Getting a Clear Look
By David Parke, Esq.
A new federal statute enacted on Jan. 1, 2021 will require many ordinary corporations, limited-liability companies, and similar entities to report their beneficial ownership to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
The scope of entities and control arrangements covered by this new statute is broad. It applies to newly formed, as well as existing, entities, and requires that the beneficial ownership information reported to FinCEN be kept up to date. The act provides civil and criminal consequences for violation of its reporting requirements.
The new Federal Corporate Transparency Act was enacted as part of the National Defense Authorization Act for Fiscal Year 2021. The act is intended to address the use of shell companies with concealed ownership that have been used for money laundering, terrorist financing, and other criminal activities.
The scope of entities and control arrangements covered by this new statute is broad. It applies to newly formed, as well as existing, entities.”
The act requires that a ‘reporting company,’ which includes a corporation, limited-liability company, or similar entity, unless exempt, submit to FinCEN certain information identifying each individual ‘beneficial owner’ of the entity. The act also requires the reporting of information regarding an individual ‘applicant,’ who, as defined in the statute, files an application to form the entity in the U.S. or to register a foreign entity in the U.S. Changes in such information must also be reported.
The act lists 24 exemptions from its definition of ‘reporting company.’ These generally include publicly traded companies; many tax-exempt entities; businesses with more than 20 full-time employees and more than $5 million in gross annual receipts; entities such as banks, insurance companies, financial services, and other companies that are already subject to regulation; and certain dormant entities as defined in the statute. However, many small, family-owned, or special-purpose entities will be subject to the act.
A ‘beneficial owner,’ whose information must be provided to FinCEN, means an individual who directly or indirectly, through a contract, arrangement, understanding, relationship, or otherwise, exercises substantial control over the entity, or owns or controls at least 25% of the ownership interests in the entity. Certain individuals, including minor children if information regarding the parent or guardian is reported, employees whose control or economic benefits derive solely from their employment status, and individuals whose only interest is through a right of inheritance, are not regarded as beneficial owners.
The reporting requirements of the act will take effect on the effective date of the regulations that are expected to be issued by the Treasury Department. Regulations must be promulgated by Jan. 1, 2022. It is expected that questions regarding the scope of the act and reporting mechanisms will be addressed in the regulations. Such questions include what types of entities, in addition to corporations and limited-liability companies, and what type of control arrangements will be subject to the reporting requirements.
The information database maintained by FinCEN under the act would be a confidential, non-public database and used for helping law enforcement and regulators, as well as helping financial institutions to facilitate compliance with customer due-diligence requirements.
The Treasury regulations will determine when and how to comply with the reporting requirements under this new act. Many existing and new entities that formerly had limited reporting obligations, and their professional advisors, will need to prepare for a new reporting requirement to FinCEN.
David Parke is a partner with the Springfield-based firm Bulkley Richardson; (413) 272-6311.