Congress’s January 1, 2021 passage of the National Defense Authorization Act for Fiscal Year 2021 included passage of the Corporate Transparency Act (“CTA”), and in doing so established reporting requirements for many U.S. businesses with the intent of creating a database of beneficial ownership controlled by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). 

The CTA, designed to stop the usage of anonymous “shell companies” frequently utilized in criminal activity, requires certain companies to report information on their “beneficial owners” (as further discussed below) to FinCEN. 

As a result, the CTA will shift the burden of this sort of ownership reporting from financial institutions (who usually collect this information via their customer due diligence processes) to “reporting companies” under the CTA. 

In this respect, the CTA, which will go into effect no later than January 1, 2022, presents a significant new reporting burden on businesses operating in the U.S., particularly those with corporate structures extending outside of U.S. borders, and such businesses should immediately begin analyzing how what their reporting requirements will be under the CTA.

What Companies Must Report?

Under the CTA, “reporting companies” are broadly defined, and include any business entity that is (a) created by the filing of a document with a U.S. state or Indian Tribe or (b) formed under the law of a foreign country and registered to do business in the United States.  Publicly traded, regulated, and government entities, and subsidiaries under the control of any such entity, are generally exempt from these reporting requirements. 

The CTA specifically exempts from reporting requirements (i) companies employing more than 20 people, reporting revenues of more than $5 million on tax returns, and which have a physical presence in the U.S., (ii) most financial services institutions (which are regulated by other agencies such as the SEC, FDIC or similar regulatory bodies), and (iii) nonprofit organizations such as churches and charities.

What Information Needs to Be Reported

The CTA will require reporting companies to provide FinCEN with detailed information on any beneficial owners.  “Beneficial owners” include individuals who (a) exercise substantial control over a company, or (b) own or control at least 25% of the ownership interests of a company.  

The term “beneficial owner” excludes (a) minor children (where the child’s guardian reports properly), (b) nominees, intermediaries, custodians or agents acting on behalf of other individuals, (c) individuals acting as employees of a company whose control of such company is solely derived from such employment status, (d) individuals whose only interest in a company is through a right of inheritance, and (e) creditors of a company, unless such creditor meets the requirements of a beneficial owner.

Information to be reported with respect to beneficial owners includes (a) legal name, (b) date of birth, (c) street address, and (d) identification number from acceptable identification documentation (as set forth in the CTA), such as a state driver’s license, U.S. passport, or other U.S. issued identification document. If a beneficial owner lacks U.S.-issued identification documents, a non-U.S. passport number must be reported.

Reported information will not be made publicly available; however, FinCEN will be permitted to disclose such information upon request to U.S. federal law enforcement agencies or, with reporting company consent, to financial institutions for customer due diligence purposes.  Upon issuance of a court order, FinCEN may also disclose such information to state and local enforcement agencies.

Timing of Reporting

Following the effective date of FinCEN’s implementing regulations which implement that CTA, newly formed reporting companies will be required to report beneficial ownership information upon their formation.  Existing reporting companies must report such information within two years following such effective date. Reporting companies will need to update beneficial ownership information within one year of any change in previously reported information.

Penalties for Noncompliance

Violations of the CTA can result in (a) civil penalties of up to $500 for every day a violation continues and (b) criminal fines up to $10,000 and/or imprisonment for up to two years.  The CTA provides a safe harbor from civil or criminal liability for inaccurate reported information where the reporting party voluntarily, promptly, and within 90 days following the inaccurate report provides FinCEN with corrected information.

Conclusion

Businesses and entrepreneurs operating in the U.S. must consider how the CTA impacts their proposed corporate ownership structure, and how they will ensure compliance with the new reporting requirements of the CTA. 

As outlined above, failure to comply with CTA reporting requirements can have significant adverse consequences, including financial and criminal penalties.  That said, as many investors and business owners meeting the “beneficial ownership” thresholds set forth above may have privacy concerns regarding reporting all required information, it may make sense to analyze the nature of your business to confirm its CTA reporting requirements, and what structural changes may alter these requirements as applied to your business. 

As always, working with experience legal and tax counsel is a must for any significant changes to your corporate structure. 

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