The National Defense Authorization Act for Fiscal Year 2021 was the year-end Act that was passed by Congress, vetoed by the President, and then Congress overrode the veto. Embedded in that larger Act was the Corporate Transparency Act (“CTA”) which established reporting requirements for corporations, LLCs and similar entities. You can read the CTA for yourself here.
The CTA authorizes the Department of the Treasury to promulgate regulations that require the reporting to the Financial Crimes Enforcement Network (FINCEN) of information relating to the beneficial owner of such entities, meaning those persons who either have “substantial control” over the entity (such as the president of a corporation or manager of an LLC) or who have at least a 25% beneficial ownership in the entity. Excluded from the reporting requirements are minor children, persons who might become beneficiaries only upon the death of another, agents and custodians of interests, persons who have interests only through employee benefits, and creditors of the entity.
The CTA will require reporting not only at the time the entity is formed, but also any time that there is a change in the beneficial ownership of the entity. Although these forms will only be required to be sent to FINCEN, it doesn’t take much imagination to see that these forms will also be subject to subpoena by civil litigants. Additionally, FINCEN is itself required to share the forms with appropriate federal and state law enforcement organs, including the IRS, and even foreign law enforcement agencies pursuant to treaties and the like. The bottom line is that U.S. entities are no longer going to be a bastion of economic privacy, at least when it comes to hiding wealth from either the U.S. or maybe even foreign governments.
Interestingly, the CTA simply bans all bearer shares and certificates of interest. For those who are unfamiliar with bearer instruments, they are simply pieces of paper by which the holder can assert an ownership interest in an entity even if that person is not listed as an owner in the entity’s other books and records.
For willfully violating the CTA, civil penalties can be up for $500 per day and up to $10,000 and then imprisoned for no more than two years. A person who misuses the information (presumably a government employee who maliciously releases the information) can be liable for up to $250,000 in fines and be imprisoned for no more than five years. And, curiously, there is a section of the CTA that relates to what happens if FINCEN is hacked.
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I’ve only here given you the 41,000ft overview of the CTA, which is chock-full of other provisions, and of course it will have to be read in context with the appropriate Treasury Regulations when those are promulgated. Notably, privately-held corporations and LLCs and such will continue to offer a wall of privacy against the curious, but suffice it to say that overall the privacy wall is today only half as tall as it used to be, and the next step will likely be a discussion of why these records are not simply made public for all to view — after all, if a foreign government can get access to this information, then why not the average American citizen? But what that means is that folks looking for long-term privacy are probably going to want to explore other options than an American corporation or LLC.
As a closing note, it should be remarked that the U.S. has been much slower to require this sort of informational reporting compared to other industrialized nations, and in fact even when compared many so-called offshore havens who adopted similar provisions over a decade ago. But for those in law enforcement at least, better late than never.
Corporate Transparency Act as found at https://jayadkisson.com/a_interesting/Corporate_Transparency_Act.pdf