The Corporate Transparency Act: Understanding New Federal Reporting Requirements of Company Ownership
New anti-money laundering legislation was included as part of the National Defense Authorization Act (NDAA) enacted by Congress on January 1, 2021 through the override of a presidential veto. The NDAA is a series of federal laws primarily specifying the annual budget and expenditures of the United States Department of Defense.
The NDAA for Fiscal Year 2021 includes the expansive Anti-Money Laundering Act of 2020 (AMLA) with the purpose of updating and amending the country’s anti-money laundering laws. It has long been acknowledged that the United States lags behind other developed countries in its safeguards designed to prevent the flow of illicit money—so much so that the Tax Justice Network, an independent institution that indexes countries’ financial secrecy, currently ranks the United States as the second most financially secretive jurisdiction, ranking behind only the Cayman Islands and just ahead of Switzerland1.
Together with the AMLA, Congress also enacted the Corporate Transparency Act (CTA), which directs the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to establish and maintain a national registry of beneficial owners of entities that are deemed “reporting companies.”2 In so acting, Congress stated that bad actors seek to conceal their ownership of business entities through the use of shell companies in order to facilitate illicit activities including money laundering, the financing of terrorism, human and drug trafficking, and securities fraud.3 The lack of state laws requiring companies to identify their beneficial owners has arguably enabled such persons to exploit these entities to further criminal activities.
The CTA broadly defines a “reporting company” as any corporation, limited liability company, or other similar entity created by the filing of a document with the secretary of state or similar office in any U.S. state or territory or with a federally recognized Indian Tribe, or formed under the laws of a foreign country and registered to do business in the United States.5 As the CTA’s focus is on shell companies and other entities with limited or no operations, the CTA provides numerous exceptions for entities from undergoing reporting, including those in a regulated industry, publically-traded companies, investment vehicles operated by investment advisors, nonprofits, and government entities.6 Significantly, there is also an exception from required reporting for an entity that (i) employs more than 20 employees; (ii) filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales; and (iii) has an operating presence at a physical office within the United States.7 Moreover, entities that are subsidiaries of such excluded companies are also exempted from these reporting requirements.8
Beneficial Owners and the Information to Report
The CTA defines a “beneficial owner” of an entity as any individual who, directly or indirectly, (i) exercises substantial control over the entity or (ii) owns or controls not less than 25 percent equity in the entity. The phrase “substantial control” is not defined in the CTA so further regulations should clarify its meaning.9 The legislation expressly excludes certain individuals from the definition of “beneficial ownership,” including (i) a minor child (as long as the child’s parent’s or guardian’s information is reported); (ii) an individual acting as an intermediary or agent on behalf of another; (iii) a person whose control over a reporting company derives solely from their employment; (iv) an individual whose only interest in a reporting company is through a right of inheritance; or (v) a creditor of a reporting company (unless they qualify as a “beneficial owner” through substantial control or equity ownership).10
In each report to FinCEN, a reporting company must provide each beneficial owner’s name, date of birth, residential or business address, and a unique identifying number from an acceptable identification document (such as a state driver’s license or passport).11
The date on which a reporting company’s report to FinCEN is due depends on if it is an existing entity or newly formed one. After the effective date of FinCEN’s forthcoming regulations—which are due within a year after the enactment of the CTA—new reporting companies will be required to report their beneficial owners’ information at formation.12 Existing entities will need to provide such information within two years from the promulgation of the new regulations. A reporting company will also need to update its information within a year of any change to its beneficial ownership.13
It is unclear whether lawyers will have an obligation to report on behalf of clients. The American Bar Association has a long-stated opposition to a mandate that lawyers provide business entity beneficial ownership information because of attorney-client privilege implications.14 See the attached ABA Fact Sheet here.
As noted above, new reporting companies will be required to report beneficial ownership information at formation. Whether this obligation will be imposed on “Applicants” who file formation documents and are frequently lawyers is a matter that potentially will be addressed by the implementing regulations. It seems clear, however, that the obligation to report information for existing companies and update reports falls on the reporting company itself.
Storage and Use of Reported Information
FinCEN will be responsible for storing in a secure private database the information collected pursuant to the CTA.15 This database will not be publicly available. The beneficial ownership information will be available from a request only by (i) a U.S. federal law enforcement agency; (ii) a state, local, or tribal law enforcement agency (if authorized by a court order); (iii) a U.S. federal agency on behalf of a foreign country (if the request is pursuant to an international agreement); or (iv) a financial institution for customer due diligence purposes and if authorized by the reporting company.16
The laws regarding customer due diligence requirements for financial institutions will also be updated to conform to the CTA, as the CTA will provide a new means for a financial institution to verify a customer’s “Know Your Customer” information.17
Penalties for Violating CTA
Companies subject to the CTA should be cognizant of the steep penalties for violating the reporting requirements of the Act. Willfully providing false information to FinCEN or failing to report complete information to FinCEN can result in fines up to $10,000 and imprisonment for up to two years.18 The CTA contains a safe harbor from such civil and criminal liability for the submission of inaccurate information if the person who submitted the report voluntarily and promptly corrects the report within 90 days.19
The CTA is a clear step towards modernization of the U.S. anti-money laundering legal landscape. It will provide law enforcement agencies greater access to the beneficial ownership information of entities than ever before. It will also shift the burden of financial institutions from needing to collect customer due diligence information to being able to obtain it from the federal government. These changes of course come at a cost. Privacy that private company owners have long enjoyed will be rolled back, and the new compliance costs will be shouldered by companies that are often small businesses.
1Financial Secrecy Index – 2020 Results, TAX JUSTICE NETWORK, https://fsi.taxjustice.net/en/introduction/fsi-results (last visited Dec. 29, 2020).
2NDAA § 6403(a).
3Id. § 6402(3).
4Id. § 6402(2).
5Id. § 6403(a)(11)(A).
6 Id. § 6403(a)(11)(B).
7 NDAA § 6403(a)(11)(B).
9Id. § 6403(a)(3)(A).
10Id. § 6403(a)(3)(B).
11Id. § 6403(b)(2).
12NDAA § 6403(b)(1)(C).
13Id. § 6403(b)(1)(B).
14Gatekeeper Regulation and the Legal Profession: ABA Opposes Anti-Money Laundering Legislation that Imposes Burdensome Regulations on Small Businesses and their Attorneys and Undermines the Attorney-Client Privilege, ABA, https://www.americanbar.org/content/dam/aba/administrative/government_affairs_office/gatekeeper-factsheet-july-2020.pdf?logActivity=true (last visited Dec. 29, 2020).
15NDAA § 6403(c)(3).
16Id. § 6403(c)(2)(B).
17Id. § 6403(d).
18Id. § 6403(c)(3)(A).
19Id. § 6403(c)(3)(C).