The Corporate Transparency Act (CTA) will significantly affect the process of forming new business entities, with impacts on company owners and managers as well as on the lawyers and other service providers who are involved in forming businesses or maintaining records for them. Although the law’s reporting requirements are not yet in effect, it is not too soon to begin thinking about how relevant information will be maintained in order to ensure that accurate filings can be made when required.
The CTA was enacted on January 1, 2021 as part of the National Defense Authorization Act. The CTA will require many companies to provide information about their beneficial owners and the individuals who form them to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). FinCEN will hold the information provided in a database that will only be accessible to certain federal, state or foreign law enforcement agencies, or to financial institutions with the company’s consent.
The purpose of the CTA is to assist law enforcement in preventing money laundering and other illegal financial activities through the use of shell companies. The CTA will help bring the United States into alignment with international standards regarding money laundering and combatting the financing of terrorism.
The CTA directs FinCEN to issue regulations in order to detail the information to be disclosed and the process for submitting information. On December 7, 2021, FinCEN issued its first set of proposed regulations under the CTA, which relate to the reporting of beneficial ownership information. When the comment period closed on the proposed rules, FinCEN had received over 230 comments. FinCEN has stated that it will be issuing additional proposed rules regarding access to and disclosure of beneficial ownership information later this year. The obligation to begin reporting information to FinCEN under the CTA will not take effect until all relevant rules have been finalized and the reporting mechanisms, protocols and forms are established.
Subject to certain exemptions, the CTA’s reporting obligations apply broadly to domestic corporations, LLCs and other entities formed by filing a document with a secretary of state or a similar office under the law of a state or Indian tribe, and to foreign entities that are registered to do business in a state or tribal jurisdiction. The CTA includes exemptions for some types of entities, most of which are organizations that are already subject to significant regulatory oversight, such as banks, public companies, nonprofit organizations, registered investment advisors and insurance companies. Also exempt are businesses with more than 20 employees that have annual revenues of more than $5,000,000 and that have an operating presence at a physical office in the United States, as well as subsidiaries of exempt entities.
Under FinCEN’s proposed rule, domestic companies formed, or foreign entities that first register in the US, on or after the effective date of FinCEN’s regulations will be required to file an initial report within 14 days of the date the company was formed or registered. Reporting companies that were formed or registered in the US prior to the effective date of the regulations will be required to file an initial report within one year after the regulations’ effective date. Thereafter, reporting companies would be required to report any changes to information previously filed with FinCEN within 30 days. In the event that a reporting company determines that it provided information to FinCEN that was not accurate, it will be required to file a corrected report within 14 days of discovering the inaccuracy.
The information to be furnished to FinCEN includes identifying information regarding beneficial owners and applicants. The CTA defines a “beneficial owner” as “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise 1) exercises substantial control over the entity; or 2) owns or controls not less than 25 percent of the ownership interests of the entity.” [31 USC 5336(a)(3)] FinCEN’s proposed regulations define both “substantial control” and “ownership interests” in broad terms, and also indicate that there can be more than one person who exercises substantial control over a company and therefore must be identified.
The CTA defines an “applicant” as ‘‘any individual who (A) files an application to form a corporation, limited liability company, or other similar entity under the laws of a State or Indian Tribe; or (B) registers or files an application to register a corporation, limited liability company, or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under the laws of a State or Indian Tribe.” [31 USC 5336(a)(2)] FinCEN’s proposed regulations indicate that lawyers, filing service employees, and others who assist in or direct the filing will be required to be identified.
The information to be furnished regarding beneficial owners and applicants consists of the following: (i) full legal name; (ii) date of birth; (iii) current residential or business street address; and (iv) either a unique identifying number from an acceptable identification document or a FinCEN identifier. FinCEN’s proposed regulations also provide for information regarding the applicable company itself to be furnished as part of the report, specifically the company’s name, business address, jurisdiction of formation or registration and unique identification number (such as an Employer Identification Number).
Historically, the United States has lagged behind most other countries in collecting information about company ownership and other related parties. The Tax Justice Network ranks the United States behind only the Cayman Islands (and ahead of Switzerland) in its level of financial secrecy. The CTA is a significant step in ensuring that law enforcement authorities will have access to the information they need in order to combat tax evasion, money laundering, financing of terrorists and other crimes. Although many details of the reporting process remain to be finalized, private companies and individuals that are involved in the company formation process can be sure that changes are on the way.
Alex Pyle is chair of Sheehan Phinney’s Business Transactions Group.