It was back in 2008 that United States Senator Levin and former President/then Senator Obama started the country down the long and winding road that has finally led to beneficial ownership disclosure requirements. Generally, “beneficial owners” are those who profit from and/or control a business. The impetus for beneficial ownership disclosure legislation is to prevent criminals from hiding behind and utilising anonymous shell companies for illicit activities like money laundering, tax evasion, drug and human trafficking and the financing of terrorism. Yet year after year, such legislation failed in the U.S. Congress…until now.
Thirteen years in the making, the Corporate Transparency Act, HR 63951, or the “CTA” was passed into U.S. law on 1 January, 2021. Even its passage took a circuitous route – with former President Trump vetoing the National Defense Authorisation Act of FY 2021 (of which the CTA is a part), only to be overridden by the House and the Senate.
Let’s review some of this groundbreaking act’s beneficial ownership disclosure requirements, and what they mean for business entities in the U.S.
The CTA’s Beneficial Ownership Reporting Requirements
The CTA requires all “reporting companies” to disclose to the Financial Crimes Enforcement Network (FinCEN) the full legal name, date of birth, address and unique identifying number (e.g., state identification card number, driver’s licence number or a passport number) of each of its “beneficial owners” and “applicants”.
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.
A “beneficial owner” is 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% 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” is undefined. As mentioned below, the U.S. Department of Treasury’s (Treasury) pending regulations may clarify this.
An “applicant” is 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. This appears to be a broad definition that Treasury’s pending regulations might also address.
Exemptions to the Reporting Requirements
There are 24 exemptions to the “reporting company” definition. These include: 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 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.
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.
Issuance of Regulations Governing the CTA Reporting Requirements
Treasury is required to issue regulations on or before 1 January, 2022, with procedures and standards governing the CTA reporting requirements. As mentioned, there are some ambiguities in the CTA that the regulations might clarify.
The date that Treasury issues its regulations is critical as it will trigger the reporting due dates; these will differ for existing companies and those that form or qualify in the U.S. after the issuance date.
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 on which Treasury issues regulations must report their beneficial ownership information upon formation or qualification. All reporting companies have up to one year from the time a change to beneficial ownership information occurs to update their filing.
Violations and Penalties
The CTA includes substantial civil and criminal penalties for wilful failure to report, wilfully providing false or fraudulent information, and for unauthorised disclosure or use of the reporting information. Penalties for reporting violations can be as high as $10,000 or two years in prison, or both, and penalties for unauthorised disclosure or use violations can be up to $250,000 or five years in prison, or both (or higher if part of violating another law).
As we await Treasury’s regulations, you can begin preparing by determining if your existing entities, or ones you plan to form or qualify in the U.S., are subject to the new reporting requirements.
We discuss preparation in detail and explore many of the CTA’s provisions in-depth during our one-hour webinar, Beneficial Ownership Disclosure Requirements: What the New Corporate Transparency Act Means for all Business Entities in the U.S.
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.