Congress included the Corporate Transparency Act (CTA) in the National Defense Authorization Act for FY 2021. The legislation requires filing of information on beneficial owners of new (and eventually, of existing) US entities and foreign entities which apply for permission to do business in the US.  These requirements will be effective on promulgation of regulations by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). This agency is required to promulgate the regulations within one year from the 1/1/2021 date the legislation (P.L. 116-283) became law.

 

Due Dates For Reports

 

Existing companies will have to report beneficial ownership information within two years of the effective date of the regulations. New entities formed after the effective date of the regulations will be required to report the CTA information to FinCEN on formation. Existing entities will be required to update their beneficial ownership information within a year of any change in ownership, or sooner if Treasury Regulations under the new law require earlier reports of changes.

 

Penalties For Failure To Report

 

There are civil and criminal penalties, including fines of up to $10,000 and up to two years in prison for willful violations.

 

Beneficial Owners Defined

 

31 U.S. Code Sec. 5336 (a)(B)(3) (new) defines “beneficial owner” as follows:

 

” The term `beneficial owner’–

“(A) means, with respect to an entity, an individual who,

directly or indirectly, through any contract, arrangement,

understanding, relationship, or otherwise–

“(i) exercises substantial control over the entity; or

“(ii) owns or controls not less than 25 percent of the

ownership interests of the entity; and

“(B) does not include–

“(i) a minor child, as defined in the State in which

the entity is formed, if the information of the parent or

guardian of the minor child is reported in accordance with

this section;

“(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 and whose control over or economic benefits from

such entity is derived solely from the employment status of

the person;

“(iv) an individual whose only interest in a

corporation, limited liability company, or other similar

entity is through a right of inheritance; or

“(v) a creditor of a corporation, limited liability

company, or other similar entity, unless the creditor meets

the requirements of subparagraph (A).

 

 

CTA Information Required

 

Beneficial Owner And Applicant Information

 

31 U.S. Code Sec. 5336 (a)(B)(2) (new) specifies that unless the entity or individual is exempt, reports by “applicants”, i.e. all individuals or entities applying to create an entity, or by entities directly, must be  made to FinCEN will identifying each beneficial owner of the applicable reporting company and each applicant with respect to that reporting company by

 

“(i) full legal name;

“(ii) date of birth;

“(iii) current, as of the date on which the report is

delivered, residential or business street address; and

“(iv)(I) unique identifying number from an acceptable

identification document; or

“(II) FinCEN identifier (a number an individual or entity can apply to FinCEN for so their personal or entity tax identification numbers, social security numbers, driver’s license numbers, or other identifying numbers do not have to be available on the FinCEN database.)

 

Acceptable Identification Documents:

 

31 U.S. Code Sec. 5336 (a)((B)(1) (new) defines the following as acceptable identification documents for individuals:

 

“(A) a nonexpired passport issued by the United States;

“(B) a nonexpired identification document issued by a

State, local government, or Indian Tribe to the individual

acting for the purpose of identification of that individual;

“(C) a nonexpired driver’s license issued by a State; or

“(D) if the individual does not have a document described

in subparagraph (A), (B), or (C), a nonexpired passport issued

by a foreign government.

 

 

Exemptions

 

As is not unusual in federal legislation, individuals and small businesses must report, while larger businesses and other favored entities are exempt. Exemptions as defined in 31 U.S. Code Sec. 5336 (a)(11) include

 

Public companies:

 

“(i) an issuer–

 

“(I) of a class of securities registered under

section 12 of the Securities Exchange Act of 1934 (15

U.S.C. 78l); or

“(II) that is required to file supplementary and

periodic information under section 15(d) of the

Securities Exchange Act of 1934 (15 U.S.C. 78o(d));

 

Governmental entities:

 

“(ii) an entity–

 

“(I) 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 2 or more States; and

“(II) that exercises governmental authority on

behalf of the United States or any such Indian Tribe,

State, or political subdivision;

 

Banks and Credit Unions:

 

“(iii) a bank, as defined in–

 

“(I) section 3 of the Federal Deposit Insurance

Act (12 U.S.C. 1813);

“(II) section 2(a) of the Investment Company Act

of 1940 (15 U.S.C. 80a-2(a)); or

“(III) section 202(a) of the Investment Advisers

Act of 1940 (15 U.S.C. 80b-2(a));

 

“(iv) a Federal credit union or a State credit union

(as those terms are defined in section 101 of the Federal

Credit Union Act (12 U.S.C. 1752));

“(v) a bank holding company (as defined in section 2

of the Bank Holding Company Act of 1956 (12 U.S.C. 1841))

or a savings and loan holding company (as defined in

section 10(a) of the Home Owners’ Loan Act (12 U.S.C.

1467a(a)));

“(vi) a money transmitting business registered with

the Secretary of the Treasury under section 5330;

 

Broker-Dealers, Exchanges, And Other SEC Registered Entities:

 

“(vii) a broker or dealer (as those terms are defined

in section 3 of the Securities Exchange Act of 1934 (15

U.S.C. 78c)) that is registered under section 15 of that

Act (15 U.S.C. 78o);

“(viii) an exchange or clearing agency (as those terms

are defined in section 3 of the Securities Exchange Act of

1934 (15 U.S.C. 78c)) that is registered under section 6 or

17A of that Act (15 U.S.C. 78f, 78q-1);

“(ix) any other entity not described in clause (i),

(vii), or (viii) that is registered with the Securities and

Exchange Commission under the Securities Exchange Act of

1934 (15 U.S.C. 78a et seq.);

“(x) an entity that–

 

“(I) is an investment company (as defined in

section 3 of the Investment Company Act of 1940 (15

U.S.C. 80a-3)) or an investment adviser (as defined in

section 202 of the Investment Advisers Act of 1940 (15

U.S.C. 80b-2)); and

“(II) is registered with the Securities and

Exchange Commission under the Investment Company Act of

1940 (15 U.S.C. 80a-1 et seq.) or the Investment

Advisers Act of 1940 (15 U.S.C. 80b-1 et seq.);

 

“(xi) an investment adviser–

 

“(I) described in section 203(l) of the Investment

Advisers Act of 1940 (15 U.S.C. 80b-3(l)); and

“(II) that has filed Item 10, Schedule A, and

Schedule B of Part 1A of Form ADV, or any successor

thereto, with the Securities and Exchange Commission;

 

Insurance Companies and Agents:

 

“(xii) an insurance company (as defined in section 2

of the Investment Company Act of 1940 (15 U.S.C. 80a-2));

“(xiii) an entity that–

 

“(I) 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

“(II) has an operating presence at a physical

office within the United States;

 

Commodities Entities, Exchanges, And Other CTFA Regulated Entities:

 

“(xiv)(I) a registered entity (as defined in section

1a of the Commodity Exchange Act (7 U.S.C. 1a)); or

“(II) an entity that is–

 

“(aa)(AA) 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 (7 U.S.C. 1a)); or

“(BB) a retail foreign exchange dealer, as

described in section 2(c)(2)(B) of that Act (7 U.S.C.

2(c)(2)(B)); and

“(bb) registered with the Commodity Futures

Trading Commission under the Commodity Exchange Act (7

U.S.C. 1 et seq.);

 

SOX Registered Accounting Firms:

 

“(xv) a public accounting firm registered in

accordance with section 102 of the Sarbanes-Oxley Act of

2002 (15 U.S.C. 7212);

 

Public Utilities:

 

“(xvi) a public utility that provides

telecommunications services, electrical power, natural gas,

or water and sewer services within the United States;

 

Financial Markets Entities:

 

“(xvii) a financial market utility designated by the

Financial Stability Oversight Council under section 804 of

the Payment, Clearing, and Settlement Supervision Act of

2010 (12 U.S.C. 5463);

“(xviii) any pooled investment vehicle that is

operated or advised by a person described in clause (iii),

(iv), (vii), (x), or (xi);

 

Tax-Exempt Nonprofits And Trusts And Their Subsidiaries And Holding Entities:

 

“(xix) any–

“(I) 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 such 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 described in this

subclause for the 180-day period beginning on the date

of the loss of such tax-exempt status;

“(II) political organization (as defined in

section 527(e)(1) of such Code) that is exempt from tax

under section 527(a) of such Code; or

“(III) trust described in paragraph (1) or (2) of

section 4947(a) of such Code;

 

“(xx) any corporation, limited liability company, or

other similar entity that–

 

“(I) operates exclusively to provide financial

assistance to, or hold governance rights over, any

entity described in clause (xix);

“(II) is a United States person;

“(III) is beneficially owned or controlled

exclusively by 1 or more United States persons that are

United States citizens or lawfully admitted for

permanent residence; and

“(IV) derives at least a majority of its funding

or revenue from 1 or more United States persons that

are United States citizens or lawfully admitted for

permanent residence;

 

US Presence Employers of more than 20 people With More Than $5 Million In Sales And Their Affiliates:

 

“(xxi) any entity that–

 

“(I) employs more than 20 employees on a full-time

basis in the United States;

“(II) 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, including the receipts or sales of–

 

“(aa) other entities owned by the entity; and

“(bb) other entities through which the entity

operates; and

 

“(III) has an operating presence at a physical

office within the United States;

 

“(xxii) any corporation, limited liability company, or

other similar entity of which the ownership interests are

owned or controlled, directly or indirectly, by 1 or more

entities described in clause (i), (ii), (iii), (iv), (v),

(vii), (viii), (ix), (x), (xi), (xii), (xiii), (xiv), (xv),

(xvi), (xvii) (xix), or (xxi);

 

Entities Owned By US Persons Without Active Businesses And No Significant Change In Control:

 

“(xxiii) any corporation, limited liability company,

or other similar entity–

 

“(I) in existence for over 1 year;

“(II) that is not engaged in active business;

“(III) that is not owned, directly or indirectly,

by a foreign person;

“(IV) 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

“(V) 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;

 

 

 

Government Determined Exempt Entities:

 

“(xxiv) 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 subsection (b) because requiring

beneficial ownership information from the entity or class

of entities–

 

“(I) would not serve the public interest; and

“(II) 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.

 

Access To FinCEN Database:

 

The following types of agencies and institutions are allowed, on proper request, to obtain access to beneficial ownership information in the FinCEN database: (31 U.S. Code Sec. 5336 (c)(2)(A)):

 

Federal national security and law enforcement agencies:

 

“(I) from a Federal agency engaged in national

security, intelligence, or law enforcement activity,

for use in furtherance of such activity; or

 

Court-authorized state, local, or Tribal law enforcement agencies:

 

“(II) from a State, local, or Tribal law

enforcement agency, if a court of competent

jurisdiction, including any officer of such a court,

has authorized the law enforcement agency to seek the

information in a criminal or civil investigation;

 

Foreign Country Inquiries Requested Through Federal Agencies:

 

“(ii) a request from a Federal agency on behalf of a

law enforcement agency, prosecutor, or judge of another

country, including a foreign central authority or competent

authority (or like designation), under an international

treaty, agreement, convention, or official request made by

law enforcement, judicial, or prosecutorial authorities in

trusted foreign countries when no treaty, agreement, or

convention is available–

 

“(I) issued in response to a request for

assistance in an investigation or prosecution by such

foreign country; and

“(II) that–

 

“(aa) requires compliance with the disclosure

and use provisions of the treaty, agreement, or

convention, publicly disclosing any beneficial

ownership information received; or

“(bb) limits the use of the information for

any purpose other than the authorized investigation

or national security or intelligence activity;

 

Financial Institutions With Due Diligence Requirements:

 

“(iii) a request made by a financial institution

subject to customer due diligence requirements, with the

consent of the reporting company, to facilitate the

compliance of the financial institution with customer due

diligence requirements under applicable law; or

 

Federal Regulators:

 

“(iv) a request made by a Federal functional regulator

or other appropriate regulatory agency consistent with the

requirements of subparagraph (C).