The Corporate Transparency Act (CTA) enacted in January 2021 as part of the National Defense Authorization Act establishes new requirements that will mandate the disclosure and reporting to the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN) of beneficial ownership interests in corporations, limited liability companies, and many other corporate entities. On April 5, 2021, the US Treasury Department published an announcement in advance of proposed rulemaking soliciting public comments on the implementation of the CTA. See Federal Register, April 5, 2021 publication here: Federal Register :: Beneficial Ownership Information Reporting Requirements.

This alert summarizes the current analysis of developing CTA reporting requirements. Tarter Krinsky & Drogin LLP attorneys are available to assist clients considering responding to the request for public comments to the proposed rulemaking, which are due by May 5, 2021. We also support clients’ ongoing efforts to develop tailored mechanisms for satisfactory compliance with the CTA.

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Reporting Pursuant To The CTA
Section 6403 of the CTA requires reporting companies – corporations, limited liability companies and similar entities (subject to certain exemptions) – to submit to FinCEN specified information on the individual natural persons who control them. Specified information is also to be required about the persons who form or register reporting companies.

The CTA Broadens Reporting And Related Compliance Requirements For Covered Persons
The CTA will require any covered entity to make an affirmative reporting of its “beneficial owners” to FinCEN. While this type of information is already collected in the United States by banks and other financial institutions pursuant the Bank Secrecy Act and various anti-money laundering laws and regulations, until the implementation of the CTA, the burden of compliance has been with financial institutions rather than the covered entity. The CTA is intended in part to assist US regulators in investigation of potential illicit activity, including money laundering, financing of terrorism, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption.

The CTA requires FinCEN to create and maintain a confidential, secure and non-public database containing the information collected, using information security methods and techniques that are appropriate to protect nonclassified information systems at the highest security level. The CTA will require the collection of “sensitive information,” and therefore establishes limitations on access to the collected information to “authorized government authorities” in order to facilitate important national security, intelligence, and law enforcement activities; and confirm beneficial ownership information provided to financial institutions to facilitate the compliance of financial institutions with anti-money laundering, countering the financing of terrorism, and customer due diligence requirements under applicable law.

Entities Required To Comply With The CTA
The CTA defines a “reporting company” as a corporation, limited liability company, or other similar entity that is created by the filing of a document with a secretary of state or similar office under the law of a State or Indian Tribe; or 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.

Exceptions. The Act provides exceptions to reporting company status, including:

• Any entity that:
  • employs more than 20 employees on a full-time basis in the U.S.;
  • filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of other entities owned by the entity; and other
  • entities through which the entity operates; and
  • has an operating presence at a physical office within the U.S.;
• Any corporation, limited liability company, or other similar entity of which the ownership interests are owned or controlled, directly or indirectly, by 1 or more entities described in the other exceptions provided in the Act;
• Any corporation, limited liability company, or other similar entity in existence for over 1 year; that is/has/does NOT:
  • engaged in active business;
  • owned, directly or indirectly, by a foreign person;
  • experienced a change in ownership or sent or received funds in an amount greater than $1,000 in the preceding 12-month period; and
    hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity;
• Any entity or class of entities that the Secretary of the Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security, has, by regulation, determined should be exempt because requiring beneficial ownership information from the entity or class of entities would not serve the public interest; and would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes;
• An issuer of a class of securities registered under section 12 of the Securities Exchange Act; or that is required to file supplementary and periodic information under such Act;
• An entity established under the laws of the United States, an Indian Tribe, a State, or a political subdivision of a State;
• A bank;
• A bank holding company;
• A savings and loan holding company;
• A Federal credit union or a State credit union;
• A registered money transmitting business;
• A registered broker or dealer;
• A registered exchange or clearing agency;
• An investment company or investment adviser registered with the Securities and Exchange;
• An insurance company;
• A Commodities Futures Act registered entity, such as a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor, retail foreign exchange dealer;
• A registered public accounting firm;
• A public utility;
• A financial market utility; and
• Any pooled investment vehicle that is operated or advised by a bank, a Federal Credit Union, a broker-dealer, and investment company, or an investment adviser.

Information CTA Will Require To Be Reported
In general, a reporting company must provide a report 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, as of the date on which the report is delivered, residential or business street address; and
(iv)(I) unique identifying number from an acceptable identification document; or
(II) FinCEN identifier in accordance with FinCEN requirements.

If an exempt entity has or will have a direct or indirect ownership interest in a reporting company, the reporting company or the applicant shall, with respect to the exempt entity, only list the name of the exempt entity, and shall not be required to report the information with respect to the exempt entity otherwise required.

The CTA Definition Of “Beneficial Owner”
The term ‘beneficial owner’ means, with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise —

(i) exercises substantial control over the entity; or
(ii) (ii) owns or controls not less than 25 percent of the ownership interests of the entity.”

“Beneficial Owner” does not include:

• A minor child
• A nominee, intermediary, custodian, or agent on behalf of another individual (the individual whom they represent would be considered the beneficial owner)
• An individual whose only interest in an entity is a right of inheritance.
• A creditor.

Documentation Identifying Beneficial Owner
Acceptable identification documents are:

• a nonexpired passport issued by the United States;
• a nonexpired identification document issued by a State, local government, or Indian Tribe to the individual acting for the purpose of identification of that individual;
• a nonexpired driver's license issued by a State; or

a nonexpired passport issued by a foreign government.

Timing Of Effectiveness Of CTA
The Secretary of the Treasury has one-year from the bill’s enactment to promulgate regulations, that is January 2022. Existing entities will be required to comply with the CTA and regulations not later than 2 years after the effective date of the regulations. Entities formed or registered after the effective date of the regulations will be required to comply at the time of formation or registration.

Reporting Changes In Beneficial Ownership
Any change in beneficial ownership must be reported not later than 1 year after the date on which there is a change.

Penalties For Failing To Comply With CTA
Those that either fail to provide the necessary report to FinCEN or provide false information in their report may be subject to civil penalties of not more than $500 for each day that the violation continues or has not been remedied; and criminal penalties consisting of a fine of not more than $10,000 and/or imprisonment for not more than 2 years.