The new Corporate Transparency Act (CTA) will require that certain entities, called reporting companies, provide detailed information about their beneficial ownership to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department.
What is a reporting company? The CTA defines a reporting company as any corporation, limited liability company (LLC), or other similar entity that is created by filing a document with the secretary of state (in any state) or is formed under the laws of a foreign country and registered to do business in the United States. Therefore, both domestic and foreign LLCs that are used to buy real estate in the United States will be required to report. Partnerships and Trusts are not specifically mentioned in the CTA and it is unclear at this time whether they will be required to report as well.
There are over 20 types of companies the CTA exempts from the reporting requirement. Some examples include:
Notably, the third exemption will not apply to many LLCs used to own real property because many of these entities do not employ workers directly. Rather, they engage third-party (or affiliated) managers to employ property management personnel.
For a complete list of entities that are not considered reporting companies, see Exceptions to Beneficial Ownership Disclosure of Private Companies in Corporate Transparency Act.
Who is a beneficial owner? A beneficial owner of any entity is an individual who exercises substantial control over the entity, or who directly or indirectly owns or controls at least 25 percent of the entity’s ownership interest. The Act does not define “substantial control” and instructs the Treasury Department to provide clarification by December 31, 2021.
What must be reported? All reporting companies must disclose the name, residential or business address, date of birth, and identification number (passport or driver’s license number) of each beneficial owner.
Who has access to the disclosures? Disclosures will not be shared with the general public and cannot be requested under the Freedom of Information Act. However, FinCEN may share the information with federal agencies and federal, state, local and tribal law enforcement agencies. FinCEN may also share the information with financial institutions for due diligence purposes with customer consent. The unauthorized disclosure of information collected under the CTA by either a government employee or third-party recipient is punishable by a civil penalty of up to $500,000 and a criminal penalty of up to five years in prison.
When must a qualifying entity report beneficial ownership? Congress has mandated that the Treasury Department issue clarifying rules on or before December 31, 2021 and compliance with the CTA will only be required once these rules are published. Thus, reporting should commence in January 2022 at the latest. Once the clarifying regulations are published, new entities will have to file their disclosure reports with the Treasury Department upon formation and existing entities will have up to two years to file their reports. If there are changes to an existing company’s beneficial ownership, it must file an updated report within one year of the change. Penalties for willfully violating the law include fines of up to $10,000 and up to two years in prison.
Shearman & Sterling will continue to monitor the CTA’s development. For more information, please see: A Look at the Biggest Overhaul of U.S. Anti-Money Laundering Laws in Decades and H.R.2513 - Corporate Transparency Act of 2019