Anything to report?

The Corporate Transparency Act (the CTA)[1] was enacted on 2 January 2021, as part of the National Defense Authorization Act for Fiscal Year 2021 (the Act).[2] The Act was enacted as the result of a congressional override following a veto of the legislation by former president Trump. The CTA represents the first significant update to the US anti‑money laundering legislative framework in nearly two decades.

With the enactment of the CTA, the US joins much of the economically developed world in requiring the disclosure of beneficial ownership information. One of the most significant aspects of the provision is a requirement that a government‑maintained registry be established that will hold information regarding the beneficial owners of certain entities formed or registered to do business in the US.

A non‑binding resolution was expressed in s.6402 of the Act, which cites that nearly two million corporations and limited liability companies (LLCs) are formed in the US each year with little or no information required by the states, under the laws of which these entities are formed, regarding the disclosure of the beneficial ownership of these entities. Therefore, congress acknowledged the acts of ‘malign actors’ to conceal the ownership of these entities with an intention to facilitate illegal activity (i.e., money laundering and the financing of terrorism, among others). As a result, and as noted, the Act mandates the creation of a federal government‑maintained registry of beneficial owners of certain entities formed or registered to do business in the US. The registry is expected to be useful for law enforcement purposes in order to control the spread of the aforementioned illegal activity. The goal of this legislation is to provide transparency and disclosure around the use of so‑called ‘shell companies’ in the US.

Effective dates

These new reporting requirements take effect as of the effective date of regulations, to be issued by the Secretary of the US Treasury by 1 January 2022. Once the regulations are effective, existing corporations, LLCs or ‘other similar entities’ must file a report within two years from the effective date of the regulations. After the effective date of the regulations, newly formed or registered entities must report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) at the time of formation or registration. Annual reporting updates will be required within one year of any change to the beneficial ownership information.

What is a reporting company?

Under s.6403 of the Act, the term ‘reporting company’ contains a long list of entities exempted from this definition. These include banks, publicly traded companies, registered broker‑dealers, governmental entities, certain insurance companies, registered investment advisors, public accounting firms and any entity that by nature of its business:

• employs more than 20 employees on a full‑time basis in the US;
• files income tax returns demonstrating more than USD5 million in gross receipts or sales; and
• has an operating presence at a physical location within the US.

Consequently, a ‘reporting company’ is a corporation, LLC or other similar company that is incorporated under the laws of any state or a foreign company registered to conduct business in the US by filing a document with any state. Reporting companies must disclose the identity of each beneficial owner of the company and each applicant with respect to the company.

The reported information must include:

• full legal name;
• date of birth;
• current residential or business street address; and
• a unique identifying number from an acceptable identification document (such as a driver’s licence or passport) or a unique identity number generated by FinCEN.

Note that the reporting requirement is now to FinCEN, whereas, in the past, the reporting requirement was to the US Internal Revenue Service (IRS).

Who is a beneficial owner?

For purposes of the CTA, a beneficial owner is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise:

• exercises substantial control over the entity; or
• owns or controls not less than 25 per cent of the ownership interests of the entity.

The new regulations are expected to provide significant clarification around the terms ‘substantial control’ and ‘ownership interest’. The term beneficial owner has been part of the existing law in the US for some time. Under the same definition of the term, the following individuals shall not be treated as ‘beneficial owners’:

• an individual acting as a nominee, intermediary, custodian or agent of another individual;
• an individual acting solely as an employee of the entity;
• an individual whose only interest in the entity is through a right of inheritance;
• a creditor of the entity, unless the creditor is also a beneficial owner; and
• a minor child, if the parent or guardian’s information is reported.

Who has access to the beneficial ownership database?

FinCEN is required to retain the beneficial ownership information for at least five years. The information collected will remain confidential and is not subject to disclosure unless requested by one of several governmental agencies (e.g., federal and state law enforcement agencies within the US or by a foreign central authority or competent authority under an established treaty, agreement or convention during the course of an investigation).

Questions around privately controlled companies

Privately controlled companies in the US are currently subject to beneficial ownership reporting under the income tax regime and, as part of this, ownership changes are reported annually to the IRS. The Act may require a different and/or more timely reporting, particularly where ownership changes are frequent. There are currently many US entities that merely hold assets but generate no income, which have heretofore not reported beneficial owners. The Act will change this. Many foreign structures utilise one or more US (or non‑US) entities to hold title to assets located within the US, including US securities, US real estate, artwork, etc. Non‑US entities are frequently used to avoid the application of the US estate tax regime.

Will non‑US entities holding US assets be subject to the new reporting requirement? More guidance is needed in order to assess whether non‑US entities would be impacted by this new legislation.

Questions around trusts

For the purposes of this new reporting, the definition of a ‘reporting company’ does not specifically include trusts. However, the definition does appear to give importance to entities that are created by the filing of a document with a state (similar to the incorporation of LLCs). Under existing US principles, there are generally two types of trusts: non‑statutory (or common‑law) trusts, which are not considered legal entities but rather contractual arrangements only; and statutory trusts, which are considered legal entities because their formation requires a filing with a state authority (similar to how a business entity is formed).

Will reporting be required for trusts? There is an industry expectation that reporting could be required for statutory trusts and not likely required for non‑statutory trusts. After the release of new regulations, tax advisors expect clarification around these questions.

Penalties

Significant penalties, both civil and criminal, will apply for non‑compliance. Under the statute, it is unlawful to provide false information or fail to report accurate, complete and updated beneficial ownership information. The civil penalty is up to USD500 for each day of violation and until the information is corrected. The criminal penalty is no more than USD10,000 or imprisonment for up to two years, or both could potentially be assessed. An exemption may apply if an individual acting in good faith corrects any inaccurate information within 90 days of submitting the inaccurate report. The unauthorised disclosure of reported information may also lead to a USD500‑per‑day civil penalty and a criminal penalty of up to USD250,000 and/or imprisonment of up to five years.

Key takeaways

This new law is a significant change in that beneficial ownership information is now being collected for the use of US governmental agencies (outside of the IRS), while, in theory, confidentiality still applies. The new law potentially impacts family structures and privately controlled entities, including those owned by trusts and private clients.

Reporting rules will become effective no later than 1 January 2022, and significant guidance in the form of regulations is expected before the end of 2021. Until then, foreign trustees, as well as private clients, should be advised to begin reviewing their existing holding structures to determine the relevant reporting implications potentially required.