Proposed regulations implementing the Corporate Transparency Act

In January 2021, Congress enacted the Corporate Transparency Act as part of the National Defense Authorization Act. The CTA requires legal entities to register with the U.S. Financial Crimes Enforcement Network, aka FinCEN, and disclose the beneficial owners of corporations, limited liability companies, or other business entities. The CTA is intended to assist law enforcement in detecting, preventing and punishing terrorism, money laundering and other misconduct involving United States corporations, as well as for other purposes.

Under the CTA, the secretary of the Treasury must prescribe implementation of regulations under the act by the beginning of 2022. Recently, FinCEN published a rulemaking notice to implement registration and disclosure requirements of the CTA and has invited public comments on who should have to file reports and what information should be disclosed. The comment period ends Monday.

The Biden administration views the CTA as an important part of its enforcement efforts. The White House intends to use the FinCEN regulations to counteract opaque corporate structures that enable money laundering and other financial crimes.

The CTA generally requires reports from U.S. companies, including corporations, LLCs, limited partnerships and business trusts. The CTA also requires reports from entities formed under foreign law and registered to do business within the United States.

Some entities, such as banks, public companies, registered broker-dealers, registered investment companies and advisers, registered money transmitting businesses, insurance companies and others are exempt from the CTA. Generally, the exemptions apply to regulated businesses whose beneficial ownership information is readily available to U.S. regulators.

There is also an exemption for larger operating companies, which include entities that (1) have over 20 full-time employees in the United States; (2) have more than $5 million in gross receipts; and (3) have a physical office within the United States. The law also exempts subsidiaries owned or controlled by exempt entities and pooled investment vehicles.

If a company is subject to the CTA, it must disclose information relating to each of its beneficial owners, which is defined 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% of the ownership interests of the entity. Substantial control is indicated by (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any senior officer or dominant majority of the board of directors (or similar body) of a reporting company; and (3) direction, determination or decision of, or substantial influence over, important matters of a reporting company.

A reporting company must also submit information regarding the company applicant, meaning the individual who forms the entity or registers the entity to do business in the United States. Many companies are formed by lawyers or services, but the company applicant would be the person who directs or controls the person who files the document.

The company will be required disclose its name, trade names, address, jurisdiction of formation, and identification number. The company must also disclose the names, birthdates, addresses and identifying numbers of the beneficial owners and company applicants.

Companies must file with FinCEN 14 days after formation or registration. Entities formed or registered before the effective date of the final regulations have one year after the effective date of the regulation to comply. Companies must file updated reports within 30 calendar days after any change in the information that was reported.

The CTA has strict penalty provisions to enforce compliance. A person who willfully fails to report or provides false or fraudulent information can be liable for a penalty of up to $500 per day, a fine of $10,000 or imprisonment up to two years, or both. More severe penalties apply to unauthorized disclosures.

Persons forming new companies should monitor the applicable dates carefully. 