Corporate Transparency Act: Your Company Must Be Compliant With.

In 2021, the U.S. Federal Government issued the Corporate Transparency Act basically describing the extent to which a corporation's actions are observable by outsiders. This is a consequence of regulation, local norms, and the set of information, privacy, and business policies concerning corporate decision-making and operations openness to employees, stakeholders, shareholders and the general public. From the perspective of outsiders, transparency can be defined simply as the perceived quality of intentionally shared information from the corporation.

In fact, it goes much deeper and there are aspects that require attention and companies must comply with.

A study published by the #Harvard Law School Forum on Corporate Governance by Carl A. Vantein and Jose T. Robles, Jr. (@Morgan Lewis & Bockius LLP) Carl A. Valenstein and Jose T. Robles, Jr., Morgan Lewis & Bockius LLP) on February 18, 2021, reinforces the importance to disclose the beneficial owners of foreign-owned shell companies.

Indeed, as mentioned in the study, while the Corporate Transparency Act ("CTA") largely applies to foreign-owned shell companies, domestic companies should carefully read the definition of "reporting company" to ensure they fall within one of the exceptions to the definition. Reporting companies should be mindful of the various penalties associated with noncompliance or providing inaccurate or misleading information to the Financial Crimes Enforcement Network ("FinCEN").

On a memorandum written by @Robert W. Downes, @Scott E. Ludwig, @Thomas E. Rutledge, and @Laurie A. Smiley, and published at the #AmericanBarAssociation, the authors explain that the Anti-Money Laundering Act of 2020, which is part of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) includes the Corporate Transparency Act.  Thus, the Corporate Transparency Act requires certain business entities (each defined as a “reporting company”) to file, in the absence of an exemption, information on their “beneficial owners” with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury (“Treasury”). The information will not be publicly available, but FinCEN is authorized to disclose the information to U.S. federal law enforcement agencies with court approval. FinCEN is also authorized to divulge data to certain other enforcement agencies, to non-U.S. law enforcement agencies, prosecutors or judges based upon a request of a U.S. federal law enforcement agency, and with consent of reporting company, to financial institutions and their regulators.

When fully implemented in 2023, the CTA will create a database of beneficial ownership information within FinCEN. The purpose of the database is to provide the resources to "crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals", as stated by congresswoman Carolyn Maloney on a press release on November 19, 2020.  In other words, the long-awaited enactment of the CTA is designed to ban anonymous shell companies used by outlaws to circumvent national and transnational regulations aiming at hiding corrupt proceeds and other illicit financing. It represents the first significant update to the U.S. anti-money laundering laws in 20 years and gives FinCEN significant authority to adopt necessary regulations to implement the provisions of the CTA.

Before CTA enactment, the burden of collecting beneficial ownership information was directed to financial institutions through the Bank Secrecy Act’s customer due diligence requirements.  However, with the implementation of CTA, such burden will to the reporting companies and will impose severe consequences for willful non-compliance and unauthorized disclosures.

The CTA is an important legal tool for the government to close the loopholes against money-laundering practices and deals a severe blow to criminals who use shell companies to facilitate their illegal activities.

As aforementioned, the burden of reporting the beneficial ownership shifted from the banks to the reporting companies, so you may be asking what are reporting companies.

Up to $10,000 fine and up to two years in prison for violating the CTA

Reporting Companies and Exemptions

The definition of reporting companies came in the 2019 Transparency Proposal, as a result of years of discussions and propositions (v.g. CLAMP Act of 2016, the TITLE Act of 2017, The Counter Terrorism and Illicit Finance Act, etc.) that evolve to a final criterion.

Consistent with previously proposed federal legislation, a reporting company is broadly defined under the CTA as a corporation, limited liability company or other similar entity that is created under state law or formed under laws of a foreign jurisdiction and registered to do business in the United States.

Nonetheless, there are categories that have been excluded from the wide definition of reporting company. Therefore, the entities listed below are not required to submit beneficial ownership information to FinCEN.

1. an issuer of a class of securities registered under section 12 of the Securities Exchange Act of 1934; or that is required to file supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934;
2. an entity established under the laws of the United States, an Indian Tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States; and that exercises governmental authority on behalf of the United States or any such Indian Tribe, State, or political subdivision;
3. a bank, as defined in section 3 of the Federal Deposit Insurance Act; section 2(a) of the Investment Company Act of 1940; or section 202(a) of the Investment Advisers Act of 1940; or a Federal credit union or a State credit union (as those terms are defined in section 101 of the Federal Credit Union Act);
4. a bank holding company (as defined in section 2 of the Bank Holding Company Act of 1956) or a savings and loan holding company (as defined in section 10(a) of the Home Owners' Loan Act);
5. a broker or dealer (as those terms are defined in section 3 of the Securities Exchange Act of 1934) that is registered under section 15 of that Act;
6. an exchange or clearing agency (as those terms are defined in section 3 of the Securities Exchange Act of 1934) that is registered under section 6 or 17A of that Act;
7. certain other entities not described above that are registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934;
8. an entity that is an investment company (as defined in section 3 of the Investment Company Act of 1940) or an investment adviser (as defined in section 202 of the Investment Advisers Act of 1940); and is registered with the Securities and Exchange Commission under the Investment Company Act or the Investment Advisers Act of 1940;
9. an investment adviser described in section 203(l) of the Investment Advisers Act of 1940 and that has filed Item 10, Schedule A, and Schedule B of Part 15 1A of Form ADV, or any successor, with the Securities and Exchange Commission;
10. an insurance company (as defined in section 2 of the Investment Company Act of 1940);
11. an entity that is an insurance producer that is authorized by a State and subject to supervision by the insurance commissioner or a similar official or agency of a State; and has an operating presence at a physical office within the United States;
12. a registered entity (as defined in section 1a of the Commodity Exchange Act);
13. an entity that is: a futures commission merchant, introducing broker, swap dealer, major swap participant, commodity pool operator, or commodity trading advisor (as those terms are defined in section 1a of the Commodity Exchange Act); or a retail foreign exchange dealer, as described in section 20 2(c)(2)(B) of that Act; and registered with the Commodity Futures Trading Commission under the Commodity Exchange Act;
14. a public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002;
15. a financial market utility designated by the Financial Stability Oversight Council under section 804 of the Payment, Clearing, and Settlement Supervision Act of 2010;
16. certain pooled investment vehicles advised by other exempt entities;
17. any organization that is described in section 501(c) of the Internal Revenue Code of 1986 (determined without regard to section 508(a) of such Code) and exempt from tax under section 501(a) of the Code, except that in the case of any such organization that loses an exemption from tax, such organization shall be considered to be continued to be exempt for the 180-day period beginning on the date of the loss of such tax-exempt status; o political organization (a defined in section 527(e)(1) of the Code) that is exempt from tax under section 527(a) of the Code; trust described in paragraph (1) or (2) of section 4947(a) of the Code;
18. any corporation, limited liability company, or other similar entity that operates exclusively to provide financial assistance to, or hold governance rights over, any entity described in the foregoing bullet point; is a United States person; is beneficially owned or controlled exclusively by one or more United States persons that are United States citizens or lawfully admitted for permanent residence; and derives at least a majority of its funding or revenue from one or more United States persons that are United States citizens or lawfully admitted for permanent residence;
19. any entity that employs more than 20 employees on a full-time basis in the United States; filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate;
20. any corporation, limited liability company, or other similar entity in existence for over one year that is not engaged in active business; that is not owned, directly or indirectly, by a foreign person; that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000 (including all funds sent to or received from any source through a financial account or accounts in which the entity, or an affiliate of the entity, maintains an interest); and that does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity; and
21. any entity or class of entities that the Secretary of the Treasury, with the written concurrence of the Attorney General and the Secretary of Homeland Security, has, by regulation, determined should be exempt from the requirements of beneficial ownership reporting because requiring beneficial ownership information from the entity or class of entities would not serve the public interest; and would not be highly useful in national security, intelligence, and law enforcement agency efforts to detect, prevent, or prosecute money laundering, the financing of terrorism, proliferation finance, serious tax fraud, or other crimes.

It is important to mention that if an exempt entity has a direct or indirect ownership interest in a reporting company, the reporting company or the applicant must only report the name of the exempt entity instead of the beneficial ownership information.

Beneficial Owner

Under the CTA, a beneficial owner is defined as, with respect to an entity, an individual who, directly or indirectly, exercises substantial control over the entity, or owns or controls not less than 25% of the ownership interests of the entity.

A beneficial owner does not include the following:

• a minor child if the information of the child’s parent or guardian is reported;
• an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual;
• an individual acting solely as an employee of the entity and whose control over or economic benefits from such entity is derived solely from the employment status of the person;
• an individual whose only interest in the entity is through a right of inheritance; or
• a creditor of the entity, unless the creditor exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity.

What is Required to Report and Penalties for Not Complying

Reporting companies are required to deliver to FinCEN a report containing the following information for each beneficial owner of the reporting company:

• full legal name;
• date of birth;
• current residential or business street address; and,
• unique identifying number from an acceptable identification document or FinCEN identifier, if available (government issued identity document as passport, driver license, etc.).

Compliance with the CTA depends on whether a reporting company was formed prior to or after the effective date of the regulations that govern the CTA. If an entity is formed before such effective date, it will have two years to deliver its beneficial ownership reports to FinCEN. Entities formed after the effective date must comply with the CTA upon formation. To the extent any information included in the report delivered to FinCEN changes, a reporting company has one year after the date of the change to submit an updated report to FinCEN.

Violators, incompliant reporting companies, or providing inaccurate or misleading information to FinCEN are subject to many penalties associated with noncompliance with the CTA. Any person that commits reporting violations may be held liable for up to $500 per day, not to exceed $10,000, and may face up to two years in prison for violating the CTA.

The CTA is a very important new regulation that brings a number of interpretative questions concerning the scope of the exceptions to the reporting obligations. Therefore, compliance teams must be very careful in implementing the new rules, especially when there are trusts or investment funds involved.

Finally, but not least, I want to thank for the Harvard Law School and the American Bar Association for being source of information for this article.