In December 2020, as part of the larger National Defense Authorization Act, the Corporate Transparency Act (CTA) was enacted with intentions of increasing transparency into companies to combat money laundering and criminal behavior. The CTA requires that certain companies (each a “reporting company”) disclose their ultimate beneficial ownership and control. If not exempt, all new entities and all existing entities will need to comply with these new regulations. Though the CTA is not effective immediately, the Treasury Department expects within one year to issue the regulations detailing how the act will be implemented.
The CTA requires that, specifically, corporations and limited liability companies formed in the United States, or non-U.S. entities registered to do business in the U.S., disclose the beneficial ownership of such companies to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The act requires registry of the following information: the beneficial owner’s name, address, date of birth, and an identification number, such as a driver’s license or passport number. Additionally, if the company is sold or its ownership changes, such company is required to update that information with the Department of the Treasury. Each company must submit to FinCEN a report that contains the information detailed above. Within one year after the enactment of the CTA, the Department of Treasury will set up a registry to collect the required information.
The CTA defines “beneficial owner” as an individual who, directly or indirectly, either “exercises substantial control over the entity” or “owns or controls not less than 25 percent of the ownership interests of the entity.” The CTA provides exclusions from the definition of “beneficial owner” including: (i) an individual acting as an intermediary, custodian, or agent, (ii) an employee whose control is derived solely from the employment status of that person, (ii) an individual whose ownership to such entity is through a right of inheritance, or (iv) a creditor of such entity, unless that person exercises substantial control or owns more than 25 percent of the ownership interests in the reporting company.
The act provides a list of entities that are exempt from reporting to the registry, including 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. Entities with at least20 full-time employees and an operating presence at an office within the United States that reported $5 million of gross receipts or sales in the previous year are exempt from the reporting requirement under the act. In addition, “any corporation, limited liability company, or other similar entity of which the ownership interests are owned or controlled by one or more entities” are also exempt from reporting.
Disclosures will be held as confidential and not be made public by FinCEN, with limited exclusions to such confidentiality. Such exclusions include: (i) requests made through appropriate protocols from a governmental agency, (ii) requests made by a “financial institution subject to customer due diligence requirements, with the consent of the reporting company, to facilitate the compliance of the financial institution with customer due diligence requirements under applicable law,” and (iii) requests made by a “federal functional regulator or other appropriate regulatory agency.”
Violations of the Act may result in up to $500 in civil penalties for each day that a violation has not been resolved and criminal penalties of up to $10,000 and two years’ imprisonment for individuals who intentionally submit incorrect or fraudulent beneficial ownership information or who knowingly do not provide comprehensive or updated beneficial ownership information.
Taylor A. Stockemer is an associate in the firm’s Mergers & Acquisitions Practice Group where he is working with individuals, companies and financial institutions in general business, transactional and regulatory matters.
Disclaimer: The information included here is provided for general informational purposes only and should not be a substitute for legal advice nor is it intended to be a substitute for legal counsel. For more information or if you have further questions, please contact one of our Attorneys.