Corporate Transparency Act

New ‘Corporate Transparency Act’ Requires Majority of US Entities to Report Ownership Information to the Treasury Department

A big change is coming for millions of business owners. On New Year’s Day, Congress passed the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021–by far the longest bill ever passed in the U.S.–with strong bipartisan support. A notable, but easily overlooked, component of this bill was the Corporate Transparency Act (the “CTA”).

Despite the fact that data privacy is a hot topic and a serious concern for people on both sides of the aisle, the CTA essentially eliminates the ability for business owners and investors to remain anonymous (at least from the federal government). The CTA is intended to strengthen national security by requiring the vast majority of US companies to self-report information regarding each of their “beneficial owners.”

The CTA requirements– which will affect millions of companies – requires entities to report ownership information in an effort to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.”

Historically, an individual could form a business entity without being required to disclose any personal information about its owners. For this reason, the burden of assisting the federal government with monitoring business ownership had primarily fallen on financial institutions, which have been required to verify ownership for their customers under “know your customer” legislation. The CTA shifts much of this burden to business owners by requiring them to self-report beneficial ownership information of both direct and indirect owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This new FinCEN database will be used by law enforcement agencies and the IRS to combat money laundering, the financing of terrorism, tax fraud, human and drug trafficking, financial and securities fraud, and acts of foreign corruption.

Overview

Purpose

More than 2,000,000 corporations, limited liability companies, and similar entities (each an “Entity”) are being formed in the United States each year – but most (if not all) states do not require any information about the beneficial owners of such Entities.

It is Congress’ belief that nefarious actors use this anonymity to conceal their ownership of Entities in order to facilitate illicit activity, including money laundering, financing of terrorism, tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, all of which are harmful to the national security interests of the United States.

Based on the foregoing, Congress felt the CTA was necessary to provide the federal government to collect beneficial ownership information in order to “protect national security interests and better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity.”

FAQ:

Additional Information:

FAQ

Which companies must report?

Any Entity that is either (i) formed under the laws of any state; or (ii) formed outside the U.S. but registers to do business within the U.S. (each a “Reporting Company”). The term Reporting Company does not include the exempt entities discussed below.

What is the timing of the Reporting Obligations?

None of the provisions of the Corporate Transparency Act take effect until the Department of the Treasury prescribes associated Regulations– which must happen prior to December 31, 2021.

Per the CTA, the regulations will require Reporting Companies to comply within the following timeframes:

Existing Entities: Any Reporting Company that was formed before the Regulations are promulgated must file a report with FinCEN within 2 years after the effective date of the Regulations.
New Entities: All Reporting Companies formed after the Regulations are promulgated must file a report at the time of formation.
Changes in Beneficial Ownership: Within 1 year after any change in the reported information, a Reporting Company must submit an updated report to FinCEN.

Who is considered a Beneficial Owner?

A “Beneficial Owner” with respect to an Entity, means an individual who, directly or indirectly (through any contract, arrangement, understanding, relationship, or otherwise) (i) exercises substantial control over the Entity; or (ii) owns or controls 25% or more of the ownership interests of the Entity. By including indirect owners in this definition, the CTA is explicitly requiring Reporting Entities to drill down through all layers of ownership until they get to the individuals who are exercising control over each owner and/or are benefitting from such ownership interest.

The term Beneficial Owner does not include the following:

(i) a minor child (as defined in the state of formation), if the information of the parent or guardian of the minor child is reported in accordance with this section;
(ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
(iii) an individual acting solely as an employee of an Entity; or
(iv) an individual whose only interest in an Entity is through a right of inheritance.

What information needs to be reported?

Reporting Companies must disclose each Beneficial Owner and provide such person’s

full legal name;
date of birth;
residential or business street address (as of the reporting date); and
either a FinCEN Identifier (discussed below) or a unique identifying number from an acceptable identification document (e.g., unexpired passport, driver’s license, state issued ID).

For the exempt entities listed below which own an interest in a Reporting Company, the Reporting Company must only disclose the name of the exempt entity.

Do I need to do anything right now?

Until the Regulations have been passed, the CTA does not require any action or disclosure from businesses or their owners.

However, while the Department of the Treasury is preparing the Regulations, it may be prudent to begin to think about whether you are an owner in any one or more existing Entity which is likely to be deemed a Reporting Entity. Likewise, you should be aware that any Entities that you form during 2021 will ultimately be subject to the disclosure requirements of the CTA. And, while the extent of the disclosure requirements will not be known until the Regulations are finalized, there may be opportunities to structure newly formed Entities in a manner that minimizes or eliminates disclosure requirements.

Which Entities are exempt from reporting requirements?

Reporting Entity does not include:

(i) Entities that (a) have more than 20 full-time employees in the United States; (b) have more than $5,000,000 in gross receipts or sales (including the receipts or sales of other entities owned by the entity; and other entities through which the entity operates) in the prior tax year; and (c) have an operating presence at a physical office within the United States;
(ii) Entities in existence for over 1 year and which (a) are not engaged in active business; (b) are not owned, directly or indirectly, by a foreign person; (c) have not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000; and (d) does not otherwise hold any kind or type of assets (including an ownership interest in any Entity);
(iii) Entities registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the “SEC Act”) including registered brokers or dealers and/or registered exchanges or clearing agency;
(iv) Entities which exercise governmental authority on behalf of the US or any State or political subdivision;
(v) Banks, as defined in the Federal Deposit Insurance Act, the Investment Company Act of 1940, or the Investment Advisers Act of 1940;
(vi) Federal or State credit unions (as defined in the Federal Credit Union Act);
(vii) Bank holding companies (as defined in the Bank Holding Company Act of 1956) or a savings and loan holding company (as defined in the Home Owners’ Loan Act);
(viii) Money transmitting businesses registered with the Secretary of the Treasury;
(ix) Investment companies (as defined in the Investment Company Act of 1940) and Investment advisers (as defined in the Investment Advisers Act of 1940) which are registered with the SEC;
(x) Insurance companies (as defined in the Investment Company Act of 1940) and state-authorized insurance producers;
(xi) Futures commission merchant, introducing brokers, swap dealers, major swap participants, commodity pool operators, retail foreign exchange dealers, commodity trading advisors, or registered entities (as defined in the Commodity Exchange Act) which are registered under the Commodity Exchange Act;
(xii) Public accounting firms registered under the Sarbanes-Oxley Act of 2002;
(xiii) Public utilities that provide telecommunications services, electrical power, natural gas, or water and sewer services;
(xiv) Financial market utilities designated by the Financial Stability Oversight Council under the Payment, Clearing, and Settlement Supervision Act of 2010;
(xv) Certain pooled investment vehicles operated or advised by a person described above
(xvi) Tax-exempt organizations described in 501(c) of the Internal Revenue Code (“IRC”)
(xvii) Tax-exempt political organization (as defined in section 527(e)(1) of the IRC);
(xviii) Charitable Trusts described in paragraph (1) or (2) of section 4947(a) of the IRC;
(xix) Entities that are formed in the US and operate exclusively to provide financial assistance to, or hold governance rights over, any tax-exempt entity described above and which is beneficially owned or controlled exclusively by US citizens (or permanent residents) and derives a majority of its funding/revenue from US citizens (or permanent residents);
(xx) Entities for which the ownership interests are owned or controlled, directly or indirectly, by 1 or more entities described in certain of the foregoing bullets; and
(xxi) Classes of Entities that the Secretary of the Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security, has determined should be exempt from the CTA.

Additional Information

FinCEN Identifier

Individuals and Entities which have provided the required information will be able to request a “FinCEN Identifier.” Reporting Companies can then report such individual’s FinCEN Identifier rather than providing all of the required information for such individual. If an individual holds a beneficial ownership interest in a Reporting Company through an Entity, then that Entity’s FinCEN Identifier can be reported rather than the FinCen Identifier of the individual.

Regulations

Prior to December 31, 2021, the Secretary of the Treasury will promulgate regulations which prescribe procedures and standards related to the CTA (the “Regulations”).

To the extent practicable, the Regulations will:

(i) minimize burdens on reporting companies and eliminate duplicative requirements;
(ii) ensure the beneficial ownership information reported to FinCEN is accurate, complete, and highly useful;
(iii) ensure the beneficial ownership information reported is secure and is protected from disclosure except as allowed under the CTA.

Until these Regulations have been finalized, there is a great deal that will remain unknown about the full scope of the disclosure requirements and the process for compliance with such requirements.

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Disclosure by FinCEN

FinCEN is required to treat all disclosed Beneficial Ownership information as confidential. Such information may only be disclosed to the extent allowable under the CTA.

FinCEN may disclose beneficial ownership information reported pursuant to this section only upon receipt of a request from:

(i) A Federal agency engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activity; or
(ii) A State or local law enforcement agency seeking information in a criminal or civil investigation which has been authorized by a court of competent jurisdiction;
(iii) A Federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country under an international treaty, agreement, convention or from a trusted foreign country requesting for information related to an investigation or prosecution by such foreign country;
(iv) A financial institution subject to customer due diligence requirements (with the consent of the customer) in order to facilitate the financial institution’s compliance with customer due diligence requirements under applicable law; or
(v) A financial institution, federal functional regulator or other appropriate regulatory agency consistent with the Regulations.

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Treasury Department Access

Beneficial ownership information shall be accessible for inspection or disclosure to officers and employees of the Department of the Treasury (which includes the IRS) :

(i) for tax administration purposes; and/or
(ii) if their official duties require such inspection or disclosure.

Agency/Financial Institution Requests for Information

All requests for information will require a written certification for each authorized investigation from the head of the agency, or their designees, that sets forth the specific reason or reasons why the beneficial ownership information is relevant to an authorized investigation or other activity justifying disclosure under the CTA. The agencies shall be required to limit the scope of information sought to the extent possible and shall restrict access to the information to only users directly engaged in the authorized investigation and whose duties require such access and who have gone through training and are authorized by the Treasury Secretary to access the information. Each requesting agency will be required to maintain a secure system for the storage of such information.

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Record Retention

FinCEN shall maintain all reported information for at least 5 years after the date on which the reporting company terminates.

Penalties for Reporting Violations

It shall be unlawful for any person to—

(A) willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN; or
(B) willfully fail to report complete or updated beneficial ownership information to FinCEN in accordance with subsection (b).

The penalty for such reporting violations is that such person shall be liable for a civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and may be fined not more than $10,000, imprisoned for not more than 2 years, or both.

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Penalties for Unauthorized Disclosure or Use of Beneficial Ownership Information

Except as authorized by this section, it shall be unlawful for any person to knowingly disclose or knowingly use the beneficial ownership information obtained by the person through either a report submitted to FinCEN or a disclosure made by FinCEN.

The penalty for such unauthorized disclosure or use is that such person shall be liable for a civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and

(i) shall be fined not more than $250,000, or imprisoned for not more than 5 years, or both; or
(ii) while violating another law of the United States or as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period, shall be fined not more than $500,000, imprisoned for not more than 10 years, or both.

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Safe Harbor

A person is not subject to the foregoing civil or criminal penalties if such person

(a) has reason to believe that a report submitted contains inaccurate information and
(b) voluntarily and promptly submits corrected information within 90 days of the original report.

This Safe Harbor does not apply if, at the time of submission, the person acted for the purpose of evading the reporting requirements and had actual knowledge that the information in their report was not accurate.

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Corporate Transparency Act Team

Sanford J. Boxerman

Shareholder

Sarah J. Luem

Shareholder