By Thomas R. Taylor
On Jan. 1, 2021, Congress enacted the Corporate Trans-parency Act (the act). The purpose of the act is to provide a means for the government to fight money laundering and counter the financing of terrorism and other illicit activities. The act requires certain entities to disclose the identity of their beneficial owners to a bureau of the U.S. Treasury Department known as the Financial Crimes Enforce-ment Network (FinCEN).
What Must be Reported? The reporting requirements are broad and require entities, referred to as “reporting companies,” to file a report with FinCEN disclosing certain information about their beneficial owners. Required information includes the full legal name, date of birth, current residential or business address and a unique identification number (such as a driver’s license or passport number) for each beneficial owner. Such information is disclosed by filing a Beneficial Ownership Statement with FinCEN.
Who Must Report. All corporations, limited liability companies and “other similar entities” organized within and registered to do business in the United States must disclose their beneficial owners. Even though the act does not explicitly so state, partnerships and trusts are likely to be required to report as well. Certain entities are exempted from the reporting obligation, including large companies, companies that are otherwise heavily regulated and companies that already provide information to another governmental agency. Specifically excluded from the reporting obligation are taxable entities that have more than 20 full-time employees in the United States, more than $5 million in gross receipts or sales and a physical office in the United States.
When Reporting Required. The obligation to report depends upon when the entity is organized. Domestic entities organized after the FinCEN Implementing Regulations become effective must file when the entity is organized. Entities organized before the Implementing Regulations become effective must report in a “timely manner,” but not later than two years after the effective date of those Regulations Updating. Once a reporting company has submitted its initial Beneficial Ownership Statement, the entity must update its reported information in a “timely manner,” but not later than one year after any changes occur in its beneficial ownership. Changes related to the beneficial owners (such as a name or address change) or changes in the identities of beneficial owners are changes that will require the filing of an updated Beneficial Ownership Statement. It appears that a change in the percentage of ownership will not require the filing of an updated Beneficial Ownership Statement.
Who is a Beneficial Owner? A “beneficial owner” is an individual who, directly or indirectly, exercises “substantial control” over an entity or owns or controls at least 25 percent of the ownership interests in an entity. However, what constitutes “substantial control” is not defined in the act and is one of the numerous provisions that will need to be clarified by the Implementing Regulations. The act provides five exceptions from beneficial owner status that should be reviewed in determining if one is a “beneficial owner.”
Data Storage and Permitted Access
Beneficial Ownership Statements filed with FinCEN will be stored and maintained solely by FinCEN and will not be made publicly available, nor will those statements generally be made available to state agencies.
Access to Reported Infor-mation. FinCEN may disclose reported information to (a) a federal agency engaged in national security intelligence or other law enforcement activity, (b) a state law enforcement agency if a court has authorized the agency to seek the information for a criminal or civil investigation, and (c) a financial institution subject to customer due diligence requirements (the so-called “Know Your Customer” (KYC) requirements), with the consent of the reporting company. It’s important to note that reported information cannot be accessed by the general public, nor can it be obtained under a Freedom of Information Act request.
Penalties and Safe Harbor
Violations of the act carry civil penalties of up to $500 for each day there is a willful failure to report complete beneficial ownership information and criminal fines up to $10,000 and/or imprisonment for up to two years. Negligent violations, however, will not be subject to any civil or criminal penalties. In addition, the act includes safe harbor rules for any person who submits inaccurate information as long as such person (a) had no knowledge of the inaccuracy, (b) was not trying to evade the reporting requirements, and (c) corrects the inaccurate information “voluntarily and promptly,” but not later than 90 days after submission.
The act is not yet effective but will become effective on the date the Implementing Regulations are issued by the Secretary of the Treasury, which will not be later than one year after the enactment of the Act. Thus, the act is required to become effective by Jan. 1, 2022.
• Entities should be aware of the act and monitor FinCEN’s Implementing Regulations to understand their reporting obligations and any available exemptions.
• Entities that will be subject to the act should assess its application and enhance their information-gathering and compliance processes to verify that all required information is being collected and timely reported to FinCEN.
Thomas R. Taylor is a corporate and M&A lawyer and shareholder in the Salt Lake City office of the international law firm of Dentons Durham Jones Pinegar.