By January 1, 2022, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) will publish regulations regarding mandatory beneficial ownership reporting requirements (Reporting Requirements) as required by the Corporate Transparency Act (CTA).[1] Once published, newly formed and existing legal entities will be required to comply or face significant penalties.  They apply to all corporations, limited liability companies or similar entities formed under state law or registered to do business in the U.S. unless one of the limited exceptions discussed below applies.  The point of the CTA is to discourage the use of shell companies, which Congress identified are regularly used for money laundering and tax evasion.  However, because of the broad scope of the CTA, the vast majority of legal entities set up in the U.S. will be subject to the reporting requirements.

Reporting Requirements and Penalties

The CTA defines as “reporting company” as any corporation, limited liability company or other similar entity created by a filing document with a secretary of state (or similar office) or formed under the law of a foreign country and registered to do business in the United States.

Each reporting company that does not meet one of the exceptions must report information on each of its “beneficial owners,” which is defined as an individual who, directly or indirectly, exercises substantial control over an entity and holds or controls at least 25% of the ownership interests of that entity.  For each beneficial owner, the reporting company must report (i) the full name, (ii) date of birth, (iii) current address and (iv) an identifying number, such as a passport or driver’s license.   It is not yet clear how each company will report under the CTA, as FinCEN has not released a draft form or provided information on how reporting companies will be able to comply.

Failure to comply with the Reporting Requirements may result in significant penalties including (i) civil penalties of up to $500 per day for non-compliance, and (ii) criminal fines of up to $10,000 or imprisonment for up to two years for willfully providing or attempting to provide false or fraudulent information, or failure to provide the information required by the Reporting Requirements. There are additional penalties for misusing the information collected under the CTA.

Exceptions to the Reporting Requirements

There are certain limited exceptions to the Reporting Requirements, which generally are entities that Congress felt were already subject to ownership transparency based on existing law.  The primary exceptions are:

1. Publicly traded companies;
2. Companies with (i) more than 20 full-time employees in the U.S., (ii) with a physical office in the United States and (iii) having $5 million in annual gross receipts, as shown on a U.S. tax return;
3. Dormant companies which (i) have been in existence for more than one year, (ii) are not engaged in an active business, and (iii) and are not owned (either directly or indirectly) by a non-U.S. individual; and
4. Additionally, there are some additional exceptions for certain financial institutions and charitable organizations.

Timeline for Compliance

As of the date of this article, FinCEN has not published the regulations regarding the Reporting Requirements but is required to do so by January 1, 2022. The exact compliance deadlines for non-excepted reporting companies will be based on the effective date of the regulations. Companies that were formed or registered before the effective date will have two years from the effective date to comply. Companies that are formed or registered on or after the effective date will be required to comply upon formation or registration.

Companies Should Prepare for Compliance Now

Companies that are uncertain of their ultimate beneficial owners should start preparing now to identify and disclose such beneficial owners in order to avoid significant civil and criminal penalties.  Additionally, professional advisors need to keep abreast of the regulations and advise clients who form entities after the effective date of the regulations of the newly imposed reporting requirements that must be met upon the formation of the company or registration of the company to do business in the U.S.

[1] The CTA was passed by Congress on January 1, 2021 and required FinCEN to publish regulations regarding the Reporting Requirements no later than January 1, 2022. As of the date of this article, the regulations have not yet been published.