In January 2021, Congress passed the Corporate Transparency Act (CTA) in an effort to update anti-money laundering laws. In short, the CTA will require companies formed or registered to do business in the U.S. to submit reports to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) identifying their beneficial owners.
Although enacted on January 1, 2021, the CTA will not take effect until the Treasury Department issues regulations. Treasury has until January 1, 2022 to do so.
Who Must Report
In broad terms, a “reporting company” is any corporation, limited liability company or similar entity (i) formed in the U.S. or (ii) formed in a foreign country but registered to do business in the U.S.
There are exemptions, however. Companies that are publicly held, heavily regulated, or otherwise already reporting information to a government agency, as well as charities and nonprofits, are exempt. In addition, any company that employs more than 20 full-time employees in the U.S., reports more than $5 million of gross receipts to the IRS, and has an operating presence at a physical office in the U.S. will be exempt.
What Must Be Reported
A “beneficial owner” is any individual who directly or indirectly exercises substantial control over the entity or owns or controls at least 25% of the ownership interest thereof. The following will not be deemed beneficial owners: minors; nominees, custodians, or agents; individuals whose control is derived solely because of employment status; individuals whose interest in the company is through right of inheritance; and creditors of the reporting company, unless said creditors meet the requirements of a beneficial owner. As important as it is, the term “substantial control” is not defined in the statute; presumably, the regulations will offer guidance.
An “applicant” is any individual who files an application to form the reporting company, or to register a foreign entity to do business, in the U.S.
Reporting companies must identify each beneficial owner and each applicant by providing their (i) full legal name, (ii) date of birth, (iii) current residential or business street address, and (iv) a unique identifying number from an acceptable identification document (e.g., a valid passport or driver’s license number, or a FinCEN identifier). If the reported information changes, the reporting company must submit an update within one year of such change.
FinCEN will retain the beneficial ownership information for each reporting company’s lifetime plus five years. The information will not be publicly available, however. FinCEN may disclose the information to federal, state, and local agencies and regulatory bodies, as well as certain financial institutions. Leech Tishman expects the regulations will set forth the protocols for such disclosures.
Violations and Penalties
It is a violation of the CTA to willfully (i) provide (or attempt to do so) false or fraudulent information or (ii) fail to report complete or updated information. Civil penalties include fines of up to $500/day. Criminal penalties include fines of up to $10,000 and/or imprisonment of up to two years.
As stated above, the CTA will not take effect until the Treasury Department issues regulations (which are due on or before January 1, 2022). Entities already formed or registered prior to the effective date of the regulations have two years to submit their initial reports. Entities formed or registered after the effective date of the regulations must submit their initial reports at the time of formation or registration.
Leech Tishman’s Corporate Practice Group plans to provide further guidance once the final regulations are issued for review. You or your company may be impacted by these new disclosure requirements. Leech Tishman is prepared to assist you in evaluating the applicability of the CTA to your business and in planning your business’ future compliance with such.
If you would like to discuss this Act in further detail, or you would like to review your Company’s disclosure requirements in more detail, please reach out to Leech Tishman’s Corporate Practice Group.
Douglas L. Rabuzzi is a Partner with Leech Tishman and a member of the Corporate Practice Group. Doug is based in Leech Tishman’s Pittsburgh office and can be reached at 412.261.1600 or email@example.com.
Alexander J. Gase is an Associate with Leech Tishman and a member of the Corporate and Taxation Practice Groups. Alex is based in the Pittsburgh office and can be reached at 412.261.1600 or firstname.lastname@example.org.
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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in alternative dispute resolution, aviation & aerospace, bankruptcy & creditors’ rights, cannabis, construction, corporate, data privacy & cybersecurity, employee benefits, employment, energy, environmental, estates & trusts, family law, government relations, immigration, insurance coverage, intellectual property, international legal matters, litigation, real estate, and taxation. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Los Angeles, New York, Philadelphia, Sarasota and Wilmington, DE.