On January 1, 2021, Congress overrode President Trump’s veto to pass the annual National Defense Authorization Act (the “Act”). The Act contains a number of anti-money laundering measures including the Corporate Transparency Act (the “CTA”) which requires U.S. companies to disclose their beneficial owners. The following memorandum provides a brief summary of the CTA reporting requirements.
While the specific form of the reports to be furnished has not yet been published, we expect that they will be burdensome and substantially duplicative of information that must already be provided (i) on U.S. federal income tax and information returns, (ii) under FATCA and CRS, and (iii) to financial institutions as part of their KYC processes. Notwithstanding the added costs and redundancies associated with the CTA, we expect that we will be required to comply with the reporting requirements in cases where we administer entities on our clients’ behalf. In other cases, given our extensive experience with the preexisting reporting requirements, we are well-positioned and would be happy to provide guidance in complying with the new CTA to any client who needs assistance.
What Information Must Be Reported?
The CTA requires each “reporting company” to submit a report to the Financial Crimes Enforcement Network (“FinCen”) containing the (i) full name, (ii) date of birth, (iii) current residential or business address and (iv) unique identifying number of each of its beneficial owners.
The CTA defines the term “beneficial owner” to mean any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise – (i) exercises substantial control over an entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity. However, the term “beneficial owner” will not include – (i) a minor child if the information of the parent or guardian of the minor child is reported; (ii) an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; (iii) an individual acting solely as an employee of a corporation, limited liability company, or other similar entity; or (iv) an individual whose only interest in a corporation, limited liability company, or other similar entity is through a right of inheritance.
Nothing in the text of the CTA defines what “substantial control” means for the purposes of determining whether an individual is beneficial owner of an entity. In addition, the CTA contains no guidance regarding how the beneficial owner is to be determined with respect to entities held through trusts. Accordingly, it will be necessary to wait until regulations are promulgated in order to determine the extent to which beneficial ownership reporting will be required for many of our clients.
When Must Reports be Submitted?
For newly created reporting companies, the report will be due at the time the company is formed or registered. Existing reporting companies will be required to make the report within two years after the effective date of the regulations to be promulgated under the CTA.
Who Must Report?
The CTA defines “reporting companies” as any corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a U.S. state or Indian Tribe or (ii) formed under the law of a foreign country and registered to do business in the United States. Publicly traded corporations, nonprofit organizations and heavily regulated entities are generally not considered reporting companies nor are companies that employ more than 20 people, report more than $5 million in gross receipts to the IRS and have a physical presence in the United States.
The above definition of “reporting company” contains a significant omission under which, it appears, a foreign entity that has not registered to do business in any state would not be required to report its beneficial ownership to the FinCEN. It remains to be seen whether this omission will be rectified in the forthcoming regulations (or, alternatively, by the states expanding the circumstances under which a foreign entity must register to do business).
Penalties for Failing to Report
Any reporting company that willfully reports false information or willfully fails to report may be subject to (1) a civil penalty of $500 for each day the violation continues and/or (2) criminal penalties of up to 2 years imprisonment and a fine of up to $10,000.
Who May Access Beneficial Ownership Information?
The CTA does not intend for the information collected by FinCEN to be publicly available and, in fact, provides for civil and criminal penalties for the unauthorized disclosure of such information. However, FinCEN will be permitted to disclose the information, upon request, to federal and state law enforcement agencies and to foreign law enforcement agencies who request the information through an appropriate agency of the federal government.
 It is likely that the regulations governing beneficial ownership through a trust, when promulgated, will adopt principles similar to those contained under FATCA or CRS.
For FATCA purposes, a U.S. person will be considered a “substantial U.S. owner” of a trust if such person is treated as owning any portion of the trust under the grantor trust rules or holds more than 10% of the beneficial interests in the trust. Treas. Reg. §1.1473-1(b)(1)(iii). A person holds a beneficial interest in a trust if such person has the right to receive a mandatory distribution or may receive a discretionary distribution from the trust. Treas. Reg. §1.1473-1(b)(3)(i). In the latter case, the extent of the discretionary beneficiary’s beneficial interest in the trust will be measured by comparing the value of the distributions such beneficiary receives during the prior year to the value or all distributions made in such year or the value of the assets held by the trust. Treas. Reg. §1.1473-1(b)(3)(ii)(A). Thus a discretionary beneficiary of a trust should generally be considered a beneficial owner of the trust in any year following the year in which the amount of distributions he receives from the trust exceeds 10% of either (a) the value of all distributions made by the trust during that year or (b) the value of the trust’s assets during that year.
For CRS purposes, the “Controlling Person” (i.e., the CRS analogue to the beneficial owner) of a trust means the settlor(s), the trustee(s), the protector(s) (if any), the beneficiary(ies) or class(es) of beneficiaries, and any other natural person(s) exercising ultimate effective control over the trust (including through a chain of control or ownership). However, a discretionary beneficiary of a trust will only be considered a beneficiary of the trust for these purposes (i.e., will only be considered a Controlling Person) to the extent that they receive distributions in a given year.