A Brief Summary of the Corporate Transparency Act and the Implementation of New Beneficial Ownership Reporting Requirements
The Corporate Transparency Act (CTA) was enacted into law on January 1, 2021 as part of the 2021 National Defense Authorization Act. The stated objectives of the CTA include the collection of certain beneficial ownership interest information from corporations, limited liability companies and similar entities “to (A) set a clear, Federal standard for incorporation practices; (B) protect vital United States national security interests; (C) protect interstate and foreign commerce; (D) better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activity; and (E) bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.”
The CTA requires reporting companies, unless exempted, to file reports with the Financial Crimes Enforcement Network of the Department of the Treasury (FinCen) identifying, and providing certain information regarding, all applicants and beneficial owners.
The reporting requirements set forth in the CTA will take effect upon the issuance of enabling regulations, which are to be promulgated by the Secretary of Treasury no later than January 1, 2022.
A reporting company is defined very broadly in the CTA as “any corporation, limited liability company or similar entity that is (i) created by the filing a document with the secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign county and registered to do business in the United States by the filing of a document with a secretary of state or similar office under the laws of a State or Indian Tribe.”
There are several types of business entities and companies that are specifically excluded from the definition of reporting company, and therefore are not subject to the reporting requirements of the CTA. The broadest such exclusion is for companies with (a) more than 20 full-time employees in the United States, (b) more than $5 million in gross receipts or sales, and (c) an operating presence at a physical office in the United States. Banks, insurance companies, investment funds, charities, public companies, broker dealers, public accounting firms, public utilities and pooled investment vehicles that are advised or operated by banks or registered investment advisors are also among the business entities and companies that are excluded from the definition of reporting company.
Beneficial Owners and Applicants
The CTA defines a beneficial owner of a reporting company as “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity, or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.”
The CTA does not define “substantial control.” Likewise, the CTA does not set forth any guidance with respect to ownership attribution for ownership interests that are held indirectly. Additional guidance regarding these two issues is expected to be provided in the forthcoming enabling regulations.
Certain individuals are excluded from the definition of beneficial owner. These individuals include minors, nominees, intermediaries, custodians and agents acting on behalf of another individual; employees whose economic interest in the reporting company arises solely as a result of being an employee of the reporting company; individuals whose interest is through a right of inheritance; and creditors not otherwise controlling the entity.
The CTA defines an applicant of a reporting company as any individual who files an application to form a reporting company or registers or files an application to register a foreign company to do business in the United States.
Information Required to be Reported and Timing of Reports
Once the reporting requirements set forth in the CTA are effective, and subject to the compliance timeline set forth below, a reporting company is required to identify each beneficial owner and applicant and report the individual’s full legal name, date of birth, current residential or business address, and a “unique identifying number from an acceptable identification document.” A state issued driver’s license number or nonexpired passport number would satisfy this requirement.
Reporting companies in existence before the effective date of the enabling regulations will have two years to file initial reports. Reporting companies formed or registered after the effective date of the enabling regulations will be required to file reports when formed or registered. Reporting companies must report changes in beneficial ownership information within one year of any such changes.
Maintenance of Beneficial Ownership Reports by The Secretary of Treasury
The Secretary of the Treasury is required to (a) maintain beneficial ownership information in a secure, nonpublic database, and (b) establish protocols to protect the security and confidentiality of the reported information and ensure governmental authorities access the beneficial information only for authorized purposes. Reports are to be accessible only by the government for national security, law enforcement, and intelligence purposes. Information regarding beneficial owners and applicants shall be maintained by FinCEN until the end of a 5-year period (or such other period of time as the Secretary of the Treasury may, by rule, determine) beginning on the date that the reporting company terminates.
Penalties for Noncompliance
Any party that unlawfully discloses any beneficial ownership information will be liable for fines of up to $500 per day and up to $250,000 in the aggregate, and up to 10 years in prison. In addition, any party that intentionally fails to comply with the reporting requirements of the CTA may be liable for fines of no more than $500 for each day that there is a willful failure to report complete beneficial ownership information. Such parties may be subject to aggregate fines of up to $10,000 or a prison term of up to two years.
The CTA contains a safe harbor from civil or criminal liability for the submission of inaccurate information if a report containing corrected information is submitted “voluntarily and promptly” (and no later than 90 days after the submission of the original inaccurate report).
This article is for educational purposes only and is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney. This article was originally published on the NCBA Business Law Section Blog on March 10, 2021, and has been republished here with the consent of the North Carolina Bar Association Business Law Section.
For more information about the Corporate Transparency Act of January 1, 2021, please contact Andrew Steffensen.