Corporate Transparency Act Requires Federal Reporting of Company Control Owners

January 06, 2021
Authors Brad Hamilton and Marika Rietsema Ball in front of mountains, with titleres Reporting Company Owners

By Brad Hamilton and Marika Rietsema Ball

On January 1, 2021 the United States Senate voted to override the Executive veto of the National Defense Authorization Act for Fiscal Year 2021, which was previously overridden by the U.S. House of Representatives, thereby passing into law the anti-money laundering reforms in that act, including the Corporate Transparency Act (“CTA”).

The CTA gives the Treasury Department 12-months to implement regulations that require both newly formed and existing corporations, limited liability companies, and other legal entities to disclose the controlling beneficial owners of the entity to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This includes all companies registered to do business in the U.S., including foreign companies. The beneficial ownership information will not be made available to the public and FinCEN is required to establish stringent procedures for the protection and proper use of the materials.

In many states, notably Colorado, Delaware, and California, corporations, limited liability companies, and other legal entities can be formed by filing only the name of the entity, a business address, and the identity and address of a registered agent. Directors, officers, or owners do not have to be identified. This allows owners to protect their identity from scammers, telemarketers, sales calls, and identity thieves, among other benefits. Unfortunately, as eloquently stated in the text of the CTA, this anonymity also allows

“malign actors…to conceal their ownership of corporations, limited liability companies, or other similar entities in the United States to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption.”

The CTA was enacted to combat the continued exploitation of the state-by-state entity formation laws to avoid identification of criminal actors who utilize shell companies to facilitate these crimes, using corporations and limited liability companies to evade capture. Thus, the CTA’s reporting requirements aim to aid law enforcement in investigation of suspected companies, as well as to limit the concealment of their owners.

WHO MUST REPORT?

Each “reporting company” as defined under the CTA will have to report to FinCEN. The CTA broadly defines “reporting company.” However, since the intention of the CTA is to target shell companies or other entities used for criminal exploitation (smaller companies with insufficient operations), the CTA provides many exclusions to this broad definition. The CTA defines “reporting company” to mean “each corporation, limited liability company, or other similar entity that is:

  • created by the filing of a document with a secretary of state or similar office under the law of a State or Indian Tribe; or
  • formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a security of state or a similar office under the laws of a State or Indian Tribe.”

This broad definition excludes several already regulated business entities, and medium and large businesses, and therefore applies mostly to small businesses – the group least able to bear additional regulatory and reporting obligations.

First, the definition of “reporting company” does not include already regulated companies, or non-profit, publicly traded, or government entities, as follows:

  1. public companies registered with and reporting to the Securities Exchange Commission;
  2. Federal, Tribal, State or Interstate entities exercising governmental authority;
  3. banks, credit unions, and other money transmitting businesses;
  4. brokers, dealers, exchange or clearing agencies, or other entities registered under the Securities and Exchange Act of 1934 (“1934 Act”);
  5. investment companies as defined under the Investment Company Act of 1940;
  6. SEC registered investment advisers as defined under the Investment Advisers Act of 1940;
  7. insurance companies;
  8. authorized insurance producers;
  9. entities registered with the CFTC under the Commodity Exchange Act;
  10. public accounting firms;
  11. public utilities;
  12. financial market utilities;
  13. pooled investment vehicles advised by registered persons;
  14. non-profit organizations;
  15. political organizations; and
  16. charitable trusts.

Additionally, the definition excludes entities that exclusively operate to provide financial assistance or to hold governance rights over non-profits, political organizations, or trusts, so long as the entity (1) is a U.S. person, (2) is beneficially owned or controlled exclusively by one or more U.S. persons either as a U.S. citizen or a lawfully admitted permanent resident, and (3) derives a majority of its funding or revenue from one or more U.S. persons either as a U.S. citizen or a lawfully admitted permanent resident.

The CTA also excludes any entity in existence for over a year but (1) is not engaged in active business, (2) is not directly or indirectly owned by a foreign person, (3) does not hold any assets (including ownership in another entity), and (4) has not experienced a change in ownership or sent or received funds greater than $1,000 in the preceding 12-months.

However, the most noteworthy exclusion to “reporting company” are those entities that (1) employee more than 20 full-time employees in the U.S., (2) filed in the previous year U.S. Federal income tax returns showing more than $5,000,000 in gross receipts or sales, and (3) operate in a physical office within the U.S. This exclusion is the one likely to provide relief from disclosure to the largest number of businesses.

The CTA also gives the Secretary of Treasury, with concurrence from the Attorney General and the Secretary of Homeland Security, the authority to determine if any additional entity or class of entity should be exempted from the “reporting company” requirement.

WHAT HAS TO BE REPORTED?

Each reporting company must provide the (a) full legal name, (b) date of birth, (c) current address, and (d) passport, driver’s license or other government issued ID number, of each “beneficial owner” of the reporting company.

The beneficial owner of the reporting company is anyone who, directly or indirectly (1) exercises substantial control over the entity, or (2) owns or controls 25% or more of the ownership interests. However, the following persons are excluded from the definition of beneficial owner:

  • minor children if their parent or guardian is reported,
  • a nominee, intermediary, custodian or agent for another,
  • an employee of the reporting company who has “substantial control” solely because of his or her duties or status as an employee,
  • a person whose ownership interest is derived only through inheritance, or
  • a creditor (unless the creditor has substantial control over the entity).

“Substantial control” is not defined in the act, and we hope it will be specified in some detail in the implementing regulations discussed below.

WHEN DO REPORTS HAVE TO BE FILED?

Reports do not have to be filed until the Department of Treasury finalizes and publishes regulations to implement the reporting requirements under the CTA. Treasury has 12-months (until the end of 2021) to finalize and publish the regulations. Then,

  • existing companies must file an initial report within 2-years after the effective date of the regulations,
  • new entities formed after the effective date of the regulations must file a report at the time of formation, and
  • thereafter, each reporting company must file another report within one-year after any of the reported information changes (although the CTA grants Treasury the power to shorten this reporting period upon review and consultation with the Department of Justice and Homeland Security).

HOW DO WE FILE THE REPORTS?

The procedure for filing has not been determined. The CTA directs Treasury to seek to establish partnerships with State, local and Tribal governments to collect reports through existing processes and procedures.

WHERE DO THE REPORTS GO, AND WHO CAN SEE THEM?

The reports go only to FinCEN, who must maintain the reports in a secure, nonpublic database for at least 5 years after the reporting company terminates. The beneficial ownership information cannot be disclosed by any officer or employee of the federal, state, local or Tribal government, and may not be disclosed by FinCEN except in compliance with security and confidentiality protocols to be included in the forthcoming regulations, to:

  • a Federal agency for national security, intelligence or law enforcement,
  • State, local or Tribal law enforcement pursuant to court order,
  • a foreign entity upon request approved by the U.S. government,
  • a financial institution with consent of the reporting company (e.g. for ‘know your customer’ due diligence requirements),
  • a Federal regulatory agency.

Disclosure in violation of the security and confidentiality protocols will be subject to criminal and civil penalties.

The Department of Treasury will provide details, procedures, protocols, definitions, and additional requirements in the forthcoming regulations. Accordingly, commencing in 2022, small businesses and newly formed entities will have to file beneficial ownership information reports with FinCEN in a manner yet to be determined.

This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the matters addressed above.