On January 1, 2021, Congress enacted the Corporate Transparency Act (the “CTA”) as part of Division F of the National Defense Authorization Act for Fiscal Year 2021 which is referred to as the Anti-Money Laundering Act of 2020. All reporting companies are mandated to submit to the Financial Crimes Enforcement Network (“FinCEN”) (a part of the Treasury Department) a report containing beneficial ownership information and company applicant information. Failure to timely file required information with FinCEN may lead to civil and criminal penalties.
What is the CTA intended to do?
The CTA is intended to create a database of beneficial ownership to provide information on reporting companies accessible by national security agencies and law enforcement. According to FinCEN, “Collecting this information and providing access to law enforcement, the intelligence community, and other stakeholders will diminish the ability of malign actors to obfuscate their activities through the use of anonymous shell and front companies.”
Who must report?
All domestic and foreign companies are required to report unless eligible for an exemption. A domestic reporting company is any entity that is a corporation, limited liability company or that is created by filing a document with the secretary of state of any state or other similar offices of a jurisdiction within the United States, defined in the CTA as a “reporting company.” Proposed regulations require reporting by limited partnerships, limited liability partnerships, limited liability limited partnerships and business trusts. A foreign reporting company is any entity formed under the law of a foreign jurisdiction that is registered to do business within the United States.
Who is exempt from reporting?
The CTA does provide that 23 types of entities are exempt from the definitions of reporting companies. These include SEC reporting securities issuers, domestic governmental authorities, banks, domestic credit unions, depository institution holding companies, money transmitting businesses, brokers or dealers in securities, securities exchange of clearing agencies, other Securities Exchange Act of 1934 entities, registered investment companies and advisers, venture capital fund advisers, insurance companies, state licensed insurance producers, Commodities Exchange Act registered entities, accounting firms, public utilities, financial market utilities, pooled investment vehicles, tax exempt entities, entities assisting tax exempt entities, large operating companies, subsidiaries of certain exempt entities and inactive domestic businesses existing prior to January 1, 2020. Any of the foregoing generally described entities that may be exempt should check the detailed descriptions of any applicable exemption in the CTA and the final regulations when issued.
The exemption for a “large operating company” applies to an entity that would otherwise be a reporting company if it (1) employs more than 20 employees on a full-time basis in the United States, (2) filed a federal income tax return for the previous year reflecting more than $5,000,000 of gross receipts or sales, and (3) has an operating presence at a physical office (not a residence or a shared space) in the United States.
What information is required to be reported?
A reporting company must include in its report information on all “beneficial owners” and its “company applicants.” The report must also report its name, any alternative names used in its business (d/b/a names), jurisdiction of formation, its business address (street address) and a unique identification number. The unique identification number must be the reporting company’s EIN/TIN, or if its EIN/TIN has not yet been issued, a reporting company must report a Dun & Bradstreet Universal Numbering System (DUNS) number or a Legal Entity Identifier (LEI). A reporting company must report for each beneficial owner and company applicant (1) full legal name, (2) date of birth, (3) current residential street address or business street address, and (4) a unique identifying number from an acceptable document. The address required for beneficial owners is the person’s residential street address for tax residency. The address required for company applicants who provide a business service as a company formation agent is the business address of the company applicant. For all other company applicants the required address is the residential street address for tax residency. The unique identifying number must be supplied from a non-expired passport or a non-expired document issued by a state such as a driver’s license or identification document with a photograph of the person to be reported. A copy of the document with the photograph must be submitted with the report. A person may apply for a FinCEN Identifier by submitting the information that would be required to be reported. The reporting company can report a FinCEN Identifier for a person in lieu of the information otherwise required. FinCEN is developing forms, instructions, and procedures for filing reports. Reporting companies will not be providing their own letters or memoranda as reports.
Who is a “beneficial owner”?
The CTA defines a “beneficial owner” as “. . . any individual who, directly or indirectly, through contract, arrangement, understanding, relationship, or otherwise – (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25% of the ownership interests of the entity.” The regulations specify that at least one beneficial owner must be reported regardless of whether or not any of the individual owners satisfies the ownership component, or exclusions to the definition to beneficial owner apply to all owners. Proposed regulations set forth three indicators of substantial control: (1) service as a senior officer of a reporting company, (2) authority to appoint or remove a senior officer or a majority of a board of directors, or similar body, of a reporting company, and (3) direction, determination, or decision of, or substantial influence over, important matters of a reporting company. An exemption applies to an individual who is an employee “who is acting solely as an employee;” however, this exemption does not apply to a senior officer. Ownership interests are broadly defined to include any form of equity interest and other interest such as capital or profits interests in a partnership, convertible debt, warrants, options or privileges to acquire equity of a reporting company. In some cases, a creditor may be a beneficial owner for example through an “equity kicker.” Beneficial ownership includes ownership through a trust or similar arrangement. An issue which does not seem to be addressed is ownership interests resulting from community property or other marital property laws.
Who is a “company applicant”?
A “company applicant” is any individual who files a formation document for a domestic reporting company or who first registers a foreign reporting company. The proposed regulations include in the definition of “company applicant” any individual who directs of controls the filing of a document by another person. Accordingly, the report must identify not only the individual who filed the document and also any person directing or controlling the formation or registration of a legal entity.
When must a report be filed with FinCEN?
A reporting company that is formed after the effective date of the final regulations must file an initial report within 14 calendar days of the date of formation as specified by the secretary of state. A reporting company that was formed before the effective date of the final regulations must file an initial report not later than one year after such effective date of the final regulations. A reporting company must file an updated report within 30 calendar days of any change in any information previously reported to FinCEN including any change in information previously reported for any beneficial owner or company applicant. A reporting company has 14 days to correct any inaccurate information reported to FinCEN from the date the inaccuracy is discovered.
What are the penalties for violation?
Willful failure to comply the CTA may result in a civil penalty of up to $500 per day for each day a violation continues without remedy or a criminal penalty of a fine up to $10,000 and imprisonment for up to two years, or both.
The CTA is an invasive tool for collection of a national database for domestic and foreign entities existing or operating in the United States. This law is intended to create an investigative tool for law enforcement and national security agencies. The principle purposes are to provide company information to prevent money laundering and to prevent terrorism. It will require time and effort by many companies to provide an initial report and to keep information provided to FinCEN up to date. Companies can get ahead of the effectiveness of the CTA now by gathering information regarding their beneficial owners and company applicants so they don’t encounter disruptions to comply. Please contact any of the lawyers in our business and real estate practice areas with any questions or concerns about the CTA.
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