Corporate Transparency Act – Who, What and When You Need to Report

On January 1, 2021, Congress passed the Corporate Transparency Act (the “Act”), which was tucked into the annual National Defense Authorization Act for Fiscal Year 2021. Designed to combat the use of anonymous shell companies by “drug cartels, human traffickers, arms dealers, terrorists and kleptocrats”[i] to hide assets and launder money, the Act requires legal entities formed in any state, and foreign entities registered to do business in the U.S., to disclose their beneficial ownership to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

Who Is Subject to the Act’s Reporting Requirements?

The Act is designed to significantly expand the categories of entities required to disclose beneficial ownership well beyond those covered by existing regulations. The Act applies to any “reporting company”, defined as a corporation, limited liability company or other similar entity that is (i) “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 a foreign entity registered to do business in the United States, and (ii) not otherwise exempted by the Act. The Act enumerates a long list of exemptions from the “reporting company” definition for companies with major U.S. operations or substantial existing regulatory oversight, which include, but are not limited to, publicly traded companies, tax-exempt organizations, banks, insurance companies, public utilities, certain registered investment companies and investment advisers, entities owned by an entity that is itself exempt from the Act, and entities with more than 20 full-time employees and an operating presence at a physical office within the United States that filed tax returns in the previous fiscal year demonstrating more than $5 million gross receipts or sales.

What Information Must Be Reported, and When?

Prior to the Act, disclosure requirements for companies not otherwise subject to SEC or similar reporting requirements were left exclusively to an entity’s state of formation, which required little to no information regarding a company’s true, beneficial owners. Instead, the onus of determining beneficial ownership has traditionally fallen to financial institutions by means of FinCEN’s existing Customer Due Diligence Rule (the “CDD Rule”) under the Bank Secrecy Act. The Act shifts the burden to the “reporting company” to disclose information about its “applicant” and “beneficial owners”. The term “applicant” refers to the individual who files the entity’s formation documents in a given state. A “beneficial owner” is defined as any individual who “(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity”, Specifically excluded from the definition are (i) individuals acting as agents, intermediaries, or custodians, (ii) an employee whose control or economic benefit is derived solely from his or her employment, and (iii) creditors of the reporting company (unless the creditor meets either the “substantial control” component of the test or owns or controls 25% or more of the reporting company. The Act does not define “substantial control”, and the term will likely be fleshed out in FinCEN’s implementing regulations.

For each beneficial owner and applicant, a reporting company must disclose such individual’s (i) full legal name, (ii) date of birth, (iii) current address, and (iv) identifying number from a government-issued form of ID. New entities that meet the “reporting company” definition will need to disclose this information at the time of formation, while entities already in existence once the regulations come into effect will need to report their beneficial ownership within two years of the effective date of the regulations. A reporting company that experiences a change in beneficial ownership must update its information on file with FinCEN within one year of such change.

Penalties for Noncompliance

Willful failure to report information as required by the Act, or submission of false or fraudulent beneficial ownership information to FinCEN, is subject to a civil penalty of up to $500 per day that such violation continues, and a fine of up to $10,000 and/or imprisonment for up to two years.

Use of Collected Information and Confidentiality

The information collected by FinCEN pursuant to the Act will not be made publicly available, and unauthorized disclosure will be subject to criminal and civil penalties. FinCEN may disclose collected information upon request to: (i) federal agencies engaged in national security, intelligence, or law enforcement activity, for use in furtherance of such activity, (ii) federal agencies requesting information on behalf of a non-U.S. law enforcement agency, (iii) state and local enforcement agencies pursuant to a court order in connection with a civil or criminal investigation, or (iv) with the consent of the reporting company, a financial institution in order to meet customer due diligence requirements[ii].

The requirements of the Act will take effect on the effective date of the implementing regulations by the Secretary of Treasury, which are required to be promulgated no later than January 1, 2022. The regulations will prescribe the standards and procedures for reporting companies to comply with the Act’s reporting requirements.

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For more information on this issue or other related matters, please contact:

Morris F. DeFeo, Jr. at +1 212 592 1463 or [email protected]
Sheldon Chanales at +1 212 592 1472 or [email protected]

© 2021 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.