A new federal law will require business entities to disclose ownership information to the Financial Crimes Enforcement Network (FinCEN). On January 1, 2021, Congress enacted the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act for 2021. Under the CTA, certain companies will be required to disclose personal information regarding their beneficial owners to FinCEN. The FinCEN filing requirements stated purpose is to counter money laundering and the financing of terrorism by hindering criminals from utilizing shell companies to launder money or evade taxes. While the CTA appears to target shell companies, its language is broad enough to ensnare many small businesses and real estate LLCs.
Who Must Report
Any corporation, limited liability company, or “similar entity” that was created by filing a document with a Secretary of State or was formed under the law of a foreign country and registered to do business in the U.S. by filing a document with a Secretary of State.
- Publicly traded companies
- Companies employing more than 20 full-time employees in the U.S. that have (a) previously filed federal tax returns; (b) more than $5 million in gross receipts or sales; and (c) an operating presence at a physical office in the U.S.
- Certain dormant companies
- Companies subject to existing regulatory reporting requirements, i.e., banks, investment companies
Information to be Reported
The identity of the Company’s “beneficial owners” is defined as an individual who, directly or indirectly, “exercises substantial control over the entity” or “owns or controls not less than 25% of the ownership interests of the entity” (with some exceptions).
- Full legal name of each beneficial owner
- Date of birth
- Current residential or business street address
- Identification number – driver’s license or passport number
A corporation or LLC with a multi-layered ownership structure must drill down to the individuals who ultimately own or control 25% or more of the ownership interests for reporting purposes.
Certain information must also be reported about the person who forms or registers the Company.
The CTA will become effective following the Treasury Department’s adoption of implementing regulations required by January 1, 2022. Following the adoption and effective date of the regulations, companies must report as follows:
- Companies formed before the regulations become effective have up to 2 years to comply.
- Companies formed after the regulations become effective must submit the CTA report upon registration with a Secretary of State, i.e., upon incorporation or organization.
Further, after the initial FinCEN filing, companies must report any change “in a timely manner” and no later than 1 year after the date on which the change occurred.
Penalties for Non-Compliance
Violations of the CTA carry civil penalties of up to $500 for every day the violation continues and criminal fines up to $10,000 and/or imprisonment for up to two years. The unauthorized disclosure of information by a government employee or a third-party recipient also includes civil and criminal penalties.
Use of the Information
The reported information will not be available publicly. The CTA requires FinCEN to maintain beneficial ownership information in a secure, non-public database that is highly useful to national security, intelligence, and law enforcement agencies, as well as federal functional regulators. It will be accessible to federal agencies engaged in national security, intelligence, or other law enforcement activity and state, local or tribal law enforcement agencies if a court authorizes the law enforcement agency to seek the information for a criminal or civil investigation. With the consent of the reporting company, a financial institution subject to customer due diligence requirements may request the information to facilitate the financial institution’s compliance with customer due diligence requirements under applicable law.