On January 1, 2021, Congress enacted the Anti Money Laundering Act (AMLA) and the Corporate Transparency Act (CTA) creating a beneficial owner registry that requires millions of companies to report their owners to the US Treasury’s Financial Crimes Enforcement Network (FinCEN).
The Problem
Prior to the enactment of the CTA, creating an anonymous US Shell Company was relatively simple. In fact, the United States was the easiest jurisdiction to create and operate anonymous shell companies to evade taxes or launder money. In many US jurisdictions, when you incorporate your company or file your LLC, there is no need to disclose all the beneficial owners to the New York State Department of State. However, many international jurisdictions such as the United Kingdom and European Union have already created corporate ownership registries.
The Financial Accountability and Corporate Transparency (FACT) Coalition was a major proponent of the CTA. FACT is an alliance of state, national, and international organizations, federal law enforcement, the U.S. Chamber of Commerce, federal agencies, financial services companies as well as progressive and conservative groups.
What is the use of this information?
The CTA will mandate reporting the ownership of companies in order will crack down on tax evasion and money laundering. This information will not be publicly available. However, the information will also be utilized by law enforcement as well as financial institutions to perform customer due diligence and Know-Your-Customer (KYC) checks which are required by Federal Anti-Money Laundering (AML) Laws.
What exactly needs to be reported to FinCEN?
Under the newly enacted CTA, companies are required to report to FinCEN the following information: (i) legal name of their beneficial owners (ii) date of birth, (iii) residential or business street address, and (iv) an identification number from a state driver's license, U.S. passport, or other U.S. state-issued document. If the beneficial owner does not hold any U.S.-issued identification documents, a non-U.S. passport number is required. No additional information or details about business purpose or operation is required.
Who is a beneficial owner?
A beneficial owner is a technical term under the CTA which means a natural person who (i) exercises substantial control over the company; or (ii) owns or controls not less than 25 percent of the ownership interests of the company. In additional changes of the beneficial owner of the company will also need to be reported to FinCEN. All beneficial owners of the company need to report the above-mentioned information to FinCEN.
When must a company report this information?
FinCEN is promulgating regulations but newly formed companies must promptly report this information. Existing companies will have two years to report this information. This Reporting is mandatory and business that do not comply will be subject to possible penalties and fines.
Are any companies exempt from reporting this information?
The CTA does expressly exempt certain companies from reporting the beneficial ownership information. Not-for-profit entities, publicly traded entities and other entities heavily regulated by federal agencies such as the Securities and Exchange Commission are exempt because they are already reporting information to those government agencies. Also, companies with 1) than 20 full-time employees in the US, 2) operating physically within the US and 3) filing income tax returns with more than $5 million in sales are exempt under the CTA.