New Legislation Makes It Harder for Shell Companies to Stay Anonymous

The Corporate Transparency Act (CTA) was passed by the U.S. Congress on December 11, 2020 and it requires certain privately held companies in the U.S. to report information on ownership to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury.

The National Defense Authorization Act for Fiscal year 2021 includes the CTA. Under the CTA, many privately held companies will see the process of identifying and verifying beneficial ownership information change to be their responsibility and not of financial institutions—as it was previously.

This legislation aims to help law enforcement detect, prevent, and punish money laundering, terrorism, and other acts of misconduct involving privately held companies inside the U.S.

Who is required to report?

A “reporting company” is roughly defined by the CTA, and certain types of entities have exemptions. All limited liability companies, foreign companies registered for business in the U.S., and privately held corporations must report their ownership information to the FinCEN. It is assumed that trusts and partnerships formed in the U.S. will fall under the ‘similar entities” category.

Public companies and their controlled subsidiaries are exempt. Other exempt entities include:

• 501(c) nonprofit entities
• Banks, bank holding companies, and credit unions
• Broker-dealers and registered investment advisors
• Insurance companies
• Governmental
• Registered investment companies and certain pooled investment
• Registered public accounting firms
• Companies with more than 20 full-time employees in the United States, more than $5 million in gross sales or receipts, and an operating physical office in the U.S.
• Entities controlled or owned by one or more such exempt entities
• Beneficial owner

The CTA defines a “beneficial owner” as an individual who directly or indirectly exercises substantial control over the entity or owns 25% of the equity interests of the entity. A person acting as an agent, on behalf of another person, a person whose only interest in an entity is through a right of inheritance, a person who controls an entity solely because of his or her employment, a creditor of an entity not otherwise controlling the entity, a custodian, an intermediary, a nominee, or a minor child are not beneficial owners.

What must be reported?

A FinCEN identifying number or an “acceptable identification document” must be presented by a reporting company to identify each beneficial owner. The person’s full legal name, date of birth, current residence, or business street address are also required.

Deadlines and penalties

Once the regulations are put into law by the Secretary of the Treasury, and an effective date has been set, reports will be required. January 1, 2021, is the expiry date for regulations to be promulgated. At formation, new companies will be required to report beneficial ownership information. Already existing entities will have two years from the effective date to report the information. After, companies must report changes in beneficial ownership within one year of the change. Willfully providing fraudulent or false information or willfully failing to report complete and updated information will incur civil and criminal penalties as authorized by the CTA.

Moving forward, The CTA will require all privately held companies, newly formed and existing, that do not meet an exemption to report beneficial ownership information to FinCEN.

This change is at the federal level and does not impact legislation at the state level. Some states, like Wyoming, do not require LLCs to disclose any ownership information at all.