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The Coming “Beneficial Ownership” Reporting Requirements

Posted by Brandon Keim | Jun 10, 2022 | 0 Comments

In 2020, the Corporate Transparency Act (CTA) became law, creating a new federal disclosure requirement for companies. Tens of millions of companies will need to identify their “beneficial owners.” 

As of this writing, there are no finalized rules in place, and there's no date certain for the reporting requirement to begin.

But the statute and proposed regulations give us a starting point. We know that the Department of Treasury's Financial Crimes Enforcement Network (FinCEN) is responsible for implementing the CTA. And we know that businesses, executives, and investors should put the CTA on their radar now.

Why CTA Was Passed

The short answer is that the law is intended to help law enforcement find shell companies and their true beneficiaries.

You may hear the CTA described as a provision of the 2020 Anti-Money Laundering Act, but it's more accurate to say that both pieces of legislation were contained in the National Defense Authorization Act—a vast bill that covers the United States military and defense-related issues. This more precise framing gives more insight as to the motivation behind the law:

Each year, more than 2 million new corporations and limited liability companies (LLCs) are formed in the U.S. However, the companies register in states' offices. There's no federal depository collecting information about the companies, so it has been difficult to know who controls these entities or receives any benefit from them.

Capitalizing on the lack of central regulation (and even tracking of companies), bad actors worldwide have come to see the U.S. as the jurisdiction of choice for financial dealings. They set up shell corporations and other entities; they use these shell companies to hide and launder money from illegal activities (e.g., drug smuggling, arms sales, human trafficking, and tax fraud).

The CTA is intended to result in a new level of transparency that will help U.S. law enforcement while aligning the U.S. with other nations that already require such registration. (The U.S.'s requirements will still be more lenient than those of other nations, so expect some advocates to push for a more stringent version down the road.) 

Who Must File a Report

Under the CTA, there are two categories of firms that will have to file a report with FinCEN: domestic and foreign.

Domestic companies will need to report if they are registered in a state as a corporation, LLC, or other registered entity.

Similarly, foreign companies will need to be a reporting company if they are a corporation, limited liability company, or other entity formed under the law of a foreign country, and they are registered to do business in any state or tribal jurisdiction. 

While this seems straightforward, given that each state has its own rules regarding what business forms are recognized in the state, expect some initial uncertainty when it comes to exactly which companies are included in the CTA. And there will be discrepancies depending on where companies are located.

On the other hand, there are 23 categories of organizations that will be exempt from the reporting requirement. These include:

  • Highly regulated entities (e.g., banks, charitable trusts)
  • Large operational companies maintaining a physical presence in the U.S.
  • Dormant companies (whose closure was on or before January 1, 2020)
  • Some entities owned or controlled by another entity exempt from the reporting requirement
  • Additional categories at the Secretary of the Treasury's request

What Reporting Will Likely Require

Under the proposed rule, the CTA will require companies to identify their beneficial owners. The CTA defines a “beneficial owner” to be any individual who

(1) exercises substantial control over a reporting company or

(2) owns or controls at least 25 percent of the ownership interests of a reporting company

FinCEN has a broad interpretation of the “substantial control” provision in mind. Its stated goal is to “capture anyone who is able to make significant decisions on behalf of the entity. FinCEN's approach is designed to close loopholes that would allow corporate structuring that obscures owners or decision-makers. This is crucial to unmasking shell companies.”

Individuals who do not need to be included in the report are:

  • minors
  • nominees, intermediaries, custodians, and agents acting on behalf of another individual
  • individuals acting solely as employees
  • individuals with a future interest through a right of inheritance
  • creditors.

Impact of Reporting

Once a report is filed, it can be accessed by U.S. federal, state, and local law enforcement and regulatory agencies (although some will need court approval before being able to pull the records). Companies will also be able to authorize financial institutions to access the records. The public will not be able to access the records, and there's a steep penalty of up to $250,000 or prison for the unauthorized dissemination of the filings.

If individuals fail to file a report, fail to update the report, or include fraudulent information may face a fine of up to $10,000 and two years in prison. (From the FinCEN's proposed rules, we anticipate that new entities will need to file their disclosure within 14 days of an initial filing. Existing companies will need to file within a year after the regulations' final authorization.)

Again, this is an overview of what the FinCEN has proposed, but there's no doubt that there will be changes in the policy before it is finalized. And there's likely to be litigation over provisions in the years to come.

Still, it's much better to start this process now—before you're racing the other millions of businesses trying to figure out how to comply with these requirements.

If you need help, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options. 

About the Author

Brandon Keim

A Certified Tax Law Specialist, CPA, partner at Frazer Ryan Goldberg & Arnold LLP, and former Senior IRS Trial Attorney, Brandon Keim holds an LL.M. in Taxation from Georgetown University Law Center.

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