Private companies will soon be required to report their ownership to FinCEN

In January of 2021, Congress enacted the Corporate Transparency Act (“CTA”), as part of the National Defense Authorization Act (“NDAA”). The CTA requires legal entities to register with the US Financial Crimes Enforcement Network (“FinCEN”) and disclose their ultimate beneficial owners.

Absent the CTA, neither the federal government nor the states require a disclosure of beneficial owners of corporations, limited liability companies (LLCs) or other business entities. Congress believes that wrongdoers have been able to exploit United States corporations for criminal gain. The CTA is intended to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations, and for other purposes.[1]

Under the CTA, the Secretary of the Treasury must prescribe implementing regulations under by January 1, 2022 (one year after enactment). Recently, FinCEN published a Notice of Proposed Rulemaking to implement registration and disclosure requirements of the CTA and has invited public comments on who should have to file reports and what should be disclosed.[2]

The Biden administration views the CTA as an important part of its enforcement effort. The White House intend to use the FinCEN regulations to counteract opaque corporate structures that enable money laundering and other financial crimes.

The CTA generally requires reports from US companies, including corporations, LLCs, limited partnerships and business trusts.8 The CTA also requires reports from entities formed under foreign law registered to do business within the United States.

Some entities are exempt from the CTA such as banks, public companies, registered broker-dealers, registered investment companies and advisers, registered money transmitting businesses, and insurance companies, among others. Generally, the exemptions apply to regulated businesses whose beneficial ownership information is readily available to US regulators.

There is also an exemption for larger operating companies, which include entities that (1) employ over 20 US full-time employees; (2) have more than $5,000,000 in gross receipts; and (3) have a physical office within the United States. The law also exempts subsidiaries owned or controlled by exempt entities and pooled investment vehicles.

If a company is subject to the CTA, it must disclose information relating to each of its beneficial owner(s), which is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise–(i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity. Substantial control is indicated by (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; and (3) direction, determination or decision of, or substantial influence over, important matters of a reporting company.

A reporting company must also submit information regarding the company applicant, meaning the individual who forms the entity or registers the entity to do business in the United States.  Many companies are formed by lawyers or services, but the company applicant would be the person who directs or controls the person who files the document.

The company will be required disclose its name, trade names, address, jurisdiction of formation and identification number. The company must also disclose the names, birthdates, addresses and identifying numbers of the beneficial owners and company applicants.

Companies must file with FinCEN 14 days after formation or registration. Entities formed or registered before the effective date of the final regulations have one year after the effective date of the regulation. Companies must file updated reports within 30 calendar days after any change in the information reported.

The CTA has struct penalty provisions to enforce compliance. A person who willfully fails to report or provides false or fraudulent information can be liable for a penalty of up to $500 per day, and a fine of $10,000 or imprisonment up to two years, or both.More severe penalties apply to unauthorized disclosures.

The CTA requires the beneficial ownership regulations to be issued by January 1, 2022, but it is not clear that FinCEN will meet that deadline. Persons forming new companies should monitor the dates carefully.

[1]S. 2956, 110th Cong. 2d Sess., Preamble.

[2] Beneficial Ownership Information Reporting Requirements, 86 Fed. Reg. 69,920 (Dec. 8, 2021) (to be codified 31 C.F.R. pt. 1010). The comment period for the NPRM closes on February 7, 2022.