Corporate Transparency Act to Have Major Impact on Clients and Attorneys.

• Author: Jonathan H. (Jason) Warner

On January 1, 2021, Congress passed (over veto) the National Defense Authorization Act of 2021 (NDAA), (1) including the Corporate Transparency Act (CTA). (2) The CTA creates an important new reporting requirement and a federal database of beneficial ownership of U.S. corporations, limited liability companies, and certain other entities. The CTA could have a major impact on U.S. and non-U.S. clients as well as attorneys when implementing regulations, expected by December 31, 2021, become effective.

Most of the voluminous NDAA relates to national defense, but Division F of the act includes the CTA as well as the Anti-Money Laundering Act of 2020 (AMLA), (3) with provisions intended to strengthen anti-money laundering laws and countering terrorism financing. Section 6502 of the AMLA requires the comptroller general to conduct a study of the effectiveness of the CTA, including a review of certain forms of entities not specifically covered by the CTA, to be completed in two years.

Other than the conference report, (4) there is little meaningful legislative history for the CTA. But the gist of the CTA has been proposed in one form or another since at least 2008, following the 2006 report by the Financial Action Task Force (FATF) (5) criticizing the United States for not collecting beneficial ownership information in accordance with FATF standards. (6) Despite a number of legislative proposals, congressional inaction continued, leading to a second FATF critical report in 2016. (7)

The Corporate Transparency Act of 2019 (8) may be seen as the precursor of the 2021 CTA, departing from previous versions by proposing a federal database with direct applicant filing (rather than requiring the states to begin collecting such information at the time of entity formation and through annual reports) and placing the burden directly on the entity rather than attorneys and other "gatekeepers" involved in the incorporation or equivalent process, as was the case in prior versions. The 2019 version may be of some interpretive value as to the CTA, (9) along with several other bills then pending in the Senate. (10)

On April 5, 2021, the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (FinCEN) released an advance notice of proposed rulemaking, (11) requesting comments by May 5, 2021, about regulations to be issued to implement the CTA (the CTA regulations). (12) The notice included a lengthy list of well thought out questions about various aspects of the CTA, some of which are addressed below; 241 comments were submitted, including comments by The Florida Bar Tax Section. (13) Some of the questions and issues discussed below derive from the Tax Section's comments and others.

This article is not intended as a comprehensive explanation of the CTA, rather a brief and somewhat informal discussion of important questions to be addressed in the pending regulations. Views expressed in this article are strictly those of the author.

Brief Overview of the Corporate Transparency Act (14)

1) New Reporting Requirement: Section 6403(a)(b) of the CTA requires that, starting in 2022, newly formed U.S. corporations, limited liability companies, and certain other entities classified as a "reporting company" must report their beneficial ownership to FinCEN at the time of formation or registration. Pre-existing reporting companies (those formed before the effective date of the CTA regulations), likely will start reporting in 2024, two years after the effective date of the CTA regulations. Changes in reported information will also be subject to the reporting requirement. (15) Comments to FinCEN have suggested that the rather simple form "certification regarding beneficial owners of legal entity customers" (16) used by U.S. banks for compliance with the Know Your Customer Rules (17) be used for CTA reporting, with appropriate modification.

2) Purpose: Citing the formation of over 2 million U.S. corporations and limited liability companies each year, CTA [section]6402 (Sense of Congress) ties the lack of beneficial owner information to malign actors utilizing such entities to facilitate illicit activity such as money laundering, financing of terrorism, serious tax fraud, human and drug trafficking, securities and financial fraud, and foreign corruption. (18) No information is provided as to the extent of the problem nor the effectiveness of other measures, such as the geographic targeting orders (19) issued by FinCEN in recent years affecting certain potentially suspicious real estate purchases in South Florida and other specific areas. (20) The conference report mentions national security concerns as well as law enforcement/investigations as reasons for enactment. (21)

3) Reporting Company: CTA [section]6503(a)(11) defines a "reporting company" as a corporation, limited liability company, (22) or "other similar entity" that is created by the filing of a document with a secretary of state or similar office under the law of a U.S. State (including any U.S. commonwealth, territory or possession of the U.S.) or Indian Tribe or formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with such office. Extensive exceptions are provided, including publicly traded companies, nonprofits, governmental entities and regulated companies (such as banks) where beneficial ownership information is already provided. An exception is also provided for an entity that employs more than 20 persons on a full-time basis in the U.S., filed a federal income tax return in the previous year reflecting more than $5 million in gross receipts or sales in the aggregate, and has an operating presence at a physical office in the U.S. Another exception is provided for an inactive company not owned by any foreign person, and subsidiaries of exempted companies are exempt while the parent exemption is effective.

4) Beneficial Owner: For CTA purposes, a beneficial owner of an entity is defined in [section]6403(a)(a)(3) as any individual who, directly or indirectly (including through contract, arrangement, understanding, relationship, or otherwise) exercises "substantial control" over the entity or owns or controls not less than 25% of the ownership interests in the entity. The term "substantial control" is not defined in the CTA, but hopefully will be addressed in the CTA regulations. (23) The reporting company must provide to FinCEN each beneficial owner's name, date of birth, current residential or business address, and a unique identifying number from an acceptable, nonexpired identification document (such as a U.S. state driver's license or a U.S. or foreign passport). FinCEN is authorized to provide an exclusive identifying number to individuals and entities to be used instead of the specified identifying information if the beneficial owner so chooses. (24)

The beneficial owner definition excludes a minor child (as long as the information of the child's parent or guardian is reported); an individual acting as a nominee, intermediary, custodian, or agent on behalf of another individual; an individual whose control over or economic benefit from a reporting company derives solely from their employment status; an individual whose only interest in a reporting company is through a right of inheritance; and a creditor of a reporting company, unless the creditor exercises substantial control over the entity or owns or controls 25% or more of the ownership interests.

5) Protection Against Disclosure: CTA [section]6403(a)(c) provides that beneficial owner information reported to Fin-CEN is not to be public information, (25) and is to be kept confidential in a secure, private database. But the information may be disclosed to federal national security, intelligence or law enforcement agencies; (26) state, local, or Tribal law enforcement agencies if authorized by a court to seek such information in a criminal or civil investigation; and pursuant to a request from a federal agency, a foreign law enforcement agency, prosecutor, or judge of another country, including a foreign central authority or competent authority (or like designation), under an international treaty, agreement, convention, or official request made by law enforcement, judicial, or prosecutorial authorities in trusted foreign countries when no...