On January 1, 2021, the National Defense Authorization Act for Fiscal Year 2021 (the "Defense Bill") was enacted into law. This Defense Bill contained the Corporate Transparency Act (the "Act"). The Act is designed to collect beneficial ownership information for Reporting Companies for several specific reasons including, but not limited to:
- Protecting the United States' national security interest
- Protecting interstate and foreign commerce
- Assisting critical national security, intelligence, and law enforcement efforts to counter money laundering, financing of terrorism, and other illegal activities.
What is a Reporting Company?
Generally, an entity is considered a Reporting Company if it is:
- formed under the laws of a U.S state,
- formed under the laws of a tribal government, or
- a foreign entity registered to do business in the United States,
The final regulations should define further what a Reporting Company is. However, it is unclear if the government will consider a trust or a partnership to be a Reporting Company for this Act's purposes.
The Act does expressly exempt several types of entities from reporting. They include, but are not limited to:
- Closely regulated entities such as banks, credit unions, broker-dealers, investment advisors, and utility companies
- Tax-exempt entities such as 501(c) non-profits
- Publicly traded companies
- Taxable entities that have:
- More than 20 full-time U.S. employees
- A physical office in the U.S. and
- Have more than $5 million in gross receipts
- An entity controlled or owned by an exempt entity
Who is a Beneficial Owner?
A beneficial owner is an individual who directly or indirectly exercises substantial control over a Reporting Company or owns or controls 25% or more of the Reporting Company. Unfortunately, the Act does not define substantial control.
A federal contractor or subcontractor who is also a Reporting Company will be required to submit the beneficial ownership information to the government with their bids or proposals.
Notably, a beneficial owner does not include:
- A minor child (the guardian or parent information must be reported instead)
- An individual acting as an agent or custodian for another person
- An individual acting only as an employee of the Reporting Company, or
- A creditor of the Reporting Company
Reporting Companies are required to disclose the personal information of beneficial owners of the Reporting Companies to a division of the U.S. Department of Treasury known as the Financial Crimes Enforcement Network ("FinCEN"). This information includes their full legal names, current addresses, dates of birth, and identification numbers (such as passport numbers or driver's licenses).
In addition, a Reporting Company is required to file an updated ownership statement any time there is a change in the beneficial ownership or change in the previously reported information (including change of address or name). This filing requirement will be within one year of the change.
However, it's not clear if a change in the ownership percentage in the Reporting Company will require filing an updated ownership statement. This will hopefully be addressed in the final regulations for the Act.
How Will This Work?
Reporting companies will file a beneficial ownership statement with this information with FinCEN either
- at the formation of the entity or
- if the entity was created prior to the enforcement of the Act, within two (2) years after the passage of the final regulations for the Act.
The statements submitted to FinCEN will be stored and maintained solely by FinCEN. They will not be made publicly available, and they will not be made generally available to the states. The information shall only be used for
- national security, law enforcement activities, and intelligence and
- confirming the information provided to financial institutions to comply with anti-money laundering laws.
FinCEN will hold the information until five years after the termination of the Reporting Company. It's not clear how FinCEN will know that a Reporting Company has been terminated.
When Does This Go into Effect?
The effective date of the Act is the date the U.S. Treasury issues the final regulations. However, it cannot be later than December 31, 2021.
Penalties for Non-Compliance
Anyone who intentionally fails to comply with the Corporate Transparency Act will be subject to fines of up to $500 for each day there is a willful failure to submit the beneficial ownership information. The maximum penalty is $10,000 in fines or a prison term of up to two years. Attorneys assisting a party in registering a Reporting Company may also be subject to these penalties if the Act is violated.
Any person or entity that discloses any beneficial information will be liable for fines up to $500 a day with a maximum penalty of $250,000 and up to ten years in prison.
The Act also contains a safe harbor provision for any person who submits inaccurate beneficial ownership information to FinCEN if that person
- was not trying to evade the reporting requirement
- had no knowledge of the inaccuracy reported, and
- corrects the information within ninety days after the report is submitted to FinCEN.
Interpreting this Act is somewhat of a moving target as we're waiting on the final regulations to define some critical terms and clarify unclear sections of the Act. The attorneys at Russell, Krafft & Gruber LLP are following closely these new developments and will update the blog upon the final regulations' passage.
Originally published March 30, 2021
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