The Corporate Transparency Act: Beneficial Ownership Reporting and the End of Corporate Privacy

 What is the Corporate Transparency Act?

On January 1, 2021 Congress passed the National Defense Authorization Act, which included the Corporate Transparency Act (“CTA”). The CTA require companies to disclose their beneficial owners to help law enforcement in the fight against money laundering and bad actors using shell companies to perpetrate fraud, which is about an $800 billion a year industry globally.

    What is required under the CTA?

• The CTA will require a reporting company to disclose its beneficial owners to the United States Treasury’s Financial Crimes Enforcement Network (“FinCEN”).
• “Reporting companies” include corporations, LLCs, limited partnerships and any other entity which is created by filing a document with a Secretary of State’s office.
• “Beneficial owners” are individuals who, directly or indirectly, through any contract or arrangement, either (1) exercises substantial control over the company; or (2) owns or controls at least 25% of the ownership interests of the company. Reporting companies must disclose a beneficial owner’s (i) name; (ii) date of birth; (iii) current address; and (iv) a unique identification number from an acceptable document (e.g. a non-expired passport, driver’s license, or an issued FinCEN number).
• Beneficial owner exclusions include (i) minors; (ii) individuals acting as a custodian agent or solely as an employee; (iii) individuals whose only interest is a right to inheritance; and (iv) creditors.
• If a reporting company has an exempt owner, it must report the name of the exempt owner and such person doesn’t need to provide any additional information.

• There are 24 categories of exempt entities who do not need to submit a beneficial owner report to FinCEN because they are already heavily regulated and deemed to be of lower risk for use in criminal activity.  These include: publicly traded companies, governmental entities, banks, credit unions, securities broker/dealers, other SEC regulated entities, investment advisors and investment companies, insurance companies, public accounting firms (which are already heavily regulated), subsidiaries of exempt entities, charities and “grandfathered private businesses.”
• Grandfathered private businesses are those (i) with more than 20 FTE U.S.-based employees; (ii) who filed a federal income tax return in the previous year showing more than $5 million in annual gross receipts; AND (iii) with a “physical office” in the U.S.
• An exempt entity must file an exemption with FinCEN.  But once any of these thresholds aren’t met, the company is no longer exempt and is required to file a beneficial owner report.
• Further, the applicant who submits the information on behalf of the reporting company or exempt entity must also provide his/her identity information, for example a lawyer on behalf of a client, or an officer/director for a company.
• Currently, trusts and general partnerships are exempt but the Treasury could decide to include them as reporting companies in the next two (2) years.

• Generally, reports to FinCEN will be considered confidential information with no public access and not subject to the Freedom of Information Act (“FOIA”).
• However, reports are available upon request by: (i) federal law enforcement, national security and intelligence agencies; (ii) state or local law enforcement, with a court order; (iii) foreign law enforcement (through a federal U.S. agency); (iv) financial institutions (with customer consent, such as in a Know Your Customer report); and (v) federal regulatory agencies.

• Compliance with the CTA depends on when a company was formed:
• For companies existing before the date FinCEN publishes the final regulations, reporting shall be completed in a timely manner, and no later than two (2) years after the effective date of the regulations.
• For an entity formed after the FinCEN regulations are finalized, the report must be filed at the time of formation.
• Additionally, for any company (new or existing) any changes in beneficial ownership information that occur after the initial reporting must be provided to FinCEN within one (1) year of the change.

• Refusing to comply with the CTA could result in significant civil and criminal penalties, such as a fine of up to $500 for each day the violation continues and a total fine of up to $10,000 and imprisonment for up to 2 years, or both.
• For unauthorized disclosures or use violations (e.g. leaks or hacking), there can be a penalty of up to $500 per day for each day the violation continues, and a fine up to $250,000, or imprisonment for up to 5 years, or both.
• Penalties can apply for knowingly providing false or fraudulent beneficial owner information, or willingly failing to provide complete or updated information.
• However, there is an exception for negligence, and a safe harbor where no penalties apply if the violator voluntarily corrects the report within 90 days of the initial submission.  Further, FinCEN may waive penalties for reasonable cause.

• Timing of Final Published Regulations:  The CTA becomes effective on the same date that FinCEN’s final regulations are published (and all companies are expected to comply, as applicable), and that date can be no later than January 1, 2022 (one year after the CTA was enacted).  On April 5, 2021, FinCEN published proposed regulations for public comment and there have been no subsequent updates from FinCEN regarding the final regulations. However, with the backlog at the Treasury already, industry experts expect that the final regulations won’t be published until several months into 2022 so there could be an extension for new companies to comply.
• Reporting procedures: The mechanics for how to obtain a FinCEN identifier and register with FinCEN are still unclear and may be clarified in the final regulations.
• Substantial control: A “beneficial owner” is someone who either (i) exercises “substantial control”; or (ii) exceeds the 25% or more ownership threshold.  “Substantial control” is not defined in the CTA but could apply to officers and directors or determined on the facts and circumstances of the company.
• Entity creation: Secretary of State offices around the country are also likely to implement their own updated procedures for entity formation based on the Treasury’s guidance.  This could include a yet-to-be formed company providing a FinCEN receipt with its articles filing to prove it submitted a beneficial owner report to FinCEN before the entity is permitted to register with the Secretary of State to form the entity.

• If you’re an entrepreneur planning to form a new company in 2022, it may be prudent to reach out to legal counsel now to determine what reporting obligations your company may have under the CTA when the law becomes effective, if your company is exempt and to start preparing the information needed and how to track any name, address or ownership changes of beneficial owners.
• Since existing companies could have until January 1, 2024 to comply there may be more time to address these same issues but determining them now and forming a plan would still be helpful.
• Also, given the number of unknowns that remain, forming an entity before year-end instead of early 2022, if possible, may be wise so you have more time to comply with the CTA’s requirements once those are fully understood.