Despite veto drama during the waning days of the Trump administration, the William (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA) was enacted into law, and deep within its 1480 pages is a title—coined the Corporate Transparency Act (CTA)—that establishes new and more stringent reporting requirements. This represents but a small set of robust changes to U.S. anti-money laundering legislation that is part of the NDAA.
At its core, the CTA aims to eliminate anonymity of certain beneficial owners of entities (read: corporations, limited liability companies, financial institutions, and funds) formed in any U.S. state or territory or otherwise registered to do business in this country. It does so by commanding that beneficial ownership information be reported, all in an effort to eliminate (or at least minimize) the use of U.S.-incorporated shell companies for purposes of money laundering or terrorist financing schemes. .
Given this rather precise objective, the list of entities exempt from the CTA is a long one, and not every domestic company will need to comply. More on that below.
Reporting Requirements Under the CTA
The CTA mandates so-called “reporting companies,” defined broadly to encompass corporations, limited liability companies, and other similar entities created or registered to do business in the U.S., to submit a report to the Financial Crimes Enforcement Network of the Department of the Treasury. These reports must include the full legal name, date of birth and address (residential or business) of each entity’s beneficial owner, as well as a unique identifying number or identifier to be provided by FinCEN.
In terms of timing, entities formed before the effective date of the CTA have two years to submit their reports to FinCEN, while new companies must make their submissions at the time of formation or registration. Then, going forward, entities are obliged to report any change in beneficial ownership within one year of occurrence.
Information reported pursuant to the CTA is considered nonpublic and must be kept confidential by FinCEN, unless release is necessary under certain circumstances as enumerated in the statute. For example, the Department of the Treasury will have access to beneficial ownership data “for inspection or disclosure to officers and employees … whose official duties require such inspection or disclosure subject to procedures and safeguards” and for tax administration purposes. Likewise, federal agencies along with state, local, or tribal law enforcement agencies may request such information in furtherance of national security, intelligence, or law enforcement activity and for use in criminal or civil investigations.
There is more. So long as they are compliant with certain limited use requirements, requests for beneficial ownership information can be made on behalf of foreign authorities to assist with ongoing investigations. Financial institutions can make similar requests, but only with consent of the reporting company and subject to customer due diligence requirements. And finally, federal regulatory agencies, including federal functional regulators, are entitled to seek beneficial ownership information stored by FinCEN, subject to scope and use limitations contained in the CTA.
Rest assured, within a year FinCEN is expected to promulgate regulations implementing the CTA that should shed more light on these reporting requirements, among other things.
The reporting requirements of the CTA beg the question: who can be deemed an entity’s beneficial owner? The answer as set forth in the law is not entirely straightforward: “an 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% of the ownership interests of the entity.” Interestingly, not mentioned are people receiving substantial economic benefits from the assets of the entity, which language was found in an earlier draft of the CTA.
It is anticipated that FinCEN will include further clarifying information expanding on this somewhat vague definition when it implements its regulations. In the meantime, earlier codified FinCEN regulations (31 C.F.R. § 1010.230(d)) provide a bit of insight to the extent they characterize a beneficial owner as “[a] single individual with significant responsibility to control, manage, or direct a legal entity… including” an executive officer or senior manager or other individual performing similar functions. Of note, expressly carved out of this definition are (1) minor children; (2) individuals acting as nominees, custodians, or agents of another individual; (3) those acting solely as employees of the entity in question and whose control is derived solely from that employment status; (4) individuals whose only interest in the entity is through a right of inheritance; and (5) creditors of the entity, unless such creditor meets certain enumerated criteria.
On paper, every business formed or operating in the U.S. is subject to the CTA. However, there are two very important exceptions: (1) foreign establishments not registered to do business here, and (2) certain specified exempted entities—spoiler alert: there are a lot of them, 24 to be exact.
Those specifically exempt from the CTA include, but are not limited to:
- Entities that are already regulated (including public companies; financial services companies, such as public accounting firms; and public utilities)
- Entities exercising governmental authority on behalf of the U.S. or any Native American tribe, state, or political subdivision
- Certain banks, bank holding companies, and federal and state credit unions
- Investment advisers and their operational investment vehicles
- Insurance companies and producers authorized by a state
- Tax exempt political organizations
- Any entity with a physical office within the U.S. that employs more than 20 employees full-time and has filed federal income tax returns demonstrating more than $5 million in gross receipts or sales in the aggregate
- Any entity that has been in existence for over one year, is not engaged in active business, not owned directly or indirectly by a foreign person, that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds greater than $1,000, and does not otherwise hold any kind of asset, including ownership interests in any other corporation, limited liability company, or similar entity
- Brokers or dealers as defined in the Securities Exchange Act
- Financial market utilities designated by the Financial Stability Oversight Council
- Any pooled investment vehicles
- Any entity or class of entities that the Secretary of the Treasury has determined, by regulation, should be exempt from the reporting requirements of the CTA
Bottom line, a wide swath of companies created or registered to do business in the U.S will not be impacted by the CTA’s reporting mandates.
Violations and Penalties
For entities not exempt from the CTA, the consequences of failing to abide by its requirements are significant. Individuals who willfully provide or attempt to provide false or fraudulent beneficial ownership information or who fail to report information to FinCEN at all will be liable for civil penalties up to $500 per day that the violation continues (up to $10,000), and/or imprisonment for not more than two years. Persons who participate in an unauthorized disclosure or use of the beneficial ownership information are subject to even harsher penalties—$250,000 and not more than five years imprisonment.
Impact of the CTA
Prior to the enactment of the NDAA—and with it the CTA—the U.S. had become the anonymous shell company capital of the world. In response, Congress has sought to flip the switch on these shell companies and add an unprecedented level of corporate transparency by overwhelmingly passing the NDAA in a bipartisan manner. Indeed, so strong was the support of the legislation from both sides of the aisle that then-President Trump’s veto was quickly overridden by both the House of Representatives and Senate.
Now that the CTA is the law, the beneficial ownership reporting requirements imposed on non-exempt entities should go a long way toward cracking down on those who rely on shell companies to launder money and fund criminality, including terrorism, nationwide. That being said and given the broad exemptions, the number of companies actually impacted by the new statute may prove to be far and few between.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.