On January 1, 2021, Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act. The purpose of the CTA is to “better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity” by creating a national registry of beneficial ownership information for “reporting companies.” The CTA largely applies to foreign-owned shell companies and is set to take effect no later than January 1, 2022—upon the promulgation of regulations by the secretary of the US Department of the Treasury (Treasury).
While the Corporate Transparency Act largely applies to foreign-owned shell companies, domestic companies should carefully read the definition of “reporting company” to ensure they fall within one of the exceptions to the definition. Reporting companies should be mindful of the various penalties associated with noncompliance or providing inaccurate or misleading information to FinCEN.
The new law requires “reporting companies” to disclose the identities of their “beneficial owners” and “applicants” to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). A reporting company is broadly defined as any corporation, limited liability company, or other similar entity established in any U.S. state or territory or foreign company registered to do business in the U.S. Although the CTA excludes numerous categories of companies, exempt companies, which include public companies, banks, and investment companies, and other highly regulated industries and already subject to reporting requirements of other federal agencies.
A beneficial owner is defined as any individual who, directly or indirectly: (1) exercises substantial control over the reporting company or (2) owns or controls at least 25 percent of the reporting company. Individuals excluded from this definition include minors (provided parental information is reported) and nominees, intermediaries, custodians, or agents acting on behalf of another individual. An applicant is defined as any individual who files an application to form or register the reporting company.
Reporting companies will be required to submit a report to FinCEN disclosing the name, date of birth, current address, and unique identification number (from a passport or driver’s license) of each of their beneficial owners and applicants.
Companies subject to the CTA should take note of filing deadlines to avoid penalties and fines. Companies formed or registered after the FinCEN regulations go into effect must submit reports at the time of formation or registration. By contrast, existing companies must submit reports within two years after the effective date of these regulations. Additionally, upon a change in any beneficial owner information, reporting companies will be required to update this information with FinCEN no later than one year after such change.