by Casey A. Olden – Last month, Congress passed a new law entitled the Corporate Transparency Act (the “CTA”). The CTA will require many entities, including corporations and limited liability companies, to disclose certain information about all “beneficial owners” and “applicants” to the Department of the Treasury. Some of the stated purposes of the CTA are to “better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activity” and “bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.”
A beneficial owner is someone who owns at least 25% of the ownership interests of an entity, or who otherwise exercises substantial control over the entity. An applicant is someone who filed an application to form the entity. A reporting entity will need to disclose the name, date of birth, current address, and a “unique identifying number from an acceptable identification document” (likely a passport or driver’s license number) for each beneficial owner and applicant. The entity will be required to file an update whenever there is a change in beneficial ownership information. This information is similar to what is currently required when engaging in a bank financing transaction, except that soon disclosure obligations will apply much more broadly.
The information collected will be stored in a nonpublic database, accessible by federal agencies engaged in national security, intelligence, or law enforcement activities. State law enforcement agencies may also gain access by court order, and a reporting entity may grant a financial institution permission to access the information to satisfy due diligence requirements.
The CTA excludes certain entities from the reporting requirements, the most common of which include 501(c) organizations and companies that have (i) more than 20 full-time employees in the United States, (ii) more than $5 million in gross receipts or sales, and (iii) an operating presence at a physical office in the United States. The Treasury Department is authorized to exempt further classes of entities in future regulations.
Regulations further defining the CTA’s requirements are scheduled to be issued no later than January 1, 2022. Reporting entities in existence before the effective date of the regulations will have two years to file an initial report. Reporting entities formed after the effective date of the regulations will be required to file an initial report when formed.
The CTA will likely lead to the creation of a large government bureaucracy to enforce the law and the regulations. There are civil and criminal penalties for willfully providing false information or for willfully failing to report information. While no immediate action is required at this time, business owners and investors should be aware of the CTA’s far reach, as it will inevitably cost additional time and money to ensure compliance.