Corporate Transparency Act: New beneficial ownership reporting requirements for all entities with US operations

On January 1, 2021, Congress passed the Corporate Transparency Act (the Act) which imposes extensive reporting requirements on the beneficial owners of most entities that are formed and/or operating within the United States. The primary purpose of the Act is to provide greater transparency of legal entities to detect and combat illegal activities. The new reporting requirements, however, will cause millions of existing legal entities to file new beneficial ownership disclosure forms with the federal government.

• Each year, it is estimated that more than two million corporations and limited liability companies (LLCs) are formed under state law, with most, if not all, states not requiring the disclosure of any information about the beneficial owners of such entities.
• Bad actors have taken advantage of this anonymity by forming entities within the US and using such entities as a means of facilitating illicit activity including money laundering, financing terrorism, serious tax fraud, human and drug trafficking, piracy, securities fraud and acts of foreign corruption.
• With the passage of the Act, which was enacted as part of the expansive William M. Thornberry National Defense Authorization Act for Fiscal Year 2021 (the NDAA), Congress now hopes to more easily detect, expose and prosecute the individuals engaged in illegal conduct using legal entities in the United States.

In an unprecedented federalization of corporate law, the Act amends Title 31 of the United States Code by ushering in a number of new reporting requirements for persons doing business in the US. As noted below, however, the Act does not discriminate between good and bad actors, resulting in new and broad reporting requirements for most beneficial owners of entities incorporated or doing business in the United States.

Which entities are impacted?

Under the stated mission of protecting national security interests and protecting interstate and foreign commerce, the Act imposes beneficial ownership information reporting requirements on all "reporting entities." A reporting entity includes corporations, LLCs and other similar entities that are formed under state law or under the laws of an Indian Tribe. Additionally, any corporation, LLC, or similar entity that was formed outside of the US that is registered to do business in the US, a state, or under the laws of an Indian Tribe will also be a reporting entity subject to the Act. Although the Act specifically mentions corporations and LLCs, it is unclear whether the Act will be interpreted to include other types of entities, such as partnerships and trusts.

Notwithstanding this ambiguity, the Act does specifically exclude a number of entities from the definition of "reporting entity." For example, entities that operate within certain regulated industries are excluded from the Act's reporting requirements, such as insurance companies, exchanges or clearing agencies, investment companies, public accounting firms, public utility companies, pooled investment vehicles, 501(c) non-profit organizations, banks, credit unions, and registered money transmitting businesses. A similar exception is provided for any entity with a physical presence in the US that employs more than 20 full-time employees and has more than US$5 million in gross receipts or sales. Likewise, certain stagnant entities without assets or financial activities are not subject to the beneficial ownership reporting requirements.

Who is a "beneficial owner"?

Going forward, all reporting entities will be required to disclose to the Treasury Department's Financial Crimes Enforcement Network (FinCEN) information about the reporting entity's beneficial owners. "Beneficial owner" is defined broadly to include any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

1. Exercises substantial control over the entity; or
2. Owns or controls not less than 25-percent of the ownership interests of the entity.

Minors, creditors, any nominee, intermediary, custodian or agent acting on behalf of another individual, individuals acting solely as employees, and individuals whose only interest in a reporting entity is through a right of inheritance do not qualify as beneficial owners.

What information must be reported to FinCEN?

Unless an exclusion applies, each reporting entity must submit a report to the Director of FinCEN that includes the following information about each beneficial owner:

1. Full legal name
2. Date of birth
3. Current residential or business street address
4. Identification number from an acceptable identification document (i.e., an unexpired passport, driver's license number, or other identification document issued by a state, local government, or Indian Tribe) or a FinCEN identifier, which can be requested from FinCEN upon submission of the beneficial owner's above information.

If any of the information in items one through four above change, the reporting entity has an obligation to file an updated report to FinCEN within one year of such changes.

When will these reporting requirements go into effect?

Although these beneficial ownership reporting requirements do not become law until the effective date of any corresponding regulations (which shall be promulgated not later than January 1, 2022), the Act makes it clear that each reporting entity, regardless of when such entity was formed or registered to do business within the US, must nevertheless submit the required beneficial ownership information to FinCEN. If a reporting entity was (or is) formed prior to the effective date of the regulations, the reporting entity must file a beneficial owner report within two years after the effective date of the regulations. If a reporting entity is formed or registered in the US after the regulations are issued, then the reporting entity must submit a beneficial owner report to FinCEN at the time of formation or registration.

What are the penalties for non-compliance?

If a person willfully provides false or fraudulent beneficial ownership information to FinCEN, or willfully fails to report complete or updated beneficial ownership information to FinCEN, such person may be subject to a fine of up to US$10,000 and imprisonment of up to two years.

Who will have access to the beneficial owner information?

The beneficial ownership information submitted to FinCEN is sensitive information and will be directly available only to authorized government authorities subject to safeguards and controls. It will not be available to the general public. Any person who knowingly discloses or uses the beneficial ownership information obtained through FinCEN reports will face penalties of up to US$10,000 and/or imprisonment of up to two years.

The Act requires the Secretary of the Treasury to maintain the beneficial owner information in a secure, nonpublic database, using information security methods and techniques that are appropriate to protect nonclassified information systems at the highest security level; and to take all steps, including regular auditing, to ensure that government authorities accessing beneficial ownership information do so only for authorized purposes consistent with the Act.

The Act provides for limited disclosure exceptions allowing beneficial ownership information to be disclosed upon request by certain US federal agencies, financial institutions, and regulatory agencies to facilitate important national security, intelligence, and law enforcement activities; and to confirm beneficial ownership information provided to financial institutions to facilitate the compliance of the financial institutions with anti-money laundering, countering the financing of terrorism, and customer due diligence requirements under applicable law. The Act expressly permits the IRS to be able to access the beneficial ownership information for tax administration purposes.