Introduction. On January 1, 2021, the United States Senate passed H.R. 6395, the National Defense Authorization Act, 2021 (“NDAA”) over the Presidential veto. The NDAA is slated to be enacted. Division F of the NDAA incorporates the Corporate Transparency Act of 2020 (“CTA”). An earlier version of the CTA, H.R. 2513, was passed by the House of Representatives in 2019. The CTA substantially revised and expanded H.R. 2513. The CTA adds section 5336 to the Bank Secrecy Act, 21 U.S.C. sections 5311 et seq., originally enacted in 1970 (“BSA”).
Legislative Intent. The Conference Report for the NDAA states the purpose of the CTA is “to establish an improved reporting system relating to beneficial ownership information, including building in further protections to ensure that sensitive information is properly used and protected” by the U.S. Government. The Conference Report states, in part, that the disclosure is intended to target “bad actors who own or control businesses that act as ‘fronts’ or shell companies on behalf of those conducting illicit activities”.
Scope of Confidentiality. Under the CTA, beneficial ownership (“BO”) information primarily is for use in law enforcement and national security efforts. The CTA requires BO information to be reported to the Financial Crimes Enforcement Network (“FinCEN”), the financial intelligence unit of the U.S. Department of Treasury (“Treasury”). The BO reports generally are not made publicly available. Rather, as the Conference Report avers, the BO information “will be kept confidential and treated as sensitive information, protected under the highest information security standards.”
Thus, under BSA section 5336(c)(2)(B)(i)(II), the reported BO information may be permitted to be disclosed to State or local governments generally only by court order. Another exception to the general prohibition on disclosure of BO information includes disclosure in response to requests of a Federal agency on behalf of foreign authorities for an investigation or other activity. Under BSA section 5336(c)(2)(B)(ii)(II)(aa), giving over BO information to a foreign authority may be for the purpose of compliance with treaty, agreement or convention provisions and involve publicly disclosing any BO information received. Under BSA section 5336(c)(2)(B)(iii), BO information may be disclosed in response to requests by financial institutions for compliance with customer due diligence requirements. BSA section 5336(c)(2)(B)(iv) permits restricted disclosure of BO information in response to requests by Federal regulatory agencies.
Whose Information Must Be Reported? A reporting company must be report to FinCEN information for each applicant and each beneficial owner. Under BSA section 5336(a)(2), an applicant is generally any individual who files an application to form a corporation, limited liability company (“LLC”) or other similar entity under State law. Alternatively, an applicant may be any individual who registers or files an application under State law to register a corporation, LLC or similar entity that initially was formed under the laws of a foreign country, in order to do business in the United States.
On the other hand, a beneficial owner under BSA section 5336(a)(3) is an individual other than certain minors, nominees, employees, heirs or creditors, who either exercise substantial control over the entity or own or control not less than 25 percent of the ownership interests of the entity. To trigger CTA reporting obligations, the entity must be a reporting company, defined in BSA section 5336(a)(11). A reporting company is a corporation, LLC or similar entity formed either under the laws of a State or a foreign country and authorized to do business in the United States.
BSA section 5336(a)(11)(B) contains broad exceptions for certain entities or their subsidiaries from CTA disclosure requirements, including broker dealers, pooled investment vehicles, publicly traded or SEC reporting companies, banks, exchanges, clearing houses, investment advisers, insurance companies, commodity exchanges, accounting firms, utilities, tax-exempt organizations, businesses with U.S. physical presence, more than 20 full-time U.S. employees and annual revenues exceeding $5,000,000, or for certain entities without any foreign ownership.
Scope and Manner of BO Information Reporting. The scope of BO information reporting requirements under the CTA shall be set forth in Treasury regulations, pursuant to BSA section 5336(b)(1). A reporting company will be required to submit a FinCEN report in compliance with Treasury regulations to be promulgated under legislative authority in BSA section 5336. Pursuant to BSA section 5336(b)(3), in furtherance of compliance with CTA, FinCEN will issue to each individual or entity that must disclose information under BSA section 5336(b)(2) a unique identifying number (the “FinCEN Identifier”).
In general, under BSA section 5336(b)(2)(A), the FinCEN report must contain the name, date of birth, address, and either a social security number, tax ID or the FinCEN Identifier of each applicant and each beneficial owner of the reporting company. Under BSA section 5336(b)(3)(A)(ii), the person with a FinCEN Identifier will use the number for FinCEN submissions updating BO information as required under BSA section 5336(b)(1)(D). Limited FinCEN disclosure applies to BSA section 5336(a)(11)(B) exempt entities or their subsidiaries.
A reporting company may have to disclose BO information of an applicant or beneficial owner who was issued a FinCEN Identifier. In that case, stating only the FinCEN Identifier of the individual in the report would be sufficient disclosure under BSA section 5336(b)(2). Conversely, a reporting company may have to include BO information of a beneficial owner who may hold the ownership interest through a parent entity of the reporting company. In that case, the reporting company may disclose only the FinCEN Identifier of the parent entity in lieu of the BO information of the individual for purposes of complying with BSA section 5336(b)(2)(A).
Timing of Implementation of Reporting Requirements. FinCEN reporting at present is not required for reporting companies, their beneficial owners or applicants. Instead, under BSA section 5336(b)(5), reporting will be required as of the effective date of final Treasury regulations that will be promulgated under BSA section 5336. The statute mandates that final Treasury regulations take effect not later than one year after the date of enactment of the CTA.
After the final Treasury regulations implementing the CTA requirements take effect, reporting companies in existence as of the effective date of the regulations will have two years to comply with the CTA reporting rules. In turn, reporting companies formed after the effective date of the Treasury regulations generally will have to file applicable FinCEN reports “at the time of” formation or registration to do business in the United States under the laws of a State. In addition, a reporting company will have to file an updated FinCEN report within a year of a change in beneficial ownership, as shall be prescribed in the final Treasury regulations.
Action Items. Corporations, LLCs and other similar entities either formed under the law of a U.S. jurisdiction or a foreign country must analyze the prospective applicability of FinCEN reporting requirements under the amended BSA, which may become effective within the current calendar year. Beneficial owners, investors and creditors must determine the chain of beneficial ownership of each entity in a holding company structure in order to comply with forthcoming FinCEN reporting rules or to ascertain whether exceptions under the BSA would apply to such individuals or entities. Specific compliance standards have not yet been promulgated, but foreign investors and foreign-owned entities should consult with U.S. tax counsel to ensure compliance in anticipation of the new beneficial ownership information reporting regime