By Gregory Zerzan, Shareholder
In January of this year, Congress enacted the National Defense Authorization Act for Fiscal Year 2021, which contained legislation known as the Corporate Transparency Act (“CTA”). The CTA attempts to address longstanding concerns that the lack of beneficial ownership disclosure requirements facilitated illegal money laundering in the United States. On April 5, 2021, the Financial Crimes Enforcement Network (“FinCEN”), a unit of the United States Treasury Department, issued an Advanced Notice of Proposed Rulemaking (“ANPRM”) which solicits public input on how the Department might best obtain information about the natural persons that are the ultimate owners of corporations, limited liability companies, and similar entities.
The ANPRM seeks to identify how to implement the law’s sweeping requirement that a “reporting company” identify its natural-person owners. With exceptions, a “reporting company” is “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 (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…”. The law contains a broad list of exceptions to this definition, but generally speaking, a company that is otherwise subject to reporting requirements (such as a publicly traded company, a bank or other financial firm, or a tax-exempt organization) will not be subject to the law’s additional beneficial owner reporting requirements. Additionally, the law exempts from the “reporting company” definition certain operating companies that (I) employ more than 20 employees on a full-time basis in the United States; (II) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including for related entities; and (III) has an operating presence at a physical office within the United States.
For all other United States companies, LLCs, and similar entities that fall within the “reporting company” definition, it will be necessary to provide FinCEN information on each beneficial owner. A "beneficial owner" is any person who owns a 25 percent or greater stake in an entity, or who exercises "substantial control." The information required to be reported includes the full legal name, date of birth, current residential or business street address, and unique identifying number from an acceptable identification document such as a passport or unexpired driver’s license. This information must be submitted to FinCEN at the time of entity formation for U.S. companies or at the time of registration to do business in the United States for foreign entities. Existing reporting companies must also submit beneficial ownership information to FinCEN “in a timely manner,” but in any event, no later than two years after the issuance of implementing regulations. Reporting companies will also have an ongoing duty to report changes in beneficial ownership and provide the required information with respect to any new or additional owners.
Failure to disclose required beneficial ownership information, or providing false information, brings with it the potential for criminal and civil penalties. A willful violation can incur civil penalties of up to $500 per day for each day the violation continues, or a criminal penalty of up to $10,000 and two years in prison.
FinCEN’s ANPRM is only the first step in implementation of the CTA. After it receives feedback from the public (the ANPRM’s Comment Period ends on May 5, 2021), it will issue Proposed Rules allowing for additional public comment, before finally issuing final rules likely sometime before year-end. Once fully implemented, the CTA will require companies to pay close attention to ensure they have accurate information about their actual natural-person owners and report the same to FinCEN.
Gregory Zerzan is a Jordan Ramis PC attorney with legislative, regulatory, and cabinet agency experience who advises clients through their interactions with Congress and federal agencies. Contact him at email@example.com or (503)-598-7070.