On 1 January 2021, as part of the National Defence Authorization Act, the US Congress passed and enacted the Corporate Transparency Act (CTA or The Act). The Act requires new and existing entities, unless otherwise exempt, to report information about their beneficial owners to the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). This legislature is designed to prevent money-laundering, financing terrorism and other unlawful activities through establishment of shell companies.
The Act applies to all corporations, limited liability partnerships and other US and non-US companies registered to operate in the United States of America (USA) and which fall within the definition of ‘reporting company’. However, The Act exempts entities that:
- have more than 20 full time employees in the USA; and
- have filed a federal tax return that reported more than USD 5 million in gross receipts or sales; and
- have an operating presence at a physical office within the USA.
The companies that are operating in highly regulated industries, such as banks, credit unions, registered brokers and dealers, registered money transmitting businesses, insurance companies, public accounting firms, public utility service companies, church, charity and non-profit entity, are not required to comply with this FinCEN requirement.
Scope of reporting
Each reporting company must report to FinCEN the following information for each ‘beneficial owner’ of the reporting company:
- Full legal name
- Date of birth
- Current residential or business physical address
- Unique identifying number from an unexpired passport or state driver’s licence
Beneficial owner is an individual who, directly or indirectly:
- exercises substantial control over the entity; or
- owns or controls 25% or more of the entity’s equity.
The Act does not currently define ‘substantial control,’ but it may be addressed in the forthcoming regulations. However, The Act excludes the following individuals from the definition of ‘beneficial owner’:
- a creditor of a corporation, limited liability company, or other similar entity, unless the creditor specifically meets the requirement of a beneficial owner; and
- an individual acting solely as an employee of a corporation, limited liability company, or other similar entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person.
Timing of reporting
The Act requires existing entities to file a report within two years after the effective date of FinCEN regulations. New entities formed after the effective date of the FinCEN regulations will need to file a report at the time of incorporation. Reporting company is required to make an annual filing to the FinCEN within one year of a change in the beneficial ownership. The Act requires FinCEN to issue effective date of regulations implementing reporting requirements for reporting companies to disclose beneficial ownership interest by 1 January 2022.
Failing to report or update the beneficial ownership information or providing fraudulent information may result in a civil penalty of not more than USD 10,000 and imprisonment for not more than two years, or both. All companies should evaluate applicability of these regulations and need to be prepared for disclosing beneficial ownership to the US, if applicable.