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.
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.”
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.
Beneficial ownership information shall be accessible for inspection or disclosure to officers and employees of the Department of the Treasury (which includes the IRS) :
FinCEN shall maintain all reported information for at least 5 years after the date on which the reporting company terminates.