Through Jennifer leung.

On January 1, 2021, Congress passed the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act of 2021. The CTA requires most private companies incorporated in the United States or registered to do business in the States United reports beneficial ownership information to the Office of the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury. Although the CTA aims to eliminate the anonymity of people who use shell companies for illegal activities, the reporting requirements will affect legitimate private companies. Businesses should be aware of and prepare for the new reporting requirements in order to avoid civil and criminal penalties for not reporting information when required.

Types of companies required to declare beneficial owners under the CTA

Companies that are required to report beneficial owners and applicants to FinCEN under the CTA are any corporation, limited liability company or other similar entity incorporated in the United States or incorporated under the law of a foreign country and registered to do business in the United States. United States. Some companies are exempt reporting requirements, including:

• listed companies;
• banks, insurance companies, investment companies registered with the Securities Exchange Commission, and credit unions;
• accounting firms;
• businesses that employ more than twenty people, have filed a tax return declaring gross receipts of more than $ 5 million and have a physical presence in the United States;
• non-profit associations; and
• any entity designated by the Secretary of the Treasury to be exempt from it.

It is not clear whether the scope of “other similar entity” under the CTA will include partnerships (general or limited) or trusts until regulations under the CTA have been passed. The LTC rule would be consistent with FinCEN’s existing customer due diligence rules if it includes limited partnerships and business trusts, but excludes general partnerships and most estate planning trusts.

CTA report requirements

Reporting will not begin until the Secretary of the Treasury has adopted regulations detailing how the CTA will be implemented, which adoption is mandatory by January 1, 2022.

FinCEN should also establish a register to collect identifying information on beneficial owners and applicants of a reporting company. Reporting companies must file a report with FinCEN upon training or registration, containing the following information regarding its beneficial owners and applicants:

• full legal name;
• Date of Birth;
• current residential or business address; and
• unique identification number from an acceptable identification document, such as a driver’s license or passport.

Companies incorporated before the adoption of the regulations will have two years after the adoption of the regulations to file their initial reports.

Companies will also be required to submit annual reports to reflect any changes to identifying information.

Definitions of beneficial owner and claimants

A “beneficial owner“is defined as a natural person who, directly or indirectly, through contract, agreement, arrangement, relationship, or otherwise owns or controls at least 25% of the stake in an entity, or exercises “substantial control” over an entity.

The CTA does not define “substantial control”. The regulations are likely to contain complex rules for measuring ownership and determining who controls, as well as how to treat multilevel companies and related parties.

The five exclusions of the definition of a beneficial owner include:

1. minor children, if the information of the child’s parent or guardian is correctly reported;
2. natural persons acting as nominee, intermediary, depositary or agent on behalf of another person;
3. a natural person acting only as an employee;
4. an individual whose interest in an entity is only through a right of inheritance; or
5. a creditor of a reporting person, if the obligee is not itself a “beneficial owner” on the basis of substantial control or ownership or control of 25% or more of the interests in the reporting company.

A “applicant”Means any natural person who files an application to establish a reporting company or registers or files an application to register a reporting company to do business in the United States. This requirement is worth noting because a reporting company would have to file identifying information for the person filing the company formation request, even if that person is not a beneficial owner. This could possibly include people in law firms who act as agents to set up the business.

Confidentiality of credentials

FinCEN will keep the information collected on beneficial owners and applicants in a confidential and secure database. Information will only be disclosed in response to a request from law enforcement agencies engaged in national security, intelligence or law enforcement activities, and if the reporting company consents, institutions financial statements and in order to comply with customer due diligence requirements.

Penalties

Businesses or individuals who violate the CTA will face civil penalties not exceeding $ 500 per day, capped at $ 10,000, and jail time of up to two years if a person willfully provides false information or fails to report.

Interim planning recommendations

Until the Secretary of the Treasury passes regulations, businesses should assume that not only corporations and LLCs, but also partnerships, trusts and other entities, will be covered by the CTA.

The management of reporting companies should assess the requirements of the LTC and determine whether their company’s operational documents should include:

• a declaration by each shareholder, member or associate, as the case may be, that they will be in compliance with or exempt from the LTC;
• a commitment from each shareholder, member or partner, as the case may be, requiring continued compliance and disclosure under the CTA or to provide proof of exemption from its requirements;
• compensation by each shareholder, member or associate, as the case may be, to the company and its other shareholders, members or associates, as the case may be, for his non-compliance with the LTC or for having provided false information; and
• consent from each disclosing party for the company to disclose identifying information to FinCEN, to the extent required by law.

Investment funds should consider adding similar representations and covenants by their investors to their subscription and management contracts. Lenders should also consider adding similar statements and covenants from their borrowers to their loan documents.