Corporate Transparency Act Establishes New Beneficial Ownership Reporting Requirements for U.S. and U.S.-Registered Foreign Companies

Key Points

• Enacted as part of the 2021 NDAA, the Act will require companies with no prior anti-money laundering reporting requirements to submit beneficial ownership information to FinCEN.
• FinCEN must issue regulations to implement the new beneficial ownership reporting requirements within one year, i.e., by December 31, 2021. In the meantime, companies should carefully review the statute, including its broad definition of a “reporting company,” and evaluate their potential obligations under the forthcoming regulations.
• The Act also calls for amendments to the FAR to require government contractors and subcontractors subject to the new beneficial ownership reporting requirements to provide that information as part of any bid or proposal for a contract valued greater than the simplified acquisition threshold.

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Background and Overview

Following years of debate and 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 passed and enacted into law the Corporate Transparency Act (“the Act”). Enacted through Congress’s override of President Trump’s veto (over unrelated issues) of the National Defense Authorization Act for Fiscal Year 2021 (2021 NDAA), the Act establishes significant new beneficial ownership reporting requirements for companies not previously subject to the U.S. Department of the Treasury’s Financial Crimes and Enforcement Center’s (FinCEN) anti-money laundering or counter-terrorist financing regulations. Broadly speaking, the law and its implementing regulations are expected to significantly advance efforts by international regulators and corporations to crack down on anonymous ownership of shell companies and facilitate the tracing of financial exchanges involving or benefiting sanctioned and other high-risk individuals.

The Act applies to U.S. companies and non-U.S. companies registered to operate in the United States that fall within the definition of a “reporting company,” described below. Subject to certain exceptions, companies that meet this definition and do not qualify for an exemption will be required to file information identifying certain “beneficial owners” at the time of the company’s formation and annually thereafter following a regulatory phase-in period. The precise effective date of these requirements will depend on the timing of implementing regulations from the Treasury Department, which the Act requires be promulgated within one year of its effective date, i.e., by December 31, 2021. Those regulations will provide additional details on the scope and applicability of the new requirements. In the meantime, companies should familiarize themselves with the detailed definitions and requirements outlined in the statute itself.

Reporting Requirement

The Act requires each “reporting company” to submit a report to FinCEN that identifies each “beneficial owner” of the applicable reporting company and each “applicant” with respect to that reporting company by—(i) full legal name; (ii) date of birth; (iii) current residential or business street address; and (iv) unique identifying number from an “acceptable identification document” (e.g., a driver’s license or passport) or FinCEN identifier.

• “Beneficial Owner” – Similar to existing beneficial ownership rules for financial institutions regulated by the Bank Secrecy Act and related statutes and regulations, the Act defines “beneficial owner” as an individual 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 percent of the ownership interests of the entity.
  • The statute does not define “substantial control,” though FinCEN may look to its existing definition of “beneficial owner” in interpreting the term. The existing definition includes 25-percent owners as well as any individual with “significant responsibility to control, manage, or direct a legal entity...” 31 C.F.R. § 1010.230(d)(2). That said, the Act does exclude certain individuals from the definition of “beneficial owner,” including “an individual acting solely as an employee of a corporation, limited liability company, or other similar entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person.” 
  • Companies that believe they may qualify as “reporting companies” should closely monitor the definition of “substantial control” as FinCEN develops and issues its implementing regulations. Companies may want to consider direct engagement through the rulemaking process to maximize the national security value of this reporting while minimizing the administrative burden on legitimate businesses, consistent with the stated purposes of the law.
• “Applicant” – The Act defines “applicant” to include any individual who files an application to form a U.S. entity with any U.S. State or Indian Tribe, or an individual who applies or files to register a non-U.S. entity to do business in the United States.

Timing of Reports

The precise timing of reports will likely be described further in FinCEN’s subsequent regulations, however the Act generally sets three deadlines for beneficial ownership reports:

• Existing Entities – Any reporting company that has been formed or registered before the effective date of FinCEN’s regulations shall submit a report “not later than 2 years after the effective date.”
• New Entities – Any reporting company that is formed or registered after the effective date of FinCEN’s regulations shall be required to submit a report at the time of formation or registration.
• Updating Prior Reports – A reporting company must submit a report within one year after the date on which there is a change in previously reported beneficial ownership information.

Scope of “Reporting Company”

FinCEN’s regulations may provide additional clarity on the scope of “reporting company,” however the Act itself provides a broad baseline of companies that must report, and then provides a detailed list of entities excluded from the beneficial ownership reporting requirements.

• At the baseline, the Act defines “reporting company” to include: A corporation, limited liability company, or other similar entity that is:
  • Created by the filing of a document with a secretary of state or a similar office under the law of a U.S. State or Indian Tribe; or
  • Formed under the law of a non-U.S. country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a U.S. State or Indian Tribe.
• The definition specifically excludes 23 enumerated types of entities, generally covering entities already subject to other anti-money laundering requirements, entities that must register with or report to the Securities and Exchange Commission or other regulatory bodies, and entities that otherwise pose a low risk relative to the purposes of the Act. The Act’s definition also includes a catch-all category covering any entity or class of entities determined by the Treasury Department in coordination with the Departments of Justice and Homeland Security not to warrant reporting requirements.
• Some of the notable exclusions include:
  • Certain entities subject to supervision or which have existing reporting requirements to financial regulatory authorities.
  • Any entity that (i) employs more than 20 employees on a full-time basis in the United States; (ii) filed a federal that return that reported more than $5 million in gross receipts or sales (including by subsidiaries and operating affiliates) and (iii) has an operating presence at a physical office within the United States.
  • 501(c) organizations, political organizations, and certain trusts.
  • A money transmitting business registered with FinCEN.
  • Certain registered investment companies and investment advisers.
  • Entities owned or controlled directly or indirectly by one or more of the other enumerated exempt entities (excluding entities owned or controlled by a money transmitting businesses and certain inactive entities).

Penalties

The Act includes substantial penalties for willfully providing false information or willfully failing to report (or update) beneficial ownership information, including civil and criminal penalties of up to $500 per day the violation continues, or up to $10,000 and/or imprisonment for up to two years.

Recommendations

While companies await further guidance and regulations from FinCEN, they should study the scope of the Act’s definition of a “reporting company” to determine their potential exposure to the new beneficial ownership reporting requirements. Companies that believe they are or will qualify as a “reporting company” should take further steps to identify individuals likely to qualify as “beneficial owners” or “applicants” under the applicable definitions in the Act. Such companies should also consider how and when they will report any required information and identify an individual or business unit responsible for gathering, reporting, and updating that information.

Government contractors and subcontractors should also note the Act’s requirement that the Federal Acquisition Regulation (FAR) be amended within two-years of the Act’s effective date to require “any contractor or subcontractor” subject to the reporting requirements in the Act to disclose its relevant beneficial ownership information “as part of any bid or proposal for a contract” valued above the simplified acquisition threshold (currently $250,000, subject to certain exceptions). This will expand current requirements under FAR 4.1802 and 52.204-17, which require Offerors (i.e., prime contractors) that are owned or controlled by another entity to provide information about their ultimate corporate (i.e., legal entity) ownership prior to contract award.

Companies that anticipate unintended consequences that would make compliance with the Act and its implementing regulations unnecessarily burdensome should engage with regulators, or through the regulatory process, to suggest improvements through the implementation process.