The CTA beneficial ownership recordkeeping requirements apply to “Reporting Companies.” Reporting Companies are limited liability companies and corporations doing business in the United States that do not fall within an exemption from reporting. The CTA exempts certain categories of regulated entities including, without limitation, banks, securities broker-dealers, investment advisors, political organizations, registered 501(c) organizations, and insurance companies. Additionally, the CTA reporting requirement excludes taxable entities that:
- Have more than 20 full-time employees in the United States;
- Report to the Internal Revenue Service annually more than $5 million in gross receipts or sales; and
- Maintain an operating presence at a physical office within the United States.
The caveat is that bigger companies are required to file a separate report explaining why they should be excluded from the reporting requirement. In other words, every corporation or LLC, no matter their revenue or employee count, will be mandated to submit some form of annual report to FinCEN and be subject to the CTA’s civil and criminal penalties.
Required Reporting Information:
Reporting Companies will be required to report the name, date of birth, current residential or business street address and unique identifying number from an acceptable document, such as an unexpired state driver’s license, unexpired personal identification card, or unexpired U.S. or foreign passport, for each “beneficial owner.” A beneficial owner is any natural person who, directly or indirectly:
- Owns 25% or more of the equity interest in the Reporting Company; or
- Exercises “substantial control” over the Reporting Company; or,
- Receives substantial economic benefits from the assets of a Reporting Company.
The CTA does not define the term “substantial control.” How will ownership or control be measured in the context of a discretionary beneficiary of an irrevocable trust or the beneficiary of an incomplete non-grantor trust? Guidance on these issues should be provided at some point in 2021.
The CTA includes a provision prohibiting the issuance of any type of certificate evidencing ownership of such entity in bearer form (i.e. where no record is kept of who owns the equity in the company). Furthermore, indirect ownership will not shield beneficial owners. Reporting Companies formed by a foreign corporation will be required to report the information of all beneficial owners of the foreign corporation.
Access to Reported Information:
FinCEN will maintain information reported under the CTA in a private registry for the life of the Reporting Company, plus five years. The information is available as follows:
- The Treasury Department will be authorized to use the information in the registry for tax purposes.
- Registry information will be available to state and local law enforcement agencies pursuant to a court order or upon receipt of an appropriate request from federal agencies “engaged in national security, intelligence or law enforcement activity.”
- Foreign law enforcement can request this information through an appropriate U.S. agency, but the information is not currently subject to any automatic reporting or exchange of information.
- With the consent of the Reporting Company, financial institutions are permitted to access this information for Customer Due Diligence (CDD) purposes.
Implications for Reporting Companies
The CTA is expected to have significant implications for both U.S. and foreign businesses. Businesses should first determine whether they are a statutory “Reporting Company.” Each statutory Reporting Company must next determine and prepare to report, as necessary, its beneficial owners. This process may require the involvement of legal counsel.
The lawyers at Lobb & Plewe, LLP are well-positioned to assist you and your business in understanding the CTA and will continue to monitor all governmental agencies’ future work as regulations and guidance are issued to implement this new law.
Penalties for CTA Violations:
The willful failure to provide complete or updated information required under the CTA or willfully providing false or fraudulent information involves steep civil and criminal consequences. Violations include the following:
- Civil penalties of up to $500 per day during the time in which the violation continues.
- Criminal fines of up to $10,000.
- Imprisonment for up to two years.
The obligations under the Act apply to beneficial owners and to natural persons who file an application to form a corporation or limited liability company. The unauthorized disclosure of information collected under the Act carries the same civil penalty but a higher criminal penalty of up to $250,000 along with a higher maximum term of imprisonment of five years. Unauthorized disclosure includes both a disclosure by a government employee and a disclosure by a third-party recipient of information under the CTA.
The CTA will be supplemented in 2021 with implementing regulations. The regulations are required to be finalized before January 1, 2022. Reporting Companies in existence on that date will be required to report beneficial ownership information within two years. Reporting Companies created after the effective date are required to report the necessary information at formation. Reporting Companies must submit an annual filing containing a list of the beneficial owners and any change in ownership or control during the previous year.
It is possible the reporting requirements will grow over time and may in fact expand with the implementing regulations. If you would like guidance with respect to not only the new CTA reporting requirements, but state and local reporting obligations for your company, Lobb & Plewe, LLP can assist you. Aside from keeping you abreast of the evolving CTA regulations, L&P provides an annual bundle of services for corporate compliance filings, which will include the filing requirements under the CTA.