The New Corporate Transparency Act Will Require Reporting of Beneficial Ownership of Many U.S. Companies, LLCs and Foreign Companies Registered To Do Business in the U.S.

The Corporate Transparency Act (“CTA”) was enacted as part of the National Defense Authorization Act (“NDAA”), which became law on January 1, 2021 when Congress overrode President Trump’s veto of the NDAA.

The Conference Report states that the purposes of the CTA include the collection of beneficial ownership interest interaction for corporations, limited liability companies (“LLCs”) and similar entities to “(A) set a clear, federal standard for incorporation practices; (B) protect vital United States national security interests; (C) protect interstate foreign commerce; (D) better enable 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 countering the financing of terrorism standards.”

The U.S. has been under significant pressure to create and conform a corporate registry to what exists in the European Union (“EU”). All 28 countries in the EU are now required to have corporate registries that include beneficial ownership information.

Summary

Under regulations to be issued, “reporting companies” (generally, any corporation, LLC or similar entity organized in any state and foreign companies registered to do business in the U.S. unless exempted (as noted below)) will be required to file reports with the Financial Crimes Enforcement Network of the Department of the Treasury (“FinCEN”) identifying all “beneficial owners” (generally, any individual directly or indirectly controlling the reporting company or owning 25% or more of the ownership interests of the reporting company) and “applicants” (generally, any individual filing an application to form or register the reporting company).

Key Points

• Although the definition of a reporting company does not include foreign companies unless they are registered to do business in the U.S., the beneficial owners of foreign companies which own a reporting company will need to be identified.
• FinCEN will be required to adopt implementing regulations within one year of the date of the CTA’s enactment (January 1, 2021).
• The transfer of an interest in reporting companies will also have to be reported.
• Investment vehicles – exclusions are made for investment companies and advisors as well as pooled investment vehicles.

What Is a Reporting Company?

The reporting requirements of a CTA apply to all “reporting companies” unless exempted. A reporting company as defined in the CTA as “any corporation, limited liability company or similar entity that is (1) created by the filing of a document with a 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 country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.”

Many types of entities, however, are exempted from the requirements of the CTA. These entities include, among others: public companies; governmental entities; banks and bank holding companies; credit unions; broker dealers; registered investment companies; registered investment advisors; insurance companies; registered public accounting firms; public utilities; certain pooled investment vehicles; IRC Sec. 501(c) [charitable] entities; companies with more than 500 full-time employees in the U.S., more than $5 million in gross receipts or sales, and an operating presence at a physical office in the U.S.; and entities owned or controlled by one or more of such exempt entities.

Who Are Beneficial Owners and Applicants of Reporting Companies?

A “beneficial owner” of a reporting company is “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 term “substantial control” is not defined in the CTA. Nevertheless, the regulations implementing FinCEN’s beneficial ownership due diligence obligations for financial institutions are instructive, as they parallel the definitions in the CTA. For purposes of determining from whom a financial institution is required to obtain information to identify and verify beneficial owners, those regulations state that a beneficial owner includes not only persons who, directly or indirectly, own 25% or more of the equity interest a company, but also any individual with “significant responsibility to control, manage, or direct” the entity. These individuals include “an executive officer or senior manager (e.g., a CEO, CFO, COO, managing member, general partner, president, vice president, or treasurer); or any other individual who regularly performs similar functions.

Who Has Access to Information Reported to FinCEN?

Information reported to FinCEN must be kept confidential by FinCEN and may be disclosed only to: certain officers or employees of the U.S.; officers or employees of state, local or tribal agencies; or offices or employees of financial institutions or regulatory agencies. Information may be disclosed by FinCEN only upon receipt of a request from (i) a federal agency engaged in national security intelligence, or other law enforcement activity for use in furtherance of the activity; (ii) a State, local or tribal law enforcement agency if a court of competent jurisdiction, including any officer of such court, has authorized the law enforcement agency to seek the information for criminal or civil investigation or (iii) a federal agency on behalf of a law enforcement agency, prosecutor or judge of another country and international treaty, agreem ent, convention, or official request made by law enforcement, judicial or prosecutorial authorities in the foreign countries when no treaty, agreement or convention is available, all subject to certain specified limitations contained in the CTA. The CTA imposes penalties upon lawful recipients of beneficial ownership information, if the information is misused.

The CTA imposes a civil penalty of not more than $500 for each day that there is a willful failure to report complete beneficial ownership information or a willful provision of or willful attempt to provide false or fraudulent beneficial ownership information. In addition, violations of those requirements may subject a person to a fine of not more than $10,000 and imprisonment of not more than two years, or both. The CTA does provide some safe harbor protections for applicants who mistakenly file inaccurate inform ation and then voluntarily file corrections.

How Is Reporting Under the CTA Different Than What Must Be Reported on IRS Form 5472

IRC Sec. 6038A requires U.S. corporations that are 25% or more foreign-owned to disclose each person that is a related party and had any transaction with the reporting corporation. In contrast, the CTA requires beneficial ownership information reporting at the time of formation of the corporation or LLC. There does not have to be transactions between related parties.

What Should U.S. Corporations, LLCs and Foreign Companies Engaged in a U.S. Trade or Business Do To Prepare for Reporting?

Although regulations have not been issued, the CTA provides that final regulations will take effect no later than one year after the date of enactment. When final regulations are issued, any entity formed or registered after the regulations’ effective date will be required to submit a report at the time of formation. Any existing entity that is considered a “reporting company” will have two years following the effective date of the regulations to submit a report. Also, changes in beneficial ownership must be reported within one year of the change in ownership.

U.S. corporations, LLCs and foreign companies registered to do business in the U.S. should determine if they are a reporting company. If they are, efforts should be undertaken to identify ultimate beneficial owners.