On January 1, 2021, the National Defense Authorization Act for Fiscal Year 2021 (the “NDAA”) was enacted into law. A pivotal part of the NDAA is the Corporate Transparency Act (the “Act”), which requires certain limited liability companies and corporations to disclose particular ownership information in what is largely an effort to combat money laundering.
The Act provides for the collection of beneficial ownership information of Reporting Companies (as defined below) in order to: (A) set a clear, Federal standard for incorporation practices; (B) protect vital United States national security interests; (C) protect interstate and foreign commerce; (D) better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity; and (E) bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.
What entities are Reporting Companies?
The Act generally provides that a Reporting Company is a corporation, limited liability company or other similar entity that is created by filing a document with the secretary of state (or an equivalent office) of any state, or formed under foreign law and registered to do business in the United States. The Act, however, provides for the following exceptions:
- Entities closely regulated or subject to supervision (examples include credit unions, bank holding companies, broker-dealers, investment advisors, private funds, and banks);
- Publicly traded companies;
- Dormant entities (i.e., a corporation or limited liability company that, as further described in the Act, has been in existence for over a year, is not engaged in active business, is not owned directly or indirectly by a foreign person, and has met other ownership and financial criteria);
- Tax-exempt entities;
- Entities with: (1) more than 20 full-time US employees; (2) a physical office in the United States; and (3) gross receipts or sales in excess of $5 million;
- Entities owned or controlled, directly or indirectly, by an otherwise exempt entity; and
- Additional entities as may be determined by the FinCEN (as defined below).
What is required under the Act?
The Act requires that Reporting Companies disclose personal information of its beneficial owners to the Financial Crimes Enforcement Network (“FinCEN”) at the time of its formation (or, if formed prior to the Act, within two years after the final regulations for the Act become effective). The personal information will be ascertained via a beneficial ownership statement and will include the beneficial owner’s:
(1) full legal name; (2) current residential or business street address; (3) date of birth; and (4) identification number (i.e., driver’s license or passport number). Changes to such information will require updating within one year of the change.
Who is considered a beneficial owner?
Under the Act, a beneficial owner is an individual who directly or indirectly through any contract, arrangement, understanding, relationship or otherwise:
(a) exercises substantial control over the Reporting Company (“substantial control” is not defined in the Act); or (b) owns or controls 25% or more of the ownership interests of the Reporting Company. However, a beneficial owner does not include:
- A minor child;
- An individual acting as a nominee, intermediary, custodian or agent on behalf of another; individual;
- An individual acting solely as an employee of a Reporting Company;
- An individual whose only interest in the Reporting Company is through inheritance; or
- A creditor of a Reporting Company.
Who is accessing and using the information?
The beneficial ownership statements submitted to the FinCEN containing personal information will be stored and maintained solely with the FinCEN and will not be publicly available nor generally available to the states. Per the express provisions of the Act, the information may only be used for (1) national security, intelligence and law enforcement activities, intelligence or national security purposes, and (2) confirming beneficial information provided to financial institutions in furtherance of anti-money laundering laws.
Such information will be maintained for five years after the termination of the Reporting Company. Upon request, the information may be disclosed to:
- Federal agencies engaged in national security intelligence or other law enforcement activity;
- State, local or tribal law enforcement agencies with court approval;
- Foreign law enforcement agencies through the appropriate federal agency;
- Financial institutions for customer due diligence requirements, with the consent of the Reporting Company; or
- Other regulators consistent with agencies expressly permitted to receive such information under the Act.
Penalties
There are civil and criminal penalties for willful failure to provide complete information, as well as failure to update such information, required under the Act. The civil penalties amount to $500 for each day that the violation continues, and the criminal fines are up to $10,000 with the possibility of imprisonment for up to two years. The obligations under the Act apply to any party that files an application for the formation of a Reporting Company. Unauthorized disclosure of the information carries the same civil penalty but a higher criminal penalty of up to $250,000, with a maximum term of imprisonment of five years. Unauthorized disclosure captures both disclosure by a government employee and a third-party recipient of such information.
Conclusion
The Act takes an important first step in the fight against money laundering and terrorist financing by establishing a repository of beneficial ownership information and criminal penalties to enforce compliance. However, the Act is not perfect. For instance, the Act fails to address how the ownership of a Reporting Company by trusts, estates, or other complex structures will be handled. Also, commentators have noted that the Act does not appear to capture those using foreign entities that are not registered to do business in a US state.
The Act becomes effective when the related regulations are prescribed and issued by the Secretary of the Treasury, which shall be no later than one year after the enactment of the Act. Hopefully, the regulations will provide the additional information needed to clarify the open issues with, as well as the administration of, the Act.
This alert was written by Bob Lamm and Andrew Piper. Please direct any questions or observations to Gunster securities law and corporate governance practice leader Bob Lamm.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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