United States: UBO In The USA: Reporting Requirements On The Horizon

Ultimate beneficial owner (UBO) requirements are arriving in the United States. With a new Act passing into law, American authorities are making strides towards increasing transparency and preventing assets from being hidden in the USA.

As governments and tax authorities around the world seek greater transparency from businesses, more and more are implementing measures to compile and manage their knowledge of who really has control over, or who benefits from, legal entities based in their local jurisdiction.

UBO is a prime example of such an initiative. The aim of this reporting requirement is to enhance a country's national security and transparency, by making it more difficult to exploit complex legal structures to launder money, which could then be used to finance illegal activities, or to hide the real UBO within a complex structure.

UBO in America

The United States is a recent addition to the growing list of countries that have chosen to increase business and financial transparency, bringing it into closer alignment with other developed economies.

In December 2020, the US Senate and House of Representatives passed the National Defense Authorization Act for Fiscal Year 2021 (NDAA), with the Act becoming law on 1 January 2021. This Act includes both the Anti-Money Laundering Act (AML) and the Corporate Transparency Act (CTA). It is the CTA that will require corporations, limited liability companies and similar entities to report certain information about their beneficial owners.

The Act defines a beneficial owner as a natural person "who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over the entity, or (ii) owns or controls not less than 25% of the ownership interests of the entity."

While the primary legislation has been passed, the regulatory phase to determine how it will be implemented in practice is ongoing. The Financial Crimes Enforcement Network (FinCEN) recently issued an Advance Notice of Proposed Rulemaking to solicit public comment on issues related to the implementation of beneficial ownership information reporting provisions, with a deadline of 5 May 2021. FinCEN must ultimately provide rules to implement reporting requirements by 1 January 2022.

Reporting companies will ultimately be required to file UBO reports with FinCEN. The frequency and method of reporting are yet to be determined, but it is likely that this will need to be done annually for existing entities, or at the time of incorporation for new entities that are being established in the US.

This means that businesses will need to start to determine which of their existing entities fall within the scope of reporting and subsequently review the structure of these entities to determine if there could be any problematic issues around reporting ownership. Establishing processes for gathering and maintaining ownership information, which can be subject to frequent change, would also be a prudent move.

UBO and compliance risk

As with certain other business and financial transparency initiatives, while the overarching principles and motivations remain largely uniform, the local implementation, processes, legal definitions and requirements can vary between regions, or from country to country.

One such comparison can be made between the recently introduced regulations in the US and those in place within the EU, as per its Fifth Anti-Money Laundering Directive (AMLD V). In the US, the definition of a reporting company, or perhaps more importantly the exemptions that apply, mean that this initiative is aimed squarely at shell companies or other investment vehicles that may be used to hide assets or launder money. In contrast, the AMLD V stipulates that beneficial owner information must be publicly disclosed for all privately held companies, regardless of size.

Variation in implementation is one thing - the penalties for failing to comply with UBO regulations also differ from country to country. For example, while the EU's directive hands down guidance as to what should be reported and by whom, the platforms for reporting UBO information and the punishments for failing to do so on time, or in the correct manner, are largely determined by each member state's government or tax authority. As such, fines can range from a relatively low €6,000 in the case of infringement in Spain, to a vastly heftier €1.25m in Luxembourg.

It stands to reason that these variations make compliance all the more challenging, especially for multinational corporations and businesses seeking to expand into new markets, as they'll need to maintain robust information collection and reporting processes to suit different local frameworks - and these may change over time as UBO legislation develops. The introduction of UBO requirements in the US will add another layer of complexity for those who do business there.

The future of UBO in the US

As this is a relatively recent development in the US, only time will tell if the forthcoming UBO regulations function as envisioned. In the event that improvements need to be made, perhaps to broaden the scope of who needs to report or to make the penalties for non-compliance more severe, obligations and processes may change as a consequence. Businesses will need to keep abreast of developments or enlist the support of a third party who can keep them informed, or even handle compliance obligations on their behalf.

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.