Corporate Transparency Act requires disclosure of beneficial ownership

Some owners of small businesses want to keep their ownership anonymous for various reasons. That just got a lot harder.

The trend in many states is to require disclosure. Just last year, the District of Columbia enacted new legislation  requiring the disclosure of beneficial ownership if you own at least ten percent of the company or if you control its financial or operational decisions.

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Delaware, the largest jurisdiction in the United States for forming new companies, does not require disclosure of beneficial ownership. It doesn’t matter if you are a foreigner or U.S. citizen. If you organize a legal entity such as a limited liability company or corporation in the state of Delaware, you can remain silent on whose money is going into the startup. Nevada and Wyoming similarly do not require disclosure of beneficial ownership.

Now the federal government has entered the fray with the enactment of the Corporate Transparency Act (CTA). If you are a small business or if you are a small business lawyer assisting a small business, you definitely want to familiarize yourself with the CTA. Under the CTA, small business will have to submit beneficial ownership information to the Department of the Treasury’s Financial Crime Enforcement Network. The information will not be available to the general public.

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No more shell companies or a burdensome invasion of privacy

Some see the new Corporate Transparency Act (CTA) as an effective anti-corruption measure, while others see it as burdensome to small businesses.

The Washington Post blared: “Congress bans anonymous shell companies after long campaign by anti-corruption groups.” Transparency International backed the legislation.  The lack of ownership information has hindered law enforcement efforts to investigate companies suspected of committing crimes.

The National Federation of Independent Business (NFIB), which is supposed to be the largest small business association in the U.S. strongly opposed the legislation,  calling it “burdensome” and specifically raised “privacy concerns for small business owners as it establishes a first-of-its-kind federal registry of small business owners.”

Target: small business

The CTA creates what it calls a “reporting company,” which is generally any limited liability company or corporation. The Act specifically exempts companies already regulated by the federal government such as banks. More importantly, the legislation exempts companies that employ more than 20 people, file a tax return on which the company reports gross receipts of more than $5 million and have a physical presence in the United States.

If your small business does not meet one of these criteria, then you fall within the purview of the new legislation. Nonprofits are excluded from the definition of reporting company.

Beneficial owners own or control the company

A beneficial owner is one who either owns 25% or more of the company or who controls the company. This includes individuals who “directly or indirectly” exercise substantial control over an entity or own or control at least 25% of the ownership interests in an entity. There are limited exceptions for example a person who controls a company entity solely because of his or her employment.

Basic information needs to be reported

The person reporting the information will include information such as the name, date of birth, current address (which can be business or residential) and a unique identifying number from an acceptable document for each beneficial owner.

Most of the information to be reported will be easy for U.S. citizens or residents. If the beneficial owner does not have any U.S. identification, the CTA requires that the beneficial owner provide a non-U.S. passport number.

Treasury Financial Crime Enforcement Network will be the repository for information

The new repository for this new database will be the Financial Crimes Enforcement Network at the Department of Treasury (FinCEN). FinCEN’s mission is “to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence.”

You may know of FinCEN as it receives from financial institutions suspicious activity reports (SARs) and other anti-money laundering (AML) considerations for financial institutions covered by SAR rules.

Beneficial ownership information not available to the public

Unlike the state databases, the beneficial ownership information will not be available to the public. FinCEN will store the information and release it to federal and state law enforcement agencies in response to an appropriate request.

State law enforcement requests will require court approval so that this is not supposed to be an easy database to access. Foreign law enforcement may also request information from FinCEN’s database.

It all sounds like the information will be kept under close wraps until you get down to the exceptions. Financial institutions will have access to the database for “know your customer,” customer due diligence purposes.

Timing of submissions

There will be detailed regulations from the Treasury Department that will amplify many of the definitions and timing of CTA. The legislation requires that the Treasury Department issue new regulations within one year after the enactment of CTA, so we should expect to see the new regulations in 2021.

Every newly formed company will have to make a submission. Existing companies will have two years from the effective date to submit your information. And this is not a one-time deal. If there is a change in the beneficial ownership, you will have to file a change of beneficial ownership.

Penalties are steep

The penalties are steep not only for those who fail to report and “applicants” who file false or fraudulent information. Criminal fines of up to $10,000 may be levied. You can even be sent to prison for up to two years.

There are also penalties for the unauthorized disclosure of information from the database. higher criminal penalty of up to $250,000 and/or a higher maximum term of imprisonment of five years.

If you are a small business lawyer, you may be considered an applicant. An applicant refers to the individual who files the formation documents (such as the articles of organization) for an entity or registers a foreign entity to do business in the United States, even if they are not a beneficial owner. We expect that FinCEN will issue regulations to provide guidance as to the breadth of these terms.

The CTA contains a safe harbor from civil or criminal liability for the submission of inaccurate information if the person “voluntarily and promptly” (and no later than 90 days after the submission of the original inaccurate report) submits a report containing corrected information.

Companies losing their anonymity

There is already a trend to require more disclosure of beneficial ownership. The new CTA accelerates that trend and it will become increasingly difficult to shield that information from government authorities and eventually the public at large.