The key requirement of the Act is that a reporting company must disclose to FinCEN, a bureau of the U.S. Department of the Treasury, personal information regarding its beneficial owners (as well as information about the beneficial owners of such beneficial owners). Information to be disclosed includes each such person’s full legal name, residential or business address, date of birth and a personal identification number (such as a drivers’ license number or a passport number). The Act defines a “beneficial owner” as an individual who, directly or indirectly (through any contract, arrangement, understanding relationship or otherwise): exercises substantial control over a reporting company or who owns or controls not less than 25 percent of the ownership interests of the reporting company. A “beneficial owner” does not include a minor child (the information of the parent or guardian must be reported instead), an individual acting as a nominee, intermediary, custodian or agent of another individual, an individual solely acting as an employee of a reporting company, or a creditor of a reporting company. The beneficial ownership information disclosed will be stored and maintained within FinCEN and may only be used for national security, intelligence and law enforcement activities, or national security purposes, and to confirm information provided to financial institutions to facilitate compliance with anti-money laundering laws. Nevertheless, the Act raises Fourth Amendment privacy concerns for many commentators, given the highly sensitive nature of the personal information being disclosed.
After the Treasury regulations are implemented, reporting companies will be required to file beneficial ownership reports upon formation of an entity subject to the Act or, if formed prior to the enactment of the regulations, within two years of the effective date of the Treasury regulations. Following submission of the initial report, reporting companies must report changes to their beneficial ownership timely and not later than one year after the change. The Act also requires changes to the Federal Acquisition Regulation (FAR) to be implemented within two years of the effective date of the Act, to provide that “any contractor or subcontractor” subject to the Act disclose its beneficial ownership information as part of any bid or proposal for a contract valued above the simplified acquisition threshold (currently $250,000, subject to certain exceptions). This will expand current requirements under the FAR, which requires prime contractors to provide certain information about corporate ownership in bids or proposals.
Noncompliance with the Act can result in significant civil and criminal penalties. Penalties for the intentional failure of a reporting company to comply with the Act or to provide false beneficial ownership information will subject the reporting company to fines of up to $500 per day, with aggregate fines up to $10,000, a prison term of not more than two years, or both. Any party that unlawfully knowingly discloses any beneficial ownership information may be subject to fines of up to $500 per day, or up to $250,000 in the aggregate, a prison term of up to 10 years, or both. Notably, the failure to comply with the Act will not invalidate the formation of an entity or prohibit it from conducting business.
The Act raises many questions which we hope will be addressed in the implementing regulations. Numerous details regarding application and administration of the Act are not covered in the initial legislation passed.
In summary, the Act will impose significant new beneficial reporting obligations on many U.S. private companies. U.S. entities should review the Act and its requirements now to determine if they will have to comply with these new reporting obligations and, if subject to the Act, to plan how to obtain the information needed from beneficial owners to timely file the reports required.