Most companies established or registered to do business in the U.S. do not have to disclose or report their ownership information. That is about to change. The recently-enacted Corporate Transparency Act, which went into effect Jan. 1, 2021, requires certain companies to report their beneficial owner(s) to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). This reporting requirement, however, will not take effect until the Secretary of the Treasury promulgates regulations to implement the act, which will occur sometime later this year. This new data collection process will affect millions of business entities and could have profound effects on the privacy of personal information.

What does the Corporate Transparency Act accomplish?

As part of the Anti-Money Laundering Act of 2020, the Corporate Transparency Act seeks to combat financial crimes through increased transparency. FinCEN has long criticized the lack of transparency in the formation of “shell companies,” which has allowed criminals, terrorists, and high-risk individuals to disguise their ownership and purpose. The Corporate Transparency Act is part of FinCEN’s efforts to build a more open financial system where law enforcement can identify the trail of transactions and actual account owners.

Does the Corporate Transparency Act apply to me?

Unless exempted, all corporations, limited liability companies or “other similar entities” that are established to do business in the U.S., or registered to do business in the U.S., are subject to the act. It is not currently clear if general or limited partnerships, business trusts or other entities must file reports.

The act exempts various entities from the reporting requirements, including publicly-traded companies, tax-exempt entities and companies operating in highly-regulated industries including banks, federal or state credit unions, money transmitting businesses, insurance companies, public utilities companies, etc.

An entity that (1) employs more than 20 employees on a full-time basis in the U.S., (2) filed federal income tax returns showing more than $5 million in gross receipts or sales in the aggregate in the previous year, and (3) has an operating presence at a physical office in the U.S. is deemed exempt. Unfortunately, these exemptions do not apply to most small businesses in the U.S., or to single-member LLCs, which are typically formed for a wide-range of legitimate liability protection reasons. Fortunately, the act authorizes Treasury to create additional exempt categories.

What information must a reporting company disclose?

Non-exempt entities must submit a report to FinCEN, identifying the entities’ “beneficial owner” and “applicant” by their legal name, date of birth, residential or business address and either an identification number (presumably a driver’s license or Social Security Number) or a FinCEN identifier.

A “beneficial owner” is an individual who exercises substantial control over the entity or owns no less than 25% of the ownership interest of the entity. If an individual whose control or ownership of the entity derives solely from being an employee, he or she is not a “beneficial owner.” We anticipate that the regulations being developed by the Treasury Department will have significant, complicated and detailed definitions of an “ultimate beneficial owner,” comparable to existing definitions under securities, banking and small business laws.

An “applicant” is someone who files the application to form a corporation, limited liability company or other similar entity or someone that registers a foreign corporation, limited liability company or other similar entity to do business in the U.S. In Ohio, applicants would include incorporators identified in the initial Articles of Incorporation (Form 532A), member, manager or authorized representative of the limited liability company identified in Articles of Organization (Form 533A), authorized officers of a foreign corporation identified in the foreign for-profit corporation Application for License (Form 530A) and authorized representative of a foreign limited liability company identified in Registration of a Foreign Limited Liability Company (Form 533B). This means that many business lawyers and paralegals will need to disclose their personal information in the FinCEN filing.

At the present time, Ohio is one of the few states that does not require the filing of any annual report by business organizations formed under its law. Other states (notably including Delaware) have annual filing requirements that generate revenue for those government agencies. Such reports typically require the identification of officers and directors, but ownership information is not commonly required to be reported. The new law will change that.

The Sarbanes-Oxley Act already applies to some private companies. Foreign ownership disclosure has been required for many years for non-domestic businesses operating in the U.S. Under anti-money laundering and “know your customer” regulations currently governing U.S. financial institutions, some ownership and control information about banking customers must already be disclosed when a new account is opened. We anticipate that the rules proposed by the Treasury will mirror many of those regulations already promulgated by the department under the Patriot Act of 2001.

When must the reporting company disclose the information?

For entities that have been in existence before the effective date of the Treasury’s regulations, they must submit the report within two years after the regulations go into effect. Presumably, this deadline will be in the year 2023. Any entities that will be formed or registered after the regulations’ effective date must submit the report at the time of formation or registration. Thereafter, any change in the reported information (including changes in ownership, address changes, etc.) must be updated within a year.

The act also requires that the Federal Acquisition Regulation (FAR) must be amended within two years to require that certain government contractors or subcontractors disclose relevant beneficial ownership information as part of any bid for a federal contract valued above a certain threshold (currently $250,000).

What will FinCEN do with the information?

The new law raises significant privacy considerations. Under the new statute, the information disclosed is confidential and will not be available for public access. The Department of the Treasury may access the beneficial ownership information for tax administration purposes. FinCEN will disclose the information under the following circumstances:

• Upon receipt of a request from a federal agency engaged in national security, intelligence, or law enforcement activity;
• Upon receipt of a request from a state or local law enforcement agency, if a court has authorized the law enforcement agency to seek the information in a criminal or civil investigation;
• Upon receipt of a request from a federal agency on behalf of a law enforcement agency, prosecutor or judge of a foreign country for the purposes of assisting an investigation or prosecution in the foreign country;
• Upon receipt of a request made by a financial institution, with consent of the reporting company, to facilitate compliance with customer due diligence requirements; or
• Upon receipt of a request by a Federal functional regulator or regulatory agency.

The information will not be accessible through Freedom of Information Act requests. However, critics of financial disclosure programs have alleged that the Treasury Department has violated domestic surveillance laws in the past by abusing its access to the private financial records of U.S. citizens and companies under the Patriot Act and related authorities. Data security will be a significant concern.

FinCEN will keep the disclosed information for at least five years after the reporting company terminates.

What are the consequences for violating this act?

Any person who willfully provides false or fraudulent beneficial ownership information or willfully fails to report complete or updated beneficial ownership information will be subject to civil penalty not more than $500 for each day of noncompliance, up to $10,000 and/or imprisonment for no more than two years.

What happens next?

Regulations will be proposed by the Treasury Department before the end of this year. They will be published in the Federal Register. A public comment period will follow, after which Treasury will consider input from various interested parties. Existing “know your customer” regulations have stirred controversy for many years because they place a costly burden on businesses operating in the financial industry, especially smaller financial companies where compliance costs are disproportionately heavy. Businesses may view the regulations as unnecessary and costly government intrusion into company management. We anticipate that there will be substantial opposition to the regulations, and litigation could ensue as parties attempt to block the implementation of the rules. Porter Wright will keep our clients and friends abreast of the latest developments.

For more information, contact Jack Beeler, Diana Jia or any member of the Business Growth & Operation practice group.