Friday February 12th 2021
The Corporate Transparency Act (CTA) was enacted on January 1, 2021 as part of the National Defense Authorization Act, which created a federal register of beneficial ownership that applies to corporations, limited liability companies (LLCs), and most partnerships. The CTA is aimed at small, privately owned businesses and encourages these organizations to report their “beneficial owners” and “applicants” to the Financial Crimes Enforcement Network (FinCEN) in order to prevent Shell companies from being used to raise funds avoid hiding washing rules or other illegal activities.
It is estimated that more than 2,000,000 corporations and LLCs are incorporated under state law each year, with most, if not all, states requiring no beneficial owner information. As a result, bad actors can hide their property in these companies and use this anonymity to conduct illegal activities such as money laundering, terrorism and proliferation financing, serious tax fraud, and people and drug trafficking.
The law comes after years of draft law and international pressure for the United States to adhere to standards set by the Financial Action Task Force (FATF) – the global watchdog for money laundering and terrorist financing created by the G-7 in 1989. Similar legislation has existed for several years in the UK and across the EU due to the European Fourth and Fifth Anti-Money Laundering Directives, which require EU member states to set up central national registers for companies and trusts. Currently, trusts are not included as reporting entities in the CTA (although statutory trusts may be required to report).
Who has to report?
The CTA prescribes reporting requirements for corporations, LLCs and other “similar companies” either (i) established by filing a document with a secretary of state or similar office under the law of a state or Native American tribe, or (ii) established under the Law of a foreign country and registered to do business in the United States by filing a document with a secretary of state or similar office under the laws of any state or Native American tribe. Companies that are required to report are referred to as “reporting companies” in the context of the CTA.
Corporations, LLCs, or similar entities with an operational presence in a US physical office that have 20 or more full-time employees in the US that have filed a federal income tax return showing gross income or sales greater than $ 5 million in the previous year Year are excluded from reporting.
Other exempt organizations are already regulated entities such as banks, credit unions, insurance companies, brokers / dealers, stock exchange or clearing agencies, registered investment companies and registered investment advisors, accounting firms, public utilities, financial market providers, certain pooled investment vehicles, 501 (c) not-for-profit organizations, and any entity, owned or controlled by one or more of the above-mentioned exempt organizations, either directly or indirectly. It is too early to say what the exact scope of the CTA will be before the finance department issues regulations. Nonetheless, it is worthless that hedge funds and private equity funds are not expressly classified as exempted in the CTA, provided that such pooled investment vehicles are either operated or advised by: (i) a company that is a registered investment company or a registered investment advisor; or (ii) an investment advisor who is exempted from registration under Section 203 (l) of the Investment Advisers Act 1940 and has filed a Form ADV on the securities and the Exchange Commission, such pooled vehicles are maintained by the CTA be excluded.
What has to be reported?
Reporting companies must list their beneficial owners, defined as those who exercise significant control over the company or who own or control at least 25% of the company and applicants, defined as those who apply to set up the company or a foreign company register in the United States.
For each beneficial owner and applicant, companies must provide:
Full legal name,
Date of birth,
Current residential or commercial street and
A unique identification number that can be obtained from an unexpired U.S. passport, unexpired U.S. or government ID, unexpired driver’s license, or foreign passport.
When does the information need to be reported?
The Treasury Department must enact regulations by January 1, 2022, and beneficial ownership reporting requirements will take effect when the regulations come into effect.
Any reporting entity in existence at the time the regulations came into force must file the report within two years of the regulations come into effect.
Any Reporting Company incorporated after the Regulations came into effect must file the Company Incorporation Report.
Each reporting entity must file a report within one year of the change in beneficial ownership information. Changes that trigger this report include (i) a change in material control over the reporting entity, (ii) a change in the contact details of a beneficial owner or applicant, and (iii) beneficial ownership greater than or less than 25% .
Who has access to the information?
The information submitted to FinCEN is available to federal agencies involved in national security, intelligence, or law enforcement measures, state or local law enforcement agencies, if approved by a court, and financial institutions that are required by the reporting company to comply with customer due diligence requirements have been authorized. The information collected will not be publicly available.
What are the penalties for violations?
Any person who intentionally provides or attempts to provide false or fraudulent beneficial ownership information, including an incorrect or fraudulent identifying photo or document, or fails to submit complete and accurate reports or to provide updated reports, will be subject to penalties of up to US $ 10,000 Fined $ 500 per day pending report and / or imprisonment of up to two years.