Introduction. On January 1, 2021, the Corporate Transparency Act of 2020 (“CTA”) was enacted into law as part of H.R. 6395, the National Defense Authorization Act, 2021 (“NDAA”). The CTA added Section 5336 to the Bank Secrecy Act, 31 U.S.C. sections 5311 et seq., originally enacted in 1970 (“BSA”). On April 5, 2021, the United States Department of Treasury (“Treasury”) and Financial Crimes Enforcement Network (“FinCEN”) published proposed regulations under the CTA. The notice of proposed rulemaking contains 48 questions to be addressed in forthcoming beneficial ownership information reporting requirements to be promulgated within a year of the enactment.
Proposed Regulations. Under the legislative history, the purpose of the CTA was “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 disclosure was intended to target “bad actors who own or control businesses that act as ‘fronts’ or shell companies on behalf of those conducting illicit activities.” The questions for comment, divided in five sections discussed below, purport to weigh the costs and benefits to stakeholders of implementing solutions to these legislative concerns.
The definitions section contains questions regarding the scope of reporting companies that would be subject to CTA requirements. The definitions section also seeks to clarify the scope of corporate filings practices under state or other applicable law, which would result in an entity being deemed a reporting company under the CTA. Ultimate beneficial owners ("UBOs") of reporting companies should be aware that any final rule defining such terms will determine whether a corporate structure falls within the purview of the CTA reporting requirements.
Treasury has inquired on information a reporting company should disclose to FinCEN about its corporate affiliates, parents and subsidiaries, particularly in light of complex, tiered corporate structures. In addition, Treasury is considering whether such affiliate information should be reported as a matter of course or only under certain conditions. UBOs would find advisable to assess whether holding company structures may be streamlined to increase efficiency and reduce potential reporting burdens under final regulations.
The Proposed Regulations include several questions on technical aspects of a FinCEN identifier used by a filer to report beneficial ownership information. Treasury noted that complex ownership structures may include multiple entities that may require individual FinCEN identifiers. Treasury suggested it may consider allowing a common FinCEN identifier for tiered reporting companies to facilitate CTA compliance by financial institutions.
Treasury inquired whether additional cybersecurity measures should be implemented to protect the confidentiality of beneficial ownership and applicant information. In addition, Treasury is considering permitting use of beneficial ownership data or applicant information by financial institutions for other purposes. Thus, UBOs should be aware that beneficial ownership information reported to FinCEN may be disclosed to other governmental agencies in some cases or to financial institutions.
Treasury expressed concern with balancing the compliance objectives of CTA with undue burdens on small businesses that may be subject to FinCEN reporting rules. Treasury is considering alternative reporting rules for small business to assist in reducing costs of CTA compliance. Therefore, UBOs using LLCs in their holding company structures need to be aware of potential multiple reporting requirements.
Conclusion and Action Items. Ultimate beneficial owners of LLCs or other entities formed under the laws of a U.S. jurisdiction must comply with forthcoming final Treasury regulations implementing the requirements under the CTA, enacted earlier this year. UBOs may find advisable to engage U.S. tax and corporate governance counsel to monitor developments in Treasury and FinCEN rules on scope of beneficial ownership, disclosure requirements, exceptions, confidentiality protections, and beneficial ownership reporting compliance at Federal, state, local or tribal government levels.