Many privately held U.S. domiciled or active entities, including foreign entities that operate in the United States,‎ will be required to disclose the identification of beneficial owners to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) pursuant to the Corporate Transparency Act (CTA), as part of the National Defense Authorization Act, which became law on January 1, 2021. Reporting will begin when the Secretary of Treasury adopts regulations under the CTA (the “Regulations”), which Congress mandated be adopted by January 1, 2022.

Once the Treasury enacts its Regulations, reporting companies will be required to file reports with FinCEN identifying all beneficial owners and applicants. For purposes of CTA:

  • reporting companies include any corporation, limited liability company, or similar entity, ‎subject to certain exclusions, organized under the law of a state or Indian tribe and foreign ‎companies registered to do business in the United States under the laws of a state or Indian tribe;‎
  • beneficial owners mean any individuals who directly or indirectly (through contract, arrangement, understanding, relationship, or otherwise) exercise substantial control over the reporting company or own or control 25% or more of the ownership interests of the reporting company; and
  • applicants are any individuals filing an application to form a reporting company or registering or filing an application to register the reporting company to do business in the United States by filing a document with a state or Indian tribe.

Noteworthy is that an applicant will be subject to the required disclosures—even if they are not a ‎beneficial owner. Definitions under the CTA are anticipated to be clarified and adjusted through the enactment of the Regulations.‎

What is the intent of the CTA?

The stated purposes behind the enactment of the CTA and its requirements of collection of beneficial ownership interest information is “to (A) set a clear, Federal standard for incorporation practices; (B) protect vital United States national security interests; (C) protect interstate and foreign commerce; (D) better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity; and (E) bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.” National Defense Authorization Act, Title LXIV “Establishing Beneficial Ownership Information Reporting ‎Requirements” § 6402(5).‎

What exclusions apply to the meaning of a beneficial owner?

The CTA excludes certain individuals from beneficial owner reporting, including:

  • minors (in which case the information of the parent or guardian of the minor child is reported);
  • nominees, intermediaries, custodians, or agents acting on behalf of another individual;
  • employees (whose sole economic interest in the reporting company is derived from employment status);
  • individuals whose interest is through right of inheritance; and
  • creditors with no control or ownership of the company.

What entities are excluded from the meaning of reporting companies?

The CTA excludes certain entities from being considered a reporting company, including:

  • public companies, governmental entities, banks, and bank holding companies;
  • credit unions;
  • brokers or dealers;
  • registered investment companies;
  • registered investment advisers;
  • insurance companies;
  • registered public accounting firms;
  • public utilities;
  • certain pooled investment vehicles;
  • 501(c) entities;
  • political organization, 527(e)(1) entities;
  • trust 4947(a) entities;
  • any corporation, LLC, or similar entity that operates exclusively to provide financial assistance to, or hold governance rights over, a certain type of tax-exempt entity, is a U.S. person, is beneficially owned or controlled exclusively by one or more U.S. citizens or lawfully admitted for permanent residence, and derives at least a majority of its funding or revenue from one or more U.S. persons that are U.S. citizens or lawfully admitted for permanent residence;
  • companies with more than 20 full-time employees in the United States, more than $5 million in gross receipts or sales, and an operating presence at a physical office in the United States; and
  • entities owned or controlled by one or more of the previously described exempt entities.

Importantly, the Regulations to be promulgated by the Treasury may exempt other entities or classes of entities and also may provide clarifying information on “similar entities” covered by the CTA.

When do reporting obligations apply to existing entities and newly formed entities?

Existing reporting companies, which are entities formed or registered before the effective date of the Regulations, must submit a beneficial ownership report to FinCEN within two years after the effective date of the Regulations. Reporting companies formed or registered after the effective date of the Regulations shall submit a beneficial ownership report to FinCEN at the time of formation or registration. Additionally, a reporting company shall in a timely manner, and not later than one year after the date on which there is a change in beneficial ownership, submit to FinCEN a report that updates the information relating to the change.

What information is required in the FinCEN report?

A reporting company is required to submit a report to FinCEN identifying each beneficial owner and applicant and provide the individual’s full legal name, date of birth, current residential or business addresses, and unique identifying number from an acceptable identification document or FinCEN identifier. Acceptable identification documents identified in the CTA are an unexpired U.S. passport or driver’s license or state, local government, or Indian tribe issued identification. If the beneficial owner or applicant does not have any of those documents, then an unexpired foreign passport will be acceptable. Upon request by an individual who has provided FinCEN with the required identifying information pertaining to the individual, or by an entity that has reported its beneficial ownership information to FinCEN, FinCEN shall issue a FinCEN identifier to such individual or entity. Any person or entity required to report identifying information may instead report their FinCEN identifier. In cases where an exempt entity has or will have a direct or indirect ownership interest in a reporting company, the reporting company or the applicant must only list the name of the exempt entity—no further information will be required.

Who can access FinCEN reports?

The reports submitted pursuant to the guidelines in the CTA and related Regulations are to be accessible only by federal agencies and state, local, and tribal government agencies for national security, law enforcement, and intelligence purposes. The CTA limits the disclosure of beneficial ownership information by FinCEN to requests “through appropriate protocols” to be promulgated by the Secretary of the Treasury from:

  • federal governmental agencies engaged in national security, intelligence, or law enforcement activities, for use in furtherance of such activity;
  • state, local, or tribal law enforcement agencies if authorized by a court of competent jurisdiction;
  • federal governmental agencies on behalf of a law enforcement agency or court of another country (including a foreign central authority) under an international treaty or convention;
  • financial institutions subject to customer due diligence requirements, with the consent of a reporting company; and
  • a federal functional regulator or other appropriate regulatory agency.

The CTA requires the Secretary of the Treasury to maintain the information contained in CTA-related reports in a secure, nonpublic database and to establish protocols to protect the security and confidentiality of the reported beneficial ownership information and ensure governmental authorities access the beneficial information only for authorized purposes. FinCEN shall maintain beneficial ownership information required under the CTA relating to each reporting company for not fewer than five years after the date on which the reporting company terminates.

The Department of the Treasury has a larger scope of access to the beneficial ownership information—including access to the information for tax administration purposes.

What are the potential penalties for reporting failures?

The CTA authorizes monetary penalties and fines (not more than $10,000), the possibility of imprisonment (not more than two years), or both for willfully providing or attempting to provide false or fraudulent reports or willfully failing to file complete or updated information.

When does the CTA take effect?

The CTA will not take effect until the Treasury issues its Regulations, which is mandated to occur by January 1, 2022.

Please reach out to one of our business attorneys today to understand if your company will be required to adhere to reporting requirements and to ensure timely compliance. This article summarizes aspects of the law relevant to the CTA; it does not constitute legal advice. For legal advice for your situation, you should contact an attorney.

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