Your U.S. Business May Soon Be Subject to New FinCEN Reporting Requirements

Recent legislation to prevent the use of shell companies in concealing illegal activity or facilitating tax evasion and money laundering brings new requirements for reporting beneficial ownership information. The Corporate Transparency Act (CTA), included in the National Defense Authorization Act of 2021, requires certain companies to report the identities of their “beneficial owners” and “applicants” to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

Potential filing requirements under the CTA will not be finalized until regulations are issued, and the regulations are likely to evolve before final adoption. Reporting companies should prepare now, however, to understand their potential filing obligations. For those entities expecting to be exempted from filing, analysis will be required to ensure compliance.

Which Entities Will Be Required to Report

The CTA creates the term “reporting company” to include generally, a corporation, limited liability company (LLC), or other similar entity that is (1) created or formed under state law, or (2) formed under a foreign country law and registered to conduct business in the United States.

However, certain entities are excluded, including:

• Businesses with a U.S. office of more than 20 full-time U.S. employees that have filed a U.S. income tax return reporting more than $5 million in gross receipts in the previous year.
• Companies already subject to certain oversight or regulations (e.g., banks, broker/dealers, publically traded companies, and insurance companies); and
• Investment companies and advisors registered with the SEC, certain pooled investment vehicles, and tax-exempt Section 501(c) corporations.

Definition of “Beneficial Owner” and “Applicant”

A “beneficial owner” is defined as any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

• Exercises substantial control over the entity; or
• Owns or controls not less than 25% of the ownership interests of the entity.

The terms “substantial control” and “ownership interests” are not defined within the CTA.

The CTA contains certain exclusions from the definition of “beneficial owner” including, minor children; nominees, agents, custodians acting for another individual; a company employee whose only control comes from being an employee; someone whose interest comes from a right of inheritance; or a creditor of the entity.

The Act also requires companies to report “ applicants,” defined as any individual who files an application to organize the above referenced U.S. entity or who registers or files an application to register the above referenced non-U.S. entity to do business in the U.S.

Information Reporting Requirement

A reporting company is required to file a report with FinCEN that identifies each beneficial owner and applicant by:

• Full legal name;
• Date of birth;
• Current residential or business street address; and
• A Unique Identifying Number:
  • For U.S. taxpayers – from a non-expired passport issued by the U.S., non-expired personal identification card, non-expired driver’s license issued by a state, or FinCEN Identifier.
  • For foreign individuals – from a non-expired passport issued by a foreign government, a legible and credible copy of the pages of the non-expired passport bearing a photograph, date of birth, etc.

Failure to comply with the Act’s reporting requirements can result in civil penalties of up to $10,000 and possible imprisonment.

Effective Date

The CTA will be effective when the Treasury Department adopts enabling regulations, which can be no later than January 1, 2022.

For more information about this alert and how the CTA may be applicable to you, contact us. We are here to help.

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