The US is implementing legislation aimed at preventing corrupt business practices such as money laundering and the financing of terrorism. The beneficial ownership disclosure rules outlined in the Corporate Transparency Act (CTA) are the first to impact entities registered at Secretary of State level. These rules will affect a huge volume of companies operating in the country. Businesses need to prepare now.
Rules will align the US with international practices
For more than 20 years many countries, including those in the G8 and G20, have been co-operating in efforts to end money laundering and other illegal activity. One primary focus of these efforts has been to enhance beneficial ownership transparency across and between jurisdictions, to clearly identify who owns, controls and benefits from these companies' activities.
These measures are intended to protect national and international security, provide critical information to law enforcement agencies and the intelligence community, and promote financial transparency. The US is now preparing to join many countries, including Canada, the United Kingdom, and all members of the European Union, by incorporating beneficial ownership disclosure requirements into their domestic legal and regulatory frameworks.
The US Treasury's Financial Crimes Enforcement Network (FinCEN) and the Corporate Transparency Act (CTA), expected to become a law later this year, are working against the proliferation of anonymous companies with these new US UBO disclosure requirements, thereby aligning with global practices.
When will the new CTA rules come into effect?
The rules were due to take effect on 1 January 2022 but FinCEN moved it back while it gathered public commentary, the results of which have not yet been announced. Industry experts expect an update on this regulation to be published within 2022 though the timing is subject to interpretation.
Which companies will be required to report?
The CTA continues to hone the definition of a 'reporting company'. It will be important for all businesses to review the new regulation with counsel and determine whether their entity or entities fit this definition. Reporting companies, as defined in the CTA, incorporated (or formed) after the CTA becomes law will be subject to its reporting rules.
Companies incorporated before the act becomes law will need to become compliant within one to two years based on current estimates. FinCEN projections indicate the new reporting rules will apply to approximately 30 million existing domestic entities and an additional 3 million that will be incorporated in the US over the next year.
This proposed regulation identifies more than 22 different types
of exempt entities, including those subject to state or
federal supervision, reporting to securities, investment, insurance
or bank regulators. Exemptions also include governmental
authorities, venture capital fund advisors, public utilities,
pooled investment vehicles, tax exempt entities, and entities
assisting tax exempt entities.
Also exempt are 'large operating companies,' defined as any
entity that:
- employs more than 20 full-time employees in the United States
- has an operating presence at a physical office in the United States, and
- filed a federal income tax return or information return for the prior year reporting more than $5 million in gross receipts or sales, excluding gross receipts or sales outside the United States.
Which individuals must be identified?
As a part of the CTA reporting requirements, reporting companies will be required to identify two categories of individuals:
- individuals authorised to incorporate an entity at the Secretary of State level
- the beneficial owners of the entity, defined under the rules as any individual who exercises substantial control over a reporting company, or owns or controls at least 25% of it.
What information must each reporting company provide?
The reporting company will be required to report four pieces of information related to each of its company applicants and beneficial owners: their name, birth date, address, and a unique identifying number from an acceptable identification document.
What are the filing deadlines?
Newly incorporated in scope entities must present reporting to FinCEN within 14 days of incorporation and annually thereafter. In scope companies incorporated before the CTA became a law will need to submit reporting within a period of one to two years of this becoming a law, with specific timing to be detailed when the law is finalised.
Are there penalties for non-compliance?
Penalties for non-compliance are unprecedented and severe, including fines of up to US$500,000 and possible imprisonment.
Companies need to prepare now
While the exact timing of the regulations becoming a law remains uncertain, when they take effect they will impact millions of companies. Businesses need to prepare now to seek guidance from their lawyers and tax advisors to determine whether their entities are subject to this level of reporting to FinCEN.
TMF can help
TMF Group's in-house global entity management and governance experts operate in 85 jurisdictions around the world. We work in tandem with our clients' lawyers and tax advisers to assist them with all regulatory and compliance obligations, including CTA reporting requirements, across global markets. For example, we recently helped Canadian companies through the registration process when Canada implemented its UBO requirements.
Contact TMF Group's US-based entity management services team to find out how we can help your company meet its obligations under the new US UBO regulations, and stay up-to-date with all other aspects of your US entity governance. Make an enquiry.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
