Christopher S W Blake
Hahn Loeser & Parks, Cleveland
cswblake@hahnlaw.com

James P Oliver
Hahn Loeser & Parks, Cleveland
​​​​​​​joliver@hahnlaw.com^[1]

Background

On 1 January 2021, the United States Congress enacted the National Defense Authorization Act 2021 (NDAA). Both the Senate and the House of Representatives voted to override former President Trump’s veto of the legislation with an overwhelming majority of 81-13 and 322-87 respectively. Title LXIV of the NDAA included the Corporate Transparency Act (CTA). The CTA is recognised as an amendment to the Anti-Money Laundering Act 2020 (AMLA), and it is a significant addition to the most comprehensive legislative crackdown on money laundering in recent history.

The CTA discourages the use of shell companies by mandating a new layer of transparency during entity formation. Prior to the CTA, Congress identified anonymous shell companies as a serious loophole to the existing AMLA legal framework. The CTA marks a bipartisan effort to address that loophole and to shift the burden of collecting ownership information from financial institutions to reporting companies. 

Reporting requirements

The statute identifies a reporting company as a 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 US.

Under the statute, a beneficial owner is any individual who directly or indirectly exercises substantial control over an entity and holds or controls at least 25 per cent of the ownership interests of that company.

The CTA will require a reporting company to provide the following information about its beneficial owners to the Financial Crimes Enforcement Network (FinCEN) database:

• full name;
• date of birth;
• current residential or business address; and
• a unique identifying number from a state-issued identification document (this may include a passport, driver’s licence or a FinCEN identifier).

The database maintained by FinCEN will have limited access. Authorised users will include federal government agencies (eg, the FBI), state and local law enforcement with an appropriate court order (ie, a warrant), non-US law enforcement (ie, Interpol) or financial institutions granted the reporting company’s permission.

Exceptions

Some entities will be exempt from reporting beneficial ownership information. The exceptions apply to entities that already disclose beneficial ownership information through other federal laws/regulations or those entities which are impracticable for money-laundering activities.

The most prominent exceptions include:

• publicly traded companies (subject to SEC regulations);
• companies employing more than 20 full-time employees in the US, operating from a physical office in the US and having filed a tax return demonstrating more than $5m in gross receipts/sales; and
• dormant companies which have been in existence for more than one year, are not engaged in ‘active business’ and not owned (either directly or indirectly) by a non-US individual.

Additional exceptions exist for certain financial institutions, charitable trusts and pooled investment vehicles

Timeline

The Secretary of Treasury has one year to promulgate regulations for the CTA; the effective date shall be no later than 1 January 2022. The effective date of the forthcoming regulations will determine the exact filing timeline for reporting companies. Companies that were formed or registered prior to the effective date will have two years to comply. Companies that are formed or registered on or after the effective date will be required to report the beneficial ownership information at the time of formation or registration. Any changes to reported information must reported to FinCEN within one year of the change occurring.

Penalties

Failure to comply with the new CTA reporting requirements will result in serious penalties. An individual who fails to meet the reporting standards may face civil penalties of up to $500 per day. An individual who wilfully provides or attempts to provide false or fraudulent information, or wilfully fails to provide FinCEN with the requisite information, may face criminal fines up to $10,000 and/or imprisonment for up to two years.

Moreover, the statute imposes penalties for individuals who engage in unauthorised use or disclosure of beneficial ownership information collected under the CTA. The civil penalty is up to $500 per day, and the criminal penalty includes fines up to $250,000 and imprisonment for up to five years.

Next steps

It is essential for a company to determine whether its entity structure qualifies as a reporting company under the CTA. Reporting companies need to keep abreast of forthcoming regulations and consider a compliance plan. Identifying beneficial owners and keeping FinCEN information up to date is essential for businesses to avoid civil and criminal penalties going forward.