The 2021 Corporate Transparency Act Imposes New Federal Reporting Requirements on Business Entities

On January 1, 2021 Congress enacted the Corporate Transparency Act (“CTA”). The purpose of the of the CTA is to fight money laundering, the financing of terrorism, and other illicit activity. As such, the legislation requires businesses to report certain personal information about those who own, control, and form a business entity to the Financial Crimes Enforcement Network of the United Stated Department of Treasury (“FinCEN”). The reporting requirements discussed in the CTA are not yet effective but will become effective on the date the Department of Treasury promulgates the final regulations, which the CTA requires occur before January 1, 2022.

The CTA only allows Federal agencies, state officials, and financial institutions access to the information submitted under CTA if there is evidence a business owner is participating in fraudulent dealings. The final regulations are expected to define these specific circumstances of fraud and establish detailed protocols to ensure the security and confidentiality of business owners is protected.
 

Requirements under the Corporate Transparency Act

The CTA creates a filing requirement that many businesses, referred to as “reporting companies,” will have to complete and submit to FinCEN. A reporting company under the CTA is defined as a corporation, limited liability company, or other similar entity that is created by filing documentation under state law or an entity that is formed under the law of a foreign country and is registered to do business in the United States.

A reporting company must provide FinCEN with all of the following information for each beneficial owner and applicant:
 

1. Full legal name.
2. Date of birth.
3. Current residential or business address.
4. A unique identifying number from an acceptable identification document (passport, driver’s license, or other government issued identification document) or FinCEN Identifier.

A beneficial owner is an individual who exercises substantial control over the entity; or controls more than 25% of the ownership interests of the entity. Additionally, an applicant is any individual who files an application to form a corporation, limited liability company, or other similar entity under the laws of a state or any individual who files an application to register a corporation, limited liability company, or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state or similar office under the laws of a state. Currently, it is unclear if attorneys are required to submit their personal information if they assist a client by forming an entity, but the final regulations are expected to provide clarification.

Any new company that is formed or registered after the effective date of the final regulations is required to submit a report to FinCEN at the time of its formation or registration. But any entity that was formed or registered before the effective date of the final regulations must submit a report to FinCEN no later than two years after the date that the final regulations become effective. Further, if there are changes in reported beneficial ownership information, a reporting company must submit an updated report to FinCEN no later than one year after the date of the change.

Not all companies are required to report under the CTA. The legislation details more than 20 business types that are exempt from reporting, some of the most notable exceptions are: companies that employ more than 20 persons full time, report revenues of more than $5 million on tax returns, and have a physical operating presence in the United States; many financial services companies that are already required to report this information to the Securities Exchange Commission including banks, credit unions, and certain accounting firms; several types of 501c3 organizations including churches, nonprofit organizations, and charities; and publicly traded companies.
 

Penalties for non-compliance

Failure to abide by the CTA may result in substantial fines or even criminal conviction and jail time. It is against the law for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information to FinCEN. It is also illegal to willfully fail to report complete or updated beneficial ownership information to FinCEN. Violating the reporting requirements of the CTA can result in civil penalties of $500 for each day that the violation continues and criminal penalties of imprisonment of up to two years and fines of up to $10,000. Further, unauthorized disclosure or use of the submitted beneficial ownership information is punishable by civil penalties of $500 for each day the violation continues and criminal penalties of imprisonment of up to 10 years and fines of up to $500,000.

The CTA does include a safe harbor provision from the civil and criminal penalties if the person who submitted the incorrect information submits a report containing corrected information no later than 90 days after their original submission, provided that the person unintentionally submitted the incorrect information initially. Additionally, the safe harbor provision excuses any person who unknowingly discloses or uses the confidential information.
 

Conclusion

By the year 2022 many businesses will be required to submit personal information about their beneficial owners to the federal government. While there are still many questions as to how this information will be collected and who qualifies as an ‘applicant,’ non-compliance can result in heavy civil penalties or even criminal consequences. The Department of Treasury is expected to clarify many of the lingering questions when they release the CTA’s final regulations. Because the statute applies to companies that already exist and not just newly formed entities, it is important for all business owners and their professional advisors who assist forming entities to understand the CTA requirements and stay attuned to the approaching regulations.

For more information, contact James Banister or the Ice Miller Business attorney with whom you normally work. 

Summer associate Ashley Scurlock contributed to this publication.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.