By Noel D. Humphreys
The Panama Papers and other recent occurrences have demonstrated that money launderers use closely held companies, such as LLC’s, as a vehicle to move money in a hidden way.[i] With Congress declaring that money laundering is a threat to the United States, and federal law enforcement gathering information to pursue money launderers, owners of closely held companies are generally going to have to report ownership to the Department of the Treasury. The long-established norm of not telling the federal government who beneficially owns or controls a limited liability company or corporation will fall by the wayside.
At least, that is the plan. The National Defense Authorization Act, recently passed by Congress, which overrode President Trump’s veto, contained the Corporate Transparency Act (the Act).[ii] Congress’ action, pressed by the Department of the Treasury, and motivated by tax collection and money-laundering concerns, will require lawyers and accountants and service providers to collect information about closely held businesses, file it with the Financial Crimes Enforcement Network of the Department of the Treasury (FinCEN) and keep that information current.
The regulations that the Treasury Department will issue will likely clear up many lingering details from this new statute. However, it is clear that the government’s capturing of beneficial owner data in a database accessible for law enforcement and intelligence purposes has become a national priority.
Following are some key questions and answers regarding the impact and process of the Act for company owners and their legal and financial advisors.
Q: What entities trigger this treatment?
A: The Act defines “Reporting Company” to include “a corporation, limited liability company or other similar entity” that is created by filing a document with a secretary of state (State Treasurer in New Jersey) or “Indian Tribe” or in a foreign country and registered to do business in the U.S. The Act excludes from the reporting requirements U.S. entities that have more than 20 full-time employees and that filed a federal tax return in the prior year showing more than $5 million in gross receipts and that have an “operating presence at a physical office” in the US. In addition, “Reporting Company” does not include companies with publicly traded securities, entities (such as the Port Authority of New York and New Jersey, for example) formed by states or the federal government, a bank, an investment company under the Investment Company Act, an insurance company, 501(c)(3)’s, and some other closely regulated kinds of enterprises. Many family-owned entities will be required to submit and keep up-to-date beneficial owner information, because they lack 20 full-time employees or lack $5 million in revenue.
Q: When does this program begin?
A: Within one year from the time the Act becomes effective, the Treasury Department must issue regulations that explain the program. Companies formed after the regulations take effect must report at the time of formation. Companies already in existence will have up to two years to comply. It is likely that many newly formed entities will be required to file, because they will not yet have qualified for an exemption.
Q: Whose personal information must be disclosed to FinCEN?
A: The Act is aimed at collecting information about beneficial owners of entities. The Act defines “beneficial owner” as an “individual” who exercises “substantial control” over the entity, or owns not less than 25% of the ownership interests of the entity. “Beneficial owner” does not include minor children, nominee owners, or employees who are only employees.
Q: Whose job is it to file information with FinCEN?
A: The Act makes reporting the obligation of the company that fits the definition of “reporting company.” The Act also creates criminal and civil penalties that may apply to the individuals who actually submit the information. Lawyers and accountants who form entities may want to consider getting back-up certificates for the file at the time of filing.
Q: What is a FinCEN identifier?
A: FinCEN will assign to individuals and entities a unique FinCEN number to keep track of who is reporting and who is identified in the reporting. The anticipated regulations will spell out how this will work.
Q: What information must be submitted to FinCEN?
A: The Act requires “full legal name,” date of birth, a current street address (residential or business), an individual identifying number, such as a passport number or driver’s license number plus the FinCEN identifier number. The anticipated regulations provide details of the process.
Q: Once a person gets into the FinCEN system, how does he or she get out?
A: If there is a change of control of the entity, the entity is supposed to report that change of control within a year. If the entity ceases to meet the definition of a “reporting company,” the entity may terminate its status with FinCEN, which retains the information for not less than five years.
Q: Who will have access to the database?
A: One of the compromises inherent in the Act is that the information is supposed to remain confidential, like tax return information. The database does not become publicly available information. The anticipated regulations are expected to establish protocols for allowing access to the database for federal intelligence and law enforcement agencies, as well as IRS investigators. Certain state agencies may also gain access for criminal and civil investigations. Financial institutions involved in “know your customer” investigations may also have access.
Q: Can an entity get around the reporting by issuing “bearer” shares?
A: The Act outlaws certificates of ownership in “bearer” form.
[ii] Title LXIV, H.R.6395 - National Defense Authorization Act for Fiscal Year 2021; https://www.congress.gov/bill/116th-congress/house-bill/6395/text