In an effort by the government to fight money laundering, Congress recently passed the Corporate Transparency Act (CTA), which requires private companies to disclose their “beneficial owners” to the US Treasury Department for Financial Crime (FinCEN). The CTA is part of the National Defense Authorization Act (2021) and became law when Congress overruled the president’s veto.
Reporting does not begin until the Treasury Department has issued regulations under the CTA that are mandatory by January 1, 2022. Companies incorporated on or after the date the regulations were adopted must report when they are incorporated. Companies that were formed prior to the adoption of regulations have a longer period after regulations to submit their first reports.
The CTA requires the reporting of persons who directly or indirectly own at least 25% of the ownership interest in a private company or who control a private company. The rules are likely to contain complex rules for measuring ownership and determining control over it, as well as for indicating whether or not the property interests of spouses or a parent and child should be consolidated or not for multi-tier businesses and related parties % Ownership Tests). Disclosure may also be required by individuals acting as agents or candidates for private companies. The rules are also expected to address supplemental reporting when ownership or control of a private company changes.
The law expressly applies to corporations and limited liability companies. Regulations determine whether partnerships and trusts are also required to report. The reporting requirements do not apply to publicly traded companies, companies already subject to certain government regulatory systems (e.g. banks and investment advisors), and larger companies with at least 20 full-time employees that have reported gross income of at least $ 5 million on previously filed federal income tax returns. The Ministry of Finance has the right to create additional exempt categories.
The information reported to FinCEN includes names, dates of birth, addresses, and either a passport or a driver’s license number. Reports may only be made available by the government for national security, law enforcement and intelligence purposes. Critics have raised concerns about data security as information is sensitive that may be hacked or inadvertently disclosed. Procedures will be in place to provide access to reports from other government agencies and foreign law enforcement agencies. A consent process can allow financial institutions to access reports that can replace some of the money laundering disclosure (AML) and know-your-customer (KYC) procedures that financial institutions are currently following.
The CTA imposes substantial fines and penalties for violations. There is also the possibility of incarceration for false reports or willful failure to submit.
While the CTA’s anti-money laundering goals are certainly laudable, the approach is likely to create significant administrative burdens for investors and small business owners. By analogy with other areas of federal law that require disclosure of ownership and control of private companies (such as tax law and antitrust requirements for mergers and acquisitions), clients may need to consult lawyers to determine if there is any reporting is required and to make correct submissions. If we just look at our own law firm and the number of private businesses we launch daily for our investors and corporate clients, the aggregate reporting is likely to overwhelm the government’s existing compliance capabilities, so we can expect a new and robust government bureaucracy on compliance push through. As with many well-intentioned but ill-considered laws, the CTA’s worthy goal of preventing shell companies from hiding money from illegal activities that place undue burdens on larger corporations and mutual funds.
As mentioned earlier, compliance is not required before regulations are enacted. This should be done by January 1, 2022. In the meantime, we will keep you informed of further developments.