Key points at a glance
Many beneficial owners of corporations, limited liability companies and similar entities formed or registered to do business in the US soon will have to begin disclosing their identities to the US Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) following the enactment of the Corporate Transparency Act (“CTA”) at the beginning of 2021 with reporting to commend once regulations are issued (no later than January 1, 2022).
These new beneficial ownership reporting requirements will affect many international family succession planning structures utilizing entities formed in or registered to do business in the US. Key questions such as how the CTA will treat trusts, trustees, protectors, settlors, beneficiaries and investment directors of trust structures holding such entities will need to be addressed.
While these reporting requirements represent a significant change to the anti-money laundering regime in the US, they reflect a growing international trend to require disclosure of beneficial ownership and create compliance obligations similar to those found in many other countries. The purpose of the CTA is to prevent potential wrongdoers from exploiting US corporations and limited liability companies for criminal gain and to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving US corporations and limited liability companies.
The reporting requirements under the CTA will commence upon the effective date of regulations to be prescribed by the Secretary of the Treasury. Such regulations are required to be issued before January 1, 2022.
Who is required to report under the CTA?
The CTA requires reporting of information on applicants and beneficial owners of entities covered by the CTA. The CTA broadly covers all US and foreign corporations, limited liability companies and other similar entities formed or registered to do business in the US by the filing of a document with a secretary of state or other similar office in any US state, the District of Columbia, Puerto Rico, or any other commonwealth, territory or possession of the US (such US jurisdictions hereinafter referred to as “State” or “States”) or Indian tribe (such entities covered by the CTA hereinafter referred to as “Company” or “Companies”). Companies used in connection with private client planning purposes will generally be required to report under the new rules. The primary exceptions to the reporting requirements are for entities operating in regulated areas, such as banks and insurance, or entities with more than 20 employees and gross sales of more than $5 million.
The applicant reporting requirements generally apply to any individual who files an application to form a Company in a US State or Indian tribe or to register a foreign Company to do business in the US. The beneficial owner reporting requirements generally apply to individuals owning or controlling at least 25% of the Company (whether directly or through attribution) as well as individuals who exercise “substantial control” over the Company. The CTA is clear that the term “beneficial owner” does not include the following: (i) a minor child (if the information of the child’s parent or guardian is otherwise reported), (ii) a nominee, intermediary, custodian, or agent on behalf of another individual, (iii) an employee of the Company, (iv) an individual whose only interest in the Company is through a right of inheritance, or (v) a creditor of a Company unless the creditor exercises substantial control over the Company or owns at least 25% of the Company. However, the CTA does not define what is meant by “substantial control”. Therefore, unless and until the forthcoming regulations provide a more concrete definition of this term, the definition of “beneficial owner” for purposes of the CTA remains somewhat unclear.
The CTA does not specify how trusts and partnerships are to be treated. If the statutory definition is strictly applied, it appears unlikely that personal trusts and general partnerships will be considered Companies under the CTA since setting up a personal trust or general partnership in a US State does not typically require the filing of any documentation with a secretary of state or similar office. However, statutory trusts (or “business trusts”), limited partnerships and limited liability partnerships are more likely to be classified as Companies since they often are created by a filing with a secretary of state or similar office.
While personal trusts may not themselves be classified as Companies, where a personal trust own a Company, it remains to be seen how such trust will be treated for purposes of determining beneficial 25% beneficial ownership or control and substantial control of the Company. If and to what extent ownership or control might be attributed to trust itself, trustee, protector, settlor or beneficiaries remains an open question to be addressed in the forthcoming regulations.
What information must be reported under the CTA?
The CTA will require Companies to provide four key identifiers about their applicants and beneficial owners: (i) name; (ii) date of birth; (iii) current residential or business street address; and (iv) either a FinCEN identifying number, or a government-issued identifying number assigned to that applicant or beneficial owner from a non-expired US passport, non-expired driver’s license issued by a US State, or other non-expired identification document issued by a US State, local government, or Indian tribe. If the applicant or beneficial owner is a foreign person and does not hold any such documents, then a government-issued identifying number from non-expired foreign passport is acceptable. If any exempt entity has a direct or indirect ownership interest in a Company, only the name of the exempt entity needs to be reported, rather than all of the information otherwise required from applicants and beneficial owners.
Storage and disclosure of information reported under the CTA
The information required to be reported under the CTA will be stored by FinCEN in a non-public database. FinCEN will only be permitted to disclose beneficial ownership information in specific circumstances, including upon request by (i) a US federal agency engaged in national security, intelligence, or law enforcement activity; (ii) a state, local, or tribal law enforcement agency; (iii) a federal agency on behalf of a law enforcement agency, prosecutor, or judge of another country; (iv) a financial institution subject to customer due diligence requirements, with the consent of the Company; or (v) a US federal functional regulator or other appropriate regulatory agency.
Timing of reports and penalties for noncompliance
Any Company that has been formed or registered before the enactment of the forthcoming CTA regulations will be required to report beneficial ownership information within 2 years after the effective date of the forthcoming regulations. Any Company formed or registered on or after the effective date of the regulations will have to report beneficial ownership information at the time of its formation or registration. In addition, all Companies will be required to file updated information not later than 1 year after the date on which there is any reportable change with respect to beneficial ownership.
Any person who wilfully fails to report or provides false information under the CTA may be subject to (i) civil penalties of up to $500 for each day that the violation continues, and (ii) a criminal fine of up to $10,000 and/or possible imprisonment of up to 2 years.
While the exact details of how the CTA reporting requirements will apply will not be known until regulations are issued, US entities and foreign entities registered to do business in the US that are used in family succession planning structures should be reviewed currently as it is likely that for many such entities beneficial owner reporting will be required. Key questions such as how trustees, protectors, settlors, beneficiaries and investment directors of trust structures holding Companies will be treated under the CTA should be addressed with experienced advisors in advance so that the impact of the new CTA rules can be understood.
For further information, please get in touch with your usual Withers contact, or email either of the authors of this article.