but its beneficial ownership reporting requirements will not become effective until after the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) issues final regulations for implementation. Last spring, FinCEN issued an Advanced Notice of Proposed Rulemaking (ANPRM), soliciting public comment on, among other things, whether certain terms in the CTA need clarification. FinCEN received over 200 public comments to its ANPRM from individuals, law firms, service companies, financial institutions, accounting firms, trade associations and others.
On December 7, 2021, FinCEN issued its Notice of Proposed Rulemaking (NPRM) for the beneficial ownership requirements of the CTA. Public comments to the NRPM were due on February 7, 2022 and are available for viewing on FinCEN’s website.
To stay up to date on this groundbreaking Act, let’s revisit some of the key parts of the CTA, and examine the important implementation details that FinCEN is proposing in its NPRM.
The CTA’s Beneficial Ownership Reporting Requirements
The CTA requires all “reporting companies” to disclose to FinCEN the full legal name, date of birth, address and unique identifying number (e.g., state identification card number, driver’s license number or a passport number) of each of its “beneficial owners” and “applicants”.
The NPRM proposes that a “beneficial owner’s” address must be his or her residential street address. For “applicants”, the NPRM would require a business address for applicants who provide a business service as “a corporate or formation agent”, and a residential street address for all other “applicants”.
Additionally, the NPRM proposes that “reporting companies” also provide a “scanned copy of the identification document from which the unique identifying number of the beneficial owner or applicant is obtained.”
A “reporting company” is defined in the CTA as a corporation, LLC or other similar entity that is created by the filing of a document with the 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 and registered to do business in the U.S. by the filing of a document with such a filing office. The CTA does not further define “other similar entity” and neither does FinCEN in its NPRM, other than to state that the proposed definition of domestic reporting company will likely include LLPs, LLLPs, Statutory Trusts and most LPs, in addition to corporations and LLCs.
A “beneficial owner” is defined in the CTA as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity, or owns or controls 25 percent or more of the ownership interests of the entity, or receives substantial economic benefits from the assets of the entity. The definition excludes minors and certain others. The term “substantial control” is undefined. The NRPM discusses “substantial control” at length and attempts to define this term.
An “applicant” is defined in the CTA as any individual who files an application to form a corporation, limited liability company, or other 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. The NPRM includes the CTA’s definition of applicant and proposes to broaden it to also include “anyone who directs or controls the filing of the document by another.”
Exemptions to the Reporting Requirements
The CTA provides 23 exemptions to the “reporting company” definition, including: any entity that employs more than 20 full-time employees in the U.S., that in the previous year filed federal income tax returns in the U.S. demonstrating more than $5 million in gross receipts or sales in the aggregate, and that has an operating presence at a physical office within the U.S. The exemptions in the CTA also include many industries that are already heavily regulated, such as banks and insurance providers, as well as publicly traded companies subject to SEC reporting. The NPRM does not propose adding any additional exemptions.
Retention and Disclosure
FinCEN is required to keep beneficial ownership information in a secure and confidential database for a minimum of 5 years after the date that a reporting company terminates. The database will not be publicly available. FinCEN can share a company’s beneficial ownership information with certain law enforcement or other governmental agencies or financial institutions, but only if strict protocols are met.
Register now for our one-hour webinar, Beneficial Ownership Disclosure Requirements Part 2, The Proposed Rules Interpreting and Clarifying the New Corporate Transparency Act scheduled for February 24 at 1 p.m. EST.
Issuance of Regulations Governing the CTA Reporting Requirements
FinCEN has indicated that the NPRM for beneficial ownership reporting is the first of three sets of proposed regulations related to the CTA. FinCEN says the second set will be for implementing protocols for access to and disclosure of the beneficial ownership information, and the third set will address amendments to the Customer Due Diligence section of the Bank Secrecy Act. FinCEN has not indicated dates for when it will be issuing NPRMs for the second and third set of proposed rules but mentioned that it may issue the second set later this year.
Reporting Due Dates
Existing companies subject to the CTA have two years from the effective date of the regulations to report their beneficial ownership information. Companies subject to the CTA that form or qualify in the U.S. after the date that Treasury issues regulations must report their beneficial ownership information upon formation or qualification. All reporting companies have up to 1 year from the time a change to beneficial ownership information occurs to update their filing.
The NPRM seeks to shorten the due date for existing reporting companies to report beneficial ownership information to one year from the date that FinCEN’s regulations become effective. For reporting companies that form after the effective date of the regulations, the NPRM clarifies that they must report their beneficial ownership information to FinCEN within 14 days of formation. The NPRM also states that FinCEN proposes to provide reporting companies with 14 calendar days to correct any inaccurate information filed with FinCEN from the date on which the inaccuracy is discovered and 30 days to update with FinCEN information that has changed after the filing.
Violations and Penalties
The CTA includes substantial civil and criminal penalties for willful failure to report, willfully providing false or fraudulent information and for unauthorized disclosure or use of the reporting information. Penalties for reporting violations can be as high as $10,000 or 2 years in prison, or both, and penalties for unauthorized disclosure or use violations can be up to $250,000 or 5 years in prison, or both (or higher if part of violating another law).
The NPRM clarifies that those subject to penalties for reporting violations include both those who are directly and indirectly involved with the submission of the report to FinCEN.
These are some but not all of the key details of the CTA and FinCEN’s NPRM. As we await FinCEN’s final regulations, you can begin preparing for the CTA’s beneficial ownership reporting requirements by carefully reviewing the CTA itself along with FinCEN’s NPRM.
We will further discuss the NRPM and explore many of the CTA’s provisions in-depth during our upcoming one-hour webinar, Beneficial Ownership Disclosure Requirements Part 2, The Proposed Rules Interpreting and Clarifying the New Corporate Transparency Act scheduled for February 24 at 1 p.m. EST.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
1Text for the Corporate Transparency Act appears on page 1217 of the PDF.