At the beginning of this year, the United States (U.S.) witnessed a watershed moment in the anti-money laundering regulatory space, with the passing of the Corporate Transparency Act (Act). The Act requires certain types of legal entities to disclose details regarding their beneficial or actual owners to the U.S. Treasury Department's Financial Crimes Enforcement Network.

Notably, the Act is applicable not only to corporations, limited liability companies or similar entities which are incorporated under U.S state laws, but also Indian entities which are registered to do business in the U.S. as well.

The Act does exempt certain types of entities from the requirements of Act such as publicly traded companies, banks, registered investment companies and investment advisors, public utilities, certain pooled investments, specified charitable organizations, any entity with an operating presence at a physical office within the United States, having at least 20 full time employees and having more than USD 5 million in gross receipts or sales. Legal entities owned or controlled by an exempted entity are also exempt from the disclosure requirements.  

Disclosure Requirements

Where applicable, the new law requires relevant entities to submit information regarding the beneficial owner (explained below) and the applicant (the individual filing the application for incorporating the entity/registering the foreign entity with U.S. authorities) such as name, date of birth, current residential or business street address, identification number from an acceptable identification document.

If the information changes subsequently, the reporting entity is required to notify the change within 1 year of such change. While the reported information will not be accessible to the public, the Act allows such information to be disclosed to authorized law enforcement authorities such as federal law enforcement agencies, including a case where such agencies are requesting such information on behalf of a law enforcement agency, prosecutor, or judge in foreign jurisdictions. This is a welcome change and will expedite cross border crackdowns on illegal shell company structures.

Beneficial Owner Definition

Beneficial owner has been defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity. The definition excludes minor child (if parent's or guardian's information is reported); a nominee, intermediary, custodian, or agent on behalf of another individual; individuals acting solely as employees in an entity and whose control/economic benefits received are a result of such employment status only; an individual whose only interest in the reporting company is through a right of inheritance; a creditor of the reporting company unless the creditor satisfies the definition of beneficial owner.

The term "substantial control" has not been defined in the Act, which may give rise to uncertainties in interpretation, although it is expected that the implementing regulations will shed more light on this aspect.

While it will be interesting to see how the implementing regulations define the contours of beneficial ownership, note that in the Indian scenario, beneficial ownership has been defined in wider fashion in the context of disclosure requirements. Under the (Indian) Companies Act, 2013, the numerical threshold has been set at 10% of ownership of shares/holding voting rights/right to receive dividends, for identifying a "significant beneficial owner". Apart from the above numerical threshold, an individual having the right to exercise or actually exercises significant influence or control is also considered as a significant beneficial owner. "Significant influence" has been defined as the power to participate (directly or indirectly) in the financial and operating policy decisions of the reporting company but does not refer to control or joint control of those policies. Control is typically understood as the right to appoint majority of the directors or to control the management or policy decisions.

Effective Date

The Act will be effective from the date of passing of implementing regulations by the Secretary of the Treasury Department (not be later than 1 January 2022) (Effective Date). Existing companies formed before the Effective Date are required to comply with the disclosure requirements within 2 years from the Effective Date. Companies which are formed after the regulations are in force are required to disclose these details at the time of formation of the entity.

Penalties

Persons who willfully fail to disclose or update such information or provides false information will be subject to fines up to USD 500 per day the violation continues subject to a maximum of USD 10,000 and/or imprisonment up to 2 years.

Key Takeaways

  • The Act appears to be a step taken by the U.S. to align itself with what is now becoming a global norm of requiring disclosure of beneficial owners. Other jurisdictions such as E.U., U.K., India, Canada, France, Germany, Brazil, China and a host of other countries already have such disclosure requirements in place.
  • While the Act will kick into action only once the implementing regulations are issued, Indian parties having existing /looking to set up U.S. structures should take a re-look at their structures, definitive documentation in light of the Act and evaluate potential exposure and the compliances involved.
  • Currently, most U.S. states do not require information regarding the true owners during the incorporation process of a legal entity. This led to various entities creating complex webs of shell corporations to avoid detection and carry out a host of illicit activities such as money laundering, tax fraud. With the U.S. recently overtaking Switzerland in global rankings in the financial secrecy hotspot index, the Act appears to be a real shot in the arm for the government to detect and break down such structures.

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