Over the last several years, there has been growing concern within the financial and trade regulatory communities about the use of shell companies to evade anti-money laundering laws, economic sanctions, and other laws.  Congress has found that malign actors have “exploited State formation procedures to conceal their identities” when forming these companies in the United States, in turn using the entities to “commit crimes affecting interstate and international commerce.” In response to this concern, Congress enacted the Corporate Transparency Act (the “Act”), requiring businesses to file information about their beneficial ownership with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). The stated purposes of the Act include the collection of beneficial ownership interest information for corporations, limited liability companies and similar entities “to (A) set a clear, Federal standard for incorporation practices; (B) protect vital United States national security interests; (C) protect interstate and foreign commerce; (D) better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activity; and (E) bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.”

FinCEN has until January 1, 2022 to adopt regulations and establish a private national database for information collected under the Act. The following is a summary of  the basic provisions of the Act.

What entities are affected by the Act?

Under the Act, a “reporting company” is defined as a corporation, limited liability company or other similar entity that is created by filing documents with a secretary of state. This definition includes foreign businesses that transact business within the United States.

The Act exempts most financial services institutions, including investment and accounting firms, securities trading firms, banks, and credit unions that report to and are regulated by government agencies such as the Securities and Exchange Commission, the Office of the Comptroller of the Currency, or the FDIC, as well as non-profit organizations and certain inactive entities. Additionally, an entity that (i) employs more than 20 full-time employees; (ii) filed in the previous year Federal income tax returns demonstrating more than $5,000,000 in gross receipts or sales in the aggregate; and (iii) has an operating presence at a physical office within the United States is exempt from reporting. Exemption is not automatic – in order to become exempt, entities will have to apply for exemption.

While partnerships and most business trusts are not specifically referred to in the definition of “reporting company”, it is likely they will be considered “other similar entities” as they are not included among the exempt business entities. Presumably this will be clarified in the forthcoming regulations.

Who constitutes a “beneficial owner” under the Act?

A “beneficial owner” is defined as “an individual who, directly or indirectly, through a contract, arrangement, understanding, relationship, or otherwise– (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” The term “indirectly” means that a reporting company will need to trace its ownership back through any entities in the ownership chain to identify the individual or individuals who own, ultimately own, or control the company.

However, a “beneficial owner” does not include (i) a minor, if the minor’s parent or guardian provides the required information; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an employee of the company and whose control over or economic benefits are derived solely from his or her employment; (iv) an individual whose only interest is through a right of inheritance; or (v) a creditor (only in their capacity as such).

What constitutes “required information” under the Act?

The Act requires that the report to be filed by the reporting company identify each beneficial owner and each applicant (the individual who files the application to register the entity with a secretary of state or similar office)  by (i) full legal name; (ii) date of birth; (iii) current residential or business street address, and (iv) a unique identifying number from an acceptable identification document or an identifier issued by FinCEN. Acceptable identification documents include a non-expired passport issued by the United States or a foreign government, and a non-expired identification document issued by a State, local government or Indian Tribe.

If an exempt entity is a beneficial owner, then the beneficial owner report must give the name of the exempt entity, but does not have to provide any other required information.

When must the information be filed with FinCEN under the Act?

Entities in existence on the date FinCEN adopts the implementing rules will have to file beneficial ownership information or an exemption application within two years after such date. Entities formed after this date will be required to file the beneficial ownership information at the time of formation.

All entities must file updated beneficial ownership information or an exemption application within one year of any change in beneficial ownership.

What are the penalties for failing to comply with the Act?

The Act establishes criminal and civil penalties for willful noncompliance. Persons who knowingly provide false or fraudulent information or willfully fail to report complete or updated information may be fined $10,000 and/or imprisoned for up to two years. Additionally, a civil penalty of $500 for each day that the violation continues will be owed to the United States.

A person who negligently provides false information or fails to provide complete or updated beneficial ownership information will not be subject to civil or criminal penalties. The Act does contain a safe harbor provision, protecting a person who provided inaccurate information if that person voluntarily and promptly corrects the report within 90 days of its initial filing.

Who can access the national database?

The information collected by FinCen will not be made available to the public, and is not subject to disclosure under a Freedom of Information Act request. Under the Act, collected information may only be released to:

• A federal, state, local, or tribal law enforcement agency conducting an active
  investigation;
• A federal agency making the request on behalf of a foreign law enforcement agency under mutual legal assistance protocols; and
• A financial institution conducting due diligence under the Banking Secrecy Act or USA PATRIOT Act – with customer consent.

What should companies do to comply with the Act?

Prior to January 1, 2022, companies should check to see if FinCEN has issued regulations for compliance with the Act. Once the rules have been issued, entities should review the regulations to confirm whether they must file a beneficial owner report or are eligible to file for an exemption. Additionally, companies should keep updated records of the required information for each owner and enhance their compliance processes to ensure that the required information is being collected and reported to FinCEN in accordance with the Act.

Companies should also include language in their shareholders, partnership, or operating agreement or similar document that requires owners of the company to regularly provide any information required to comply with the Act and any relevant regulations, and may want to consider indemnification provisions if an owner fails to timely provide required information or provides false or incomplete information. If such agreement contains a confidentiality provision, it should include an exception to permit the company to report the required information to FinCen.

For further information or guidance on revising your policies, procedures, and operating agreement, please contact David Paseltiner.