Submitted by UCS on February 9, 2021
On January 1st, the National Defense Authorization Act for Fiscal Year 2021 was enacted into law. The bill includes the Corporate Transparency Act (the “CTA”) which creates a beneficial ownership registry within the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”), requiring certain corporations and limited liability companies to report information on their “beneficial owners” to FinCEN.
What information is required to be reported?
Beneficial owners and companies must report a list of beneficial owners as well as the following:
What are the requirements of the CTA?
The CTA requires corporations and limited liability companies to disclose to law enforcement and others with legally mandated anti-money laundering responsibilities ( for e.g. financial institutions) information on who is the real, natural person (a.k.a. beneficial owner) who owns and controls an entity at the point of formation and update such information upon any change. This rule reflects a growing international trend to require disclosure of beneficial ownership and creates a compliance regime similar to that of many other countries.
Who is FinCEN?
FinCEN is a government bureau that works to prevent and punish money laundering and related financial crimes of criminals and terrorists networks. They also track suspicious persons and activity by researching mandatory disclosures for financial institutions.
FinCEN receives its duties from the United States Congress and the director of the bureau is appointed by the Treasury Secretary.
What is a Beneficial Owner?
The CTA defines a beneficial owner as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise 1) Exercises substantial control over an entity or 2) Owns or controls at least 25% of the ownership interests in an entity and 3) Receives substantial economic benefits from the assets of a corporation or limited liability company. A “beneficial owner” does not include:
Who will have access to this information?
Federal, state, local and tribal law enforcement would have access to the information for use in authorized investigations as would financial institutions (with customer consent) that have legally mandated anti-money laundering obligations. Note, the CTA will not require states to maintain a separate beneficial ownership information registry.
Are There Exemptions?
The CTA explicitly exempts companies that employ more than 20 people, report revenues of more than $5 million on tax returns, and have a physical presence in the United States; 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; and Churches, charities, and other nonprofit organizations.
What will be the responsibilities of states for handling the new reporting requirement?
The CTA will require states to notify filers upon initial formation or registration of the federal requirement to provide beneficial ownership to FinCEN. States will have two years after the effective date of the regulations governing the CTA to begin providing such notice. States must also provide filers with the reporting company form created by the secretary of the Treasury and must also update their websites to notify filers of the federal requirements under the CTA.
When is the reporting requirement expected to take effect?
The U.S. Treasury must pass and put rules into effect by December 31, 2021, at which time reports will commence being required.
What is the grace period for existing companies to submit their information?
Starting in 2022, existing companies will have two years to submit initial reports while individuals forming or registering new companies will be required to submit reports at the time of formation or registration.
Is there a penalty for non-compliance?
Any party that intentionally fails to comply with the reporting requirements of the CTA may be liable for fines of no more than $500 for each day that there is a willful failure to report complete beneficial ownership information and such parties may be subject to aggregate fines of up to $10,000 or a prison term of up to two years.
How does this change how annual reports are filed?
Companies will be required to submit annual reports that identify the company’s beneficial owners and changes in beneficial ownership.
What should companies prepare for?
Consult with your attorney on the impact of the new laws and evaluate how your company can remain in compliance.
Disclaimer: United Corporate Services, Inc. and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.