Legal Bulletins

On January 7, 2021, Congress passed the National Defense Authorization Act (Defense Act), which includes the Corporate Transparency Act (Act).

The Act, which takes effect on the effective date of the U.S. Treasury Secretary’s implementing regulations, requires “reporting companies” to file information on beneficial owners and applicants with the Financial Crimes Enforcement Network (FinCEN). The beneficial ownership information will be maintained by FinCEN on a secure registry that may only be accessed by authorized federal, state, local and foreign law enforcement agencies, as well as financial institutions, with the reporting company’s consent, in an effort to satisfy mandatory customer due diligence requirements. Further, the U.S. Treasury Department may access beneficial ownership information and use the information for tax purposes.

The goal of the Act is to crack down on anonymous shell companies, which are often used as vehicles for money laundering and other illicit activities, by providing federal law enforcement agencies greater access to beneficial ownership information through the beneficial ownership registry.

What Companies Are Subject to Reporting?

The Act requires reporting companies to file beneficial ownership information with FinCEN.

A reporting company is a corporation, LLC or “other similar entity” that is formed in the United States by filing a document with a secretary of state or a similar office or that is formed in a foreign country and is registered to do business in the United States by filing a document with a secretary of state or a similar office.

The Act excludes 24 types of entities from the definition of a reporting company, some of which are:

• Publicly traded companies and registered public accounting firms;
• Registered brokers or dealers;
• An entity that is either an investment company (as defined in Section 3 of the Investment Company Act of 1940) or an investment adviser (as defined in Section 202 of the Investment Advisers Act of 1940), and in each case registered with the SEC;
• Banks (as defined in Section 3 of the Federal Deposit Insurance Act, Section 2(a) of the Investment Company Act of 1940 or Section 202(a) of the of Investment Advisers Act of 1940);
• A bank holding company (as defined in Section 2 of the Bank Holding Company Act of 1956) or a savings and loan holding company (as defined in Section 10(a) of the Home Owners Loan Act);
• Any corporation, LLC or other similar entity of which the ownership interests are “owned or controlled,” directly or indirectly, by one or more of the exempt entities enumerated in the Act;
• Entities employing more than 20 full-time employees with more than $5 million in gross receipts in the aggregate (including those of entities owned by the exempt entity and other entities through which the exempt entity operates) and an operating presence at a physical office in the United States; and
• Pooled investment vehicles that are “operated or advised” by a bank, federal or state credit union, registered broker or dealer, or investment company or investment adviser.

The Act does not explicitly include common law trusts in its definition of a reporting company, although it is unlikely that the implementing regulations will consider common law trusts to be reporting companies, because they are not formed by filing a document with the secretary of a state. Statutory trusts, however, may be subject to the Act’s reporting requirements.

What Information Must Be Reported?

The Act requires reporting companies to submit a FinCEN report that includes the following information for each beneficial owner or applicant (as defined in the section below):

• Full legal name;
• Date of birth;
• Current residential or business street address; and
• Unique identifying number from an acceptable identification document, such as a U.S. passport, state driver's license, other U.S. and state-issued identification or a foreign passport.

If an exempt entity has or will have a direct or indirect ownership interest in a reporting company, the reporting company or applicant need only provide the name of the exempt entity.

Criminal and civil liability may be imposed for any person who willfully fails to provide complete or updated beneficial ownership reports or willfully provides false or fraudulent beneficial ownership information. There is, however, a safe harbor from such liability for individuals who “voluntarily and promptly,” within 90 days after the submission of such false or fraudulent information, file a new report containing corrected and accurate information.

Who Are Beneficial Owners and Applicants?

Beneficial Owners

With respect to an entity, an individual who, directly or indirectly, (i) exercises substantial control over the entity; or (ii) owns or controls at least 25% of the equity interests of such entity. The Act does not define “substantial control” and it is anticipated that the implementing regulations will provide a definition for such term.

The following individuals are not beneficial owners:

• Minors (provided the information of the parent/guardian is reported);
• Nominees, intermediaries, custodians and agents;
• Individuals who are employees and whose control over or economic benefits from the entity are derived from their employment;
• Individuals whose only interest in the entity is through a right of inheritance, and
• Creditors that are not also beneficial owners of the reporting company.

Applicants

An “applicant” is any individual who files an application to form a reporting company in the United States or registers or files an application to register a foreign reporting company to do business in the United States.

When Does Reporting Begin?

Existing reporting companies must report beneficial ownership information within two years after the effective date of the U.S. Treasury Secretary’s implementing regulations.

New reporting companies formed or registered after the effective date of the implementing regulations are required to report beneficial ownership information at the time of formation or registration.

Any exempt subsidiary entities must report beneficial ownership information at the time such entity no longer is a subsidiary of an exempt entity.

Any change in beneficial ownership information must be reported within one year after such change in information.

If you have any questions, please contact Christopher R. Rahl or Michele Bresnick Walsh.

Christopher R. Rahl
410-576-4222 • crahl@gfrlaw.com

Michele Bresnick Walsh
410-576-4216 • mwalsh@gfrlaw.com