Corporate Transparency Act

Corporate Transparency Act

As part of the National Defense Authorization Act of 2021 Congress adopted the Corporate Transparency Act (or "CTA"). The CTA includes some of the most significant changes to US anti-money laundering ("AML") laws in recent years. One of the most significant changes is that the CTA will create a new national database of corporate beneficial ownership information. Complying with the CTA will impose major new obligations on companies and their owners.

CTA Requirements

The CTA requires corporations, partnerships, limited liability companies and other businesses to file a beneficial ownership report. The beneficial ownership report must disclose each beneficial owner of the company, along with specified personal data about each individual. Complying with this requirement will have a significant impact on entrepreneurs, business owners, attorneys and others involved in forming new companies.

The CTA empowers FinCEN, the Financial Crimes Enforcement Network of the U.S. Treasury Department to implement this new law. In December 2021 FinCEN published is initial draft of proposed regulations.

Under FinCEN's proposed regulations, companies formed after the effective date of the regulations must file an initial beneficial ownership report fourteen days after they are formed. Entities that existed before the effective date of the new regulations will have one year to file an initial beneficial ownership report.

Corporate Transparency Act / Beneficial Ownership Report

Each beneficial ownership report must provide the name and other identifying information of each beneficial owner. The CTA defines "beneficial owner" as any individual who, directly or indirectly:

1. Exercises substantial control over the covered entity, or

2. Holds at least 25 percent of the ownership interests of the covered entity.

In its proposed regulations, FinCEN defines "substantial control" with a facts and circumstances test, that looks at the individuals ability to control or influence the decisions of the company.

Exempt Individuals

The CTA exempts several types of individual from the coverage of a beneficial ownership report. An individual that falls into one of these exempt categories does not need to be disclosed in the company's beneficial ownership report:

1. Custodians/agents for an individual, or those acting solely as an employee of an entity.

2. An entity's creditors, unless the creditor holds at least 25 percent of the ownership interests of the covered entity or substantial control.

3. An individual whose only interest in a covered entity is through a "right of inheritance."

4. A minor child if the information of the parent (or guardian) is reported. The obligation to file a FinCEN report is an obligation of the covered entity itself.

Data Required in the Beneficial Ownership Report

Each beneficial ownership report must include the following data points for each beneficial owner as well as for the individual that files the paperwork to form or register the entity (called the "company applicant"):

1. Full legal name,

2. Date of birth,

3. Current residential or business street address, and

4. A unique identifying number from an acceptable identity document (such as an unexpired drivers license or passport) or a unique identity number generated by FinCEN.

Importantly, if an exempt entity has a direct or indirect ownership in a covered entity, the covered entity must report the legal name of the exempt entity, but not the other information generally required.

Exempt Companies under the CTA

The CTA exempts several types of companies from the obligation to file a FinCEN report. Most exempt entities are already subject to some form of federal regulation that gives federal law enforcement visibility into their ownership.

Some of the key forms of exempt entities are:

1. Public companies (defined as issuers of a class of securities under section 12 of the Securities Exchange Act of 1934 or issuers that are required to file information under section 15(d) of that Act).

2. Any entity that employs more than 20 full-time employees in the United States, filed a federal tax return for the previous year with more than $5 million in gross receipts or sales (includes subsidiaries and operating affiliates), and operates from a physical US office.

3. Shelf companies (defined as any entity that is in existence for over one year, not engaged in "active business," and not directly or indirectly owned by a non-US person).

4. Certain charitable trusts and charitable split-interest trusts, Internal Revenue Code Section 501(c) charitable organizations and certain related entities.

5. Any pooled investment vehicle that is operated or advised by a bank, registered broker-dealer, registered investment company, or registered investment adviser, among others.

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