While the Corporate Transparency Act largely applies to foreign-owned shell companies, domestic companies should carefully read the definition of “reporting company” to ensure they fall within one of the exceptions to the definition. Reporting companies should be mindful of the various penalties associated with noncompliance or providing inaccurate or misleading information to FinCEN.
Congress recently passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act. The purpose of the CTA is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity” by creating a national registry of beneficial ownership information for “reporting companies.” The CTA largely applies to foreign-owned shell companies and is set to take effect no later than January 1, 2022—upon the promulgation of regulations by the secretary of the US Department of the Treasury (Treasury).
Under the CTA, a “reporting company” must report certain beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) within the Treasury. A “reporting company” is defined as any corporation, limited liability company, or similar entity that is (1) created by filing a formation document with a secretary of state or similar office; or (2) formed under the law of a foreign country and registered to do business in the United States.
While the definition of “reporting company” is broad, there are a whole host of exceptions to the definition. Such exceptions include, but are not limited to, public companies; non-foreign-owned shell companies; financial institutions (such as banks, credit unions, brokers, dealers, and exchange and clearing agencies); investment companies; insurance companies operating within the United States; public utility companies; accounting firms; pooled investment vehicles; nonprofit and political organizations; and entities that employ more than 20 employees, filed federal tax returns demonstrating more than $5 million in gross receipts or sales, and have an operating presence within the United States.
While the CTA largely applies to foreign-owned shell companies, domestic companies should nevertheless carefully read the definition of “reporting company” to ensure they fall within one of the exceptions to the definition.
Reporting companies are required to deliver to FinCEN a report containing the following information for each beneficial owner of the reporting company: (1) full legal name, (2) date of birth, (3) current residential or business street address, and (4) unique identifying number from an acceptable identification document or FinCEN identifier, if available.
Compliance with the CTA depends on whether a reporting company was formed prior to or after the effective date of the regulations that will be promulgated later this year to govern the CTA. If an entity is formed before such effective date, it will have two years to deliver its beneficial ownership reports to FinCEN. Entities formed after the effective date must comply with the CTA upon formation. To the extent any information included in the report delivered to FinCEN changes, a reporting company has one year after the date of the change to submit an updated report to FinCEN.
Under the CTA, a “beneficial owner” is defined as, with respect to an entity, an individual who, directly or indirectly, (1) exercises substantial control over the entity, or (2) owns or controls not less than 25% of the ownership interests of the entity.
Reporting companies should be mindful of the various penalties associated with noncompliance with the CTA or providing inaccurate or misleading information to FinCEN. Any person that commits reporting violations may be held liable for up to $500 per day, not to exceed $10,000, and may face up to two years in prison for violating the CTA.
Beneficial ownership information provided to FinCEN will be kept in a secure, confidential national registry and will be maintained for at least five years after the termination of a reporting company. The CTA provides that the secretary of the Treasury must maintain information security protections, including encryption, for all beneficial ownership information reported to FinCEN.
In addition, the beneficial ownership information may only be released, upon following appropriate protocols, to federal agencies engaged in national security, intelligence, or law enforcement activity; state, local, or tribal law enforcement agencies upon court order; federal agencies on behalf of a foreign agency, prosecutor, or judge under an international treaty or agreement; financial institutions subject to customer due diligence requirements, upon the consent of the reporting company; and federal functional regulators.
We note that the CTA contains various provisions addressing improper disclosure of beneficial ownership information. Any employee or officer of a requesting agency that violates disclosure protocols will be subject to criminal and civil penalties.
The CTA will not require states to maintain a separate beneficial ownership information registry. However, the CTA will require states to notify filers upon initial formation or registration of the federal requirement to provide beneficial ownership to FinCEN. States will have two years after the effective date of the regulations governing the CTA to begin providing such notice. States must also provide filers with the reporting company form created by the secretary of the Treasury, or a link thereto, and must also update their websites to notify filers of the federal requirements under the CTA.
The CTA also prohibits an entity organized under state law from issuing bearer shares.
For more information on the Corporate Transparency Act and how it affects financial institutions, please see our December 16, 2020 LawFlash.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
Jose T. Robles, Jr.