Due to the burden imposed on banks by Bank Secrecy Act (BSA) regulation changes requiring collection of information on individuals who hold, directly or indirectly, 25% or more of an equity interest in a legal entity customer, Congress passed the Corporate Transparency Act (the Act) as part of the National Defense Authorization Act to relieve the collection burden from banks by creating a repository of information on legal entities. The Act, upon effectiveness of the implementing regulation, which is due by January 1, 2022, will require certain newly formed and eventually — after a two-year implementation — certain existing US corporations, limited liability companies (LLCs), and other similar entities, and non-US companies registered to do business in the United States to file annual reports with the Financial Crimes Enforcement Network (FinCEN) identifying their beneficial owners. The report must contain the beneficial owner’s or owners’ full legal name, date of birth, current residential or business street address, and unique identifying number from an acceptable identification document. As noted in our previous article, there can be more than one beneficial owner and, where there are layers of entity ownership, each layer must be examined and the ultimate beneficial owner determined in accordance with the current requirements of 31 CFR §1010.230.

There are exclusions from the reporting requirements, which will be addressed herein. However, the usefulness of the exemptions is debatable in terms of reducing BSA officer workloads.

A number of companies by type are excluded from the reporting requirements, including public companies as well as companies that meet the following criteria (i) have more than 20 full-time employees, (ii) report more than $5 million in yearly revenue to the Internal Revenue Service, and (iii) have an operating presence at a physical office within the United States. Public companies, of course, are companies that issue securities registered under §12 of the Securities and Exchange Act of 1934 (the 34 Act) or that are required to file supplementary and periodic information under §15(d) of the 34 Act.

Additional entities that are exempted from the reporting requirement are: (i) any entity established under the laws of the United States, an Indian tribe, or a state or a political subdivision of a state or under an interstate compact between two or more states that is designated to exercise government authority on behalf of such governments; (ii) banks, federal or state credit unions, or bank holding companies; (iii) money-transmitting businesses registered with the Secretary of the Treasury; (iv) brokers or dealers as defined in §3 of the 34 Act or any other entity not otherwise described that is registered with the Securities and Exchange Commission (SEC) under the 34 Act; (v) an entity that is an investment company or investment advisor properly registered with the SEC; (vi) an insurance company as defined in §2 of the Investment Company Act of 1940; (vii) an entity that is an insurance producer authorized by a state and subject to supervision by the state insurance commissioner or similar official and having an operating presence and physical office in the United States; (viii) a public accounting firm registered in accordance with §102 of the Sarbanes-Oxley Act of 2002; (ix) a public entity; (x) a financial market utility; (xi) any pooled investment vehicle operated or advised by a bank, credit union, or broker/dealer; (xii) an organization described in §501(c) of the Internal Revenue Code (the Code) and exempt from tax under §501(a) of the Code or a political organization under §527(e)(1) of the Code that is exempt from tax under §527(a) of the Code; (xiii) any corporation, LLC, or similar entity that is owned or controlled, directly or indirectly, by one of the entities described above; and (xiv) any corporation, LLC, or similar entity that has existed for more than one year with very minimal activity, subject to further definition in the forthcoming regulation. Whether such exempt entities must affirmatively establish exempt status, either initially or on an ongoing basis, remains to be seen from the regulation.

It also remains to be seen whether the FinCEN regulations implementing the Act’s beneficial owner reporting requirements will actually reduce the burden of a financial institution’s collection of beneficial ownership information regarding exempt legal entity customers as well as existing nonexempt legal entity customers over the next two years. Banks will still be required to identify and verify the beneficial ownership of such legal entity customers. The additional flexibility in how they collect such information will not commence until existing nonexempt entities are required to report two years from the effective date of the regulation.