The National Defense Authorization Act, passed by the U.S. House and Senate at the end of 2020, contained a piece of legislation intended to increase transparency into shell companies to combat money laundering and criminal behavior: the Corporate Transparency Act (CTA). The CTA will create a massive registry of the “beneficial owners” of “reporting companies” with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). A “beneficial owner” is any individual who owns a 25% stake in a reporting company, or exercises substantial control – a term that has not yet been defined – over the reporting company. A “reporting company” is, simply put (and with a few exceptions excluded for brevity), any small, privately held, for-profit entity formed or registered in the U.S. In particular, companies with (i) more than 20 full-time employees; (ii) more than $5 million in annual gross receipts or sales; and (iii) an operating presence at a U.S. physical office are excluded from the reporting requirements, as the regulations are meant to provide insight into the ownership of U.S. companies with small or limited operations. Obviously, though, many small companies that are not engaged in money laundering or criminal behavior will likewise be swept up by these requirements.
Banks and financial institutions have been obligated to inquire into the identity of beneficial owners for some time – for example, many readers may be familiar with bank “know your customer” requirements. The CTA, however, shifts the burden of collecting and reporting ownership information, including name, birth date, address, and unique identification number (for example, a driver’s license or passport number) to the companies themselves. Companies will need to submit this information at their formation, as well as keep it up to date. Registry information will not be public, but can be shared in many instances, such as after an inquiry from a law enforcement agency.
Intentionally submitting incorrect information to FinCEN is punishable by financial penalties, as well as potential imprisonment. Furthermore, any company engaging in a separate verification or diligence process, such as a bank “know your customer” review, will need to make sure any information in the FinCEN registry matches the information provided to the inquiring party.
Regulations implementing the CTA are expected later this year, and will hopefully address many of the outstanding questions seeking clarity about who must report, and when. In particular, many are waiting eagerly for information about how to calculate “ownership” and what will constitute “substantial control,” anticipating that the final rules governing both issues will be lengthy and complex. Furthermore, developing the government infrastructure to collect, store, and update this information will itself be a massive undertaking. We are keeping a close watch on developments in this area, since the CTA will likely create the most significant burden (in terms of legal fees required time) for our smallest clients.