On January 7, 2021, Congress passed the National Defense Authorization Act (Defense Act), which includes the Corporate Transparency Act (Act).
The Act, which takes effect on the effective date of the U.S. Treasury Secretary’s implementing regulations, requires “reporting companies” to file information on beneficial owners and applicants with the Financial Crimes Enforcement Network (FinCEN). The beneficial ownership information will be maintained by FinCEN on a secure registry that may only be accessed by authorized federal, state, local and foreign law enforcement agencies, as well as financial institutions, with the reporting company’s consent, in an effort to satisfy mandatory customer due diligence requirements. Further, the U.S. Treasury Department may access beneficial ownership information and use the information for tax purposes.
The goal of the Act is to crack down on anonymous shell companies, which are often used as vehicles for money laundering and other illicit activities, by providing federal law enforcement agencies greater access to beneficial ownership information through the beneficial ownership registry.
The Act requires reporting companies to file beneficial ownership information with FinCEN.
A reporting company is a corporation, LLC or “other similar entity” that is formed in the United States by filing a document with a secretary of state or a similar office or that is formed in a foreign country and is registered to do business in the United States by filing a document with a secretary of state or a similar office.
The Act excludes 24 types of entities from the definition of a reporting company, some of which are:
The Act does not explicitly include common law trusts in its definition of a reporting company, although it is unlikely that the implementing regulations will consider common law trusts to be reporting companies, because they are not formed by filing a document with the secretary of a state. Statutory trusts, however, may be subject to the Act’s reporting requirements.
The Act requires reporting companies to submit a FinCEN report that includes the following information for each beneficial owner or applicant (as defined in the section below):
If an exempt entity has or will have a direct or indirect ownership interest in a reporting company, the reporting company or applicant need only provide the name of the exempt entity.
Criminal and civil liability may be imposed for any person who willfully fails to provide complete or updated beneficial ownership reports or willfully provides false or fraudulent beneficial ownership information. There is, however, a safe harbor from such liability for individuals who “voluntarily and promptly,” within 90 days after the submission of such false or fraudulent information, file a new report containing corrected and accurate information.
With respect to an entity, an individual who, directly or indirectly, (i) exercises substantial control over the entity; or (ii) owns or controls at least 25% of the equity interests of such entity. The Act does not define “substantial control” and it is anticipated that the implementing regulations will provide a definition for such term.
The following individuals are not beneficial owners:
An “applicant” is any individual who files an application to form a reporting company in the United States or registers or files an application to register a foreign reporting company to do business in the United States.
Existing reporting companies must report beneficial ownership information within two years after the effective date of the U.S. Treasury Secretary’s implementing regulations.
New reporting companies formed or registered after the effective date of the implementing regulations are required to report beneficial ownership information at the time of formation or registration.
Any exempt subsidiary entities must report beneficial ownership information at the time such entity no longer is a subsidiary of an exempt entity.
Any change in beneficial ownership information must be reported within one year after such change in information.
Christopher R. Rahl
410-576-4222 • firstname.lastname@example.org
Michele Bresnick Walsh
410-576-4216 • email@example.com
Amanda J. Chong
410-576-4170 • firstname.lastname@example.org