In an effort by Congress to aid law enforcement in its efforts against money laundering, financing of terrorism, tax fraud, financial fraud, and other crimes, many small businesses will now be required to report the identity of their beneficial owners to the federal government.  As part of the National Defense Authorization Act, Congress recently passed the Corporate Transparency Act.  The new law requires that “reporting companies” file a report with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department, that includes identifying information about each “beneficial owner” of the entity as well as each “applicant” with respect to the entity.

The law requires that the Treasury Department issue regulations implementing the new law by no later than December 31, 2021.  Reporting companies in existence on the effective date of the regulations must submit the required report within two years after the effective date of regulations.[1]  Reporting companies formed after the effective date of the regulations will be required to submit the report at the time of formation.[2]

The law initially defines a “reporting company” as any corporation, limited liability company, or other similar entity 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 as well as any such foreign entity that is 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.[3]  The law, however then excludes a number of entities from the reporting company definition, including larger businesses.[4]  In particular, an entity is not a “reporting company” and thus is not required by the new law to file a report with FinCEN if it meets all of the following criteria: (a) it employs more than 20 persons on a full time basis in the United States; (b) it had more than $5,000,000 in gross receipts in the previous year; and (c) has an operating presence at a physical office in the United States.  A host of other entities are also excluded from the new law’s filing requirement, including companies whose securities are listed on a securities exchange, 501(c) organizations, banks, insurance companies, broker/dealers, investment advisors, public accounting firms registered under section 102 of the Sarbannes-Oxley Act, and defunct entities that meet certain criteria.  The law also contains a provision specifically allowing the Secretary of the Treasury, by regulation, to exempt entities or classes of entities if requiring such entities to file the required report 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 various crimes.[5]

Businesses that are required to comply with the Corporate Transparency Act’s filing requirement will need to report certain information about each of its “beneficial owners” as well as its “applicant.”  An “applicant” is any individual who files an application to form the entity or registers or files an application to register a foreign entity to do business in the United States.[6]  A “beneficial owner” is defined as an individual who directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise either:  (a) exercises substantial control over the entity; or (b) owns or controls not less than 25% of the ownership of the entity.[7]  There are a few exceptions to the definition.  Most significantly, it does not include an individual acting solely as an employee and whose control over or economic benefits are derived solely from the employment status of such person.  It also does not include a minor child, an individual acting as a nominee, intermediary, custodian, or agent on behalf of another person, an individual whose only interest is through a right of inheritance, or a creditor of the entity unless the creditor meets the criteria of the initial definition.[8]

The report required of a reporting company will need to identify each beneficial owner of the reporting company and each applicant with respect to the reporting company by: (a) full legal name, (b) date of birth, (c) current residential or business street address, and (d) either a unique identifying number from an acceptable identification document or a unique identifying number assigned by FinCEN.[9]

In the event of a change in any of the reported information, the reporting company must, in a timely manner, and not more than a year after the change, submit a report that updates the information relating to the change in beneficial ownership.[10]  The law explicitly provides, however that the regulations can reduce this time period to less than one year.

FinCEN is required to maintain the information as confidential in a secure, non-public, database and make it available only to (a) federal agencies in order to facilitate national security, intelligence, and law enforcement activities, or (b) state, local, or Tribal law enforcement agencies, if a court of competent jurisdiction has authorized the law enforcement agency to seek the information in a criminal or civil investigation.  FinCEN may also make the information available to financial institutions, with the consent of the reporting company, to confirm beneficial ownership information provided to the financial institution.[11]  A person that fails to comply with the reporting requirements may be subject to civil as well as criminal penalties, including imprisonment.[12]

We expect that the regulations will provide further guidance regarding some of the details of the law, including what constitutes “substantial control” for purposes of determining a beneficial owner and additional detail on the definition of an “applicant.”  In the meantime, businesses that will need to report to FinCEN should make plans to acquire the information about its beneficial owners and applicant necessary to comply with the law, and consider adding provisions to its governing documents requiring that the information necessary for compliance be provided to the company.

Article written by J. Michael Wood, Esq.

[1] 31 U.S.C. § 5336(b)(1)(B).

[2] 31 U.S.C. § 5336(b)(1)(C).

[3] 31 U.S.C. § 5336(a)(11)(A).

[4] 31 U.S.C. § 5336(a)(11)(B).

[5] 31 U.S.C. § 5336(a)(11)(B)(xxiv).

[6] 31 U.S.C. § 5336(a)(2).

[7] 31 U.S.C. § 5336(a)(3)(A).

[8] 31 U.S.C. § 5336(a)(3)(B).

[9] 31 U.S.C. § 5336(b)(2).

[10] 31 U.S.C. § 5336(a)(3)(C).

[11] 31 U.S.C. § 5336(c).

[12] 31 U.S.C. § 5336(h).