The Corporate Transparency Act (CTA) was enacted on January 1, 2021 as part of the National Defense Authorization Act creating a federal beneficial ownership registry applicable to corporations, limited liability companies (LLCs) and most partnerships.  Targeted at small, privately-held business entities, the CTA requires these organizations to report their “beneficial owners” and “applicants” to the Financial Crimes Enforcement Network (FinCEN) in an attempt to prevent the use of shell companies to evade anti-money laundering rules or to hide other illegal activities. 

It is estimated that more than 2,000,000 corporations and LLCs are formed under state law each year with most, if not all, states failing to require information about the beneficial owners.  As a result, bad actors are able to conceal their ownership of these entities and use that anonymity to conduct illicit activities including money laundering, terrorist and proliferation financing, serious tax fraud, and human and drug trafficking.

The law comes after years of proposed legislation and international pressure for the United States to conform to standards set by the Financial Action Task Force (FATF) – the global money laundering and terrorist financing watchdog created in 1989 by the G-7.  Similar legislation has been in place for several years now in the United Kingdom and throughout the EU as a result of the European Fourth and Fifth Anti-Money Laundering Directives which required EU member states to create central national registries for corporations and trusts.  For now, trusts are not included under the CTA as reporting entities (although statutory trusts may be required to report).

Who must report?

The CTA imposes reporting requirements on corporations, LLCs, and other “similar entities” that are either (i) created by filing 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.  Entities required to report are called “Reporting Companies” under the CTA.

Corporations, LLCs or similar entities with an operating presence at a physical office within the United States with over 20 full-time employees in the United States, and that filed Federal income tax returns demonstrating more than $5 million in gross receipts or sales in the previous year are exempt from reporting.

Other exempt organizations include entities that are already regulated, such as banks, credit unions, insurance companies, broker/dealers, exchange or clearing agencies, registered investment companies and registered investment advisors, public accounting firms, public utilities, financial market utilities, certain pooled investment vehicles, 501(c) nonprofit organizations and any entity that is owned or controlled by, be it directly or indirectly, one or more of the exempt organizations mentioned above. It is too soon to say what the exact reach of the CTA will be prior to the Treasury Department issuing regulations. Nonetheless, it is worth nothing that while hedge funds and private equity funds are not specifically identified within the CTA as being exempt, to the extent that such pooled investment vehicles are operated or advised by either: (i) an entity that is a registered investment company or a registered investment adviser or (ii) an investment adviser that is deemed an exempt reporting adviser in reliance on the exemption from registration under Section 203(l) of the Investment Advisers Act of 1940 and has filed a Form ADV with the Securities and Exchange Commission, such pooled investment vehicles will be exempt from the CTA.

What must be reported?

Reporting Companies must list their beneficial owners, defined as persons who exercise substantial control over the entity or who own or control at least 25% of the entity, and applicants, defined as anyone who files an application to form the entity or register a foreign entity in the United States.

For each beneficial owner and applicant, companies must provide:

1. Full legal name,

2. Date of birth,

3. Current residential or business street address, and

4. A unique identification number, which can be from a non-expired US passport, non-expired US or state government ID, non-expired driver’s license or a foreign passport.

When must the information be reported?

Treasury must issue regulations by January 1, 2022 and the beneficial ownership reporting requirements will take effect on the effective date of the regulations.

Any Reporting Company that is existing at the time regulations are effective must file the report within two years of the effective date of the regulations.

Any Reporting Company formed subsequent to the effective date of the regulations must file the report on the formation of the entity.

Every Reporting Company must file a report within one year of the beneficial ownership information changing. Changes that trigger this report include (i) a change in substantial control of the Reporting Company, (ii) a change in contact details for a beneficial owner or applicant, and (iii) beneficial ownership exceeding or dropping below 25%.

Who has access to the information?

The information filed with FinCEN will be available to federal agencies engaged in national security, intelligence, or law enforcement activity, state or local law enforcement if authorized by a court, and financial institutions authorized by the Reporting Company to comply with customer due diligence requirements.  The information collected will not be publicly available.

What are the penalties for non-compliance?

Any person who willfully provides, or attempts to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, or fails to file complete and accurate reports or fails to provide updated reports will face penalties of up to $10,000 (accruing at $500 per day that the report is outstanding) and/or imprisonment for up to two years.