Most business entities in the United States are not currently required to disclose the identities of their equity owners. However, this will soon change with the passage of the Corporate Transparency Act (“CTA”) that was enacted by Congress on January 1, 2021. The CTA, which was enacted as part of the Anti-Money Laundering Act to deter financial crimes, will for the first time require many existing and future business entities to disclose information about the entity’s equity owners. The equity owner disclosure requirements will take effect upon the issuance of final regulations under the CTA by the Financial Crimes Enforcement Network (“FinCEN”), which is expected to occur later this year or early in 2023. Assuming that the proposed CTA regulations issued earlier by FinCEN are substantially similar to the final version of the CTA regulations, entities formed, or registered to do business, in the United States, except for certain exempted entities listed below, will be required to report information regarding the beneficial owners of the entity to FinCEN. Entities that fail to comply with the CTA’s reporting requirements may be subject to civil and/or criminal penalties.
The CTA broadly defines a reporting company (“Reporting Company”) as “a corporation, limited liability company, or other similar entity that is: (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign 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 State or Indian Tribe.” Under the proposed CTA regulations, the following entity types are excluded:
- Insurance Producers
- Regulated Commodity Brokers
- Public Accounting Firms
- Public Utilities
- Financial Market Utilities
- Pooled Investment Vehicles
- Charitable Organizations
- Charitable Holding Companies
- Grandfathered Private Businesses
- Wholly-Owned Subsidiary of Exempt Entity
- Stable Shell Companies
- Publicly-Traded Companies
- Governmental Entities
- Credit Unions
- Bank Holding Companies
- Money Transmitting Businesses
- Securities Exchanges and Clearing Agencies
- Other SEC Regulated Entities
- Investment Advisors
- Investment Companies
- Exempt VC Fund Advisers
- Insurance Companies
Assuming the final CTA regulations mirror the proposed CTA regulations published earlier for public comment, each Reporting Company must file a report for each beneficial owner (“Beneficial Owner”). The report will require disclosure of each beneficial owner’s full legal name, date of birth, current address (which may be a residential or business street address), and either a unique identifying number from an acceptable identification document or a FinCEN identifier. Acceptable identification documents include: (i) a non-expired passport issued by the United States; (ii) a non-expired identification document issued by a State, local government, or Indian Tribe to an individual; (iii) a non-expired driver’s license issued by a State; or (iv) a non-expired passport issued by a foreign government.
The proposed CTA regulations defines a Beneficial Owner of a Reporting Company as any individual who, directly or indirectly, (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity. Substantial control (“Substantial Control”) over an entity is determined on a factual and circumstantial basis. For example, Substantial Control includes “direction, determination, or decision of, or substantial influence over, important matters affecting the reporting company,” such as “the nature, scope, and attributes of the business of the reporting company.” The following individuals are excluded from the definition of Beneficial Owner: (i) a minor child; (ii) an individual acting as an intermediary or agent on behalf of another; (iii) a person whose control over a Reporting Company derives solely from their employment; (iv) an individual whose only interest in a Reporting Company is through a right of inheritance; or (v) a creditor of a Reporting Company.
Each Reporting Company must also provide the same details for its company applicant (“Company Applicant”). A Company Applicant is the individual who filed the document that created the Reporting Company or filed the document that qualified the Reporting Company to do business in the United States. Often times, the Company Applicant will be the accountant, lawyer, or paralegal who filed the articles of incorporation, articles of organization, or application for qualification to do business.
Reporting Companies in existence as of the date regulations promulgated under the CTA take effect (the “Effective Date”) will have one year to file their initial reports. Reporting Companies formed after the Effective Date will have 14 calendar days after the date of formation. If changes are made to any information previously submitted, the Reporting Company must file an amendment within 30 calendar days.
Companies that are subject to the CTA should be aware of civil and criminal penalties for reporting violations. For an inadvertent failure to file, the Reporting Company will be subject to a daily fine. Willful failure to file may result in criminal sanctions. Penalties are also enhanced when failure to file is combined with other illegal activity. Importantly, the CTA contains a safe harbor from such criminal and civil penalties if the report filer believed the report to be true and corrects the information within 90 days.
Once the CTA takes effect, Mirick O’Connell intends to send out an additional communication regarding the CTA. In the meantime, please contact any of the attorneys in our Business Group with any questions regarding the CTA.