The U.S. Government wants to know who owns your business. The Corporate Transparency Act (“CTA”) requires, as of January 2022, entities defined as reporting companies to report key information about their beneficial owners. The information will be held in a ‘secure’ database maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

Before this legislation companies did not have an obligation to report their true owners. As long as the company paid their taxes there wasn’t much of an issue. But lately numerous law enforcement agencies and others in government have been shocked by an apparent improper wave of money laundering. As a result, every single entity in the U.S. (with only a few exceptions) must annually report their beneficial owners to the federal government or face significant penalties.

Not all of the regulations have been finalized but one thing is clear: This law includes every business owner and real estate investor using an entity for asset protection. This law includes you.

Background

The CTA was enacted by both houses of Congress on January 1, 2021, as part of the National Defense Authorization Act of 2021. When senators and representatives are asked to approve spending for defending the country and paying the salaries of our fine men and women in uniform you often get a patch work of unrelated bills (that may never be passed on their own merits) attached for the legislature ride. The CTA relates not to boots or battleships but to money laundering.

Specifically, the CTA is an amendment to the Anti-Money Laundering Act of 2020, and it seeks to discourage the use of ‘shell companies’ by mandating the transparency of every entity newly formed or already in existence. Congress has determined that anonymous shell companies are a very serious and challenging loophole within our existing legal framework and that the self-reporting of almost every single entity in the country is necessary to combat this widespread societal scourge.

Required Reporting

A reporting company obligated to report annually to FinCEN is a corporation, limited liability company, limited partnership or similar entity which is chartered by filing with a secretary of state, tribal office (or comparable commission) or is formed in a foreign country and qualified to do business in the United States.

Beneficial ownership under the CTA is defined as any individual who directly or indirectly (i.e. through a second entity) exercises substantial control over an entity AND owns or controls at least 25% of the ownership participation (i.e. stock or membership interests) in the company.

The information required for the reporting (as of this writing) of beneficial owners includes:

  • Full Name
  • Date of Birth
  • Current Residential or Business address; and
  • A unique identifying number from a state-issues identification document (ID)
    -This may include a passport, driver’s license, or a FinCEN identifier.

Given legitimate concerns about the privacy of such information, it is claimed that the FinCEN database will feature strictly limited access. Those with entry will be federal agencies (the FBI), non-US law enforcement (Interpol) and state and local law enforcement agencies with a warrant.

Many of our clients set up Wyoming LLCs for their privacy features. The Wyoming Secretary of State does not list the names of LLC managers or owners on their website, nor do they collect such information. However, FinCEN will collect this material for their secure database. Will it stay confidential?

Exemptions

Some entities will be exempt from the reporting requirement, many of which already report pursuant to existing government regulations. The exempt entities include:

  • Publicly traded companies (subject to SEC regulations)
  • Companies employing more than 20 full-time employees in the United States, operating from a physical office in the United States, AND having filed a tax return demonstrating more than $5 million in gross receipts/sales.
  • Dormant companies which have been in existence for more than one year, are not engaged in “active business,” AND are not owned (either directly or indirectly) by a non-U.S. individual.
  • Additional exceptions apply to certain financial institutions and charitable trusts.

Penalties

The government wants you to report, as is evidenced by the penalties. Civil penalties for failing to report are $500 per day. Willfully failing to report or providing false information can result in criminal fines up to $10,000 and/or two years in prison. Hacking or misusing the FinCEN database (an interestingly anticipated worry) includes criminal fines of up to $250,000 and five years in prison.

The penalties for failing to report are significant. Of course, you can handle this filing on your own. But many of our clients prefer our assistance (such as with our service for annual state fillings and minute preparations to avoid a piercing of the veil). Many clients prefer our help so that they can do whatever they do best to manage their business and investments. In the coming weeks (as we learn the new regulations) we will provide our clients information on how Corporate Direct can assist to meet the CTA’s annual filing requirement. 

LEAVE A REPLY

Please enter your comment!
Please enter your name here