The fight to uncover money laundering by Russian oligarchs and other bad actors will soon affect small companies and trusts. On January 1, 2021, the U.S. Senate overrode President Trump’s veto of the Corporate Transparency Act (the “Act”). This Act requires all entities formed in or registered to do business in the United States to report beneficial ownership information to an agency known as the Financial Crimes Enforcement Network (“FinCEN”). This means that there are now federal reporting requirements for small companies and trusts that own an interest in those companies. FinCEN will require companies to annually collect and report ownership information to the government. FinCEN will develop a database of beneficial ownership information for unregulated entities that is available to them for law enforcement purposes.
This Act does not become effective until the US Treasury Department issues final regulations. On December 1, 2021, FinCEN issued a Notice of Proposed Rulemaking to implement the beneficial ownership reporting requirements of the Act. It is expected that the Treasury will issue final regulations by the end of 2022.
What does this mean from a practical standpoint? The Act imposes disclosure requirements on beneficial owners. A beneficial owner is an individual who, directly or indirectly, through contract, arrangement, understanding, relationship or otherwise, exercises substantial control over the entity or who owns or controls at least 25% of the ownership interest in the entity. It does not include a minor child, an individual acting as a nominee, intermediary, custodian or agent on behalf of another individual, an individual acting solely as an employee and whose economic benefits derive solely from their employment status, an individual whose only interest is through a right of inheritance, or a creditor of the entity (unless it exercises substantial control or has at least 25% of the ownership interest in the entity). It would include a manager of an LLC or officer of a corporation who is not a legal owner.
For instance, a business entity such as a corporation, limited partnership, or limited liability company that owns real estate (or perhaps multiple business entities, each owning separate properties) must regularly collect and report each entity’s ownership information to FinCEN.
The Trustee of a trust that controls 25% or more of the reporting company’s stock, partnership or membership interests will have to provide owner information to FinCEN. The settlor who creates the trust will need to comply with the Act if the settlor can revoke the trust. Current beneficiaries who have withdrawal rights or general powers of appointment will need to comply because they have control over the trust assets. Beneficiaries who do not receive any property until the death of the settlor, or the death of a current beneficiary do not have to report.
Publicly traded companies and larger companies with revenue exceeding five million dollars, and who have 20 employees or more don’t have to comply with the Act. That is because larger entities have many reporting requirements under other laws. Note that small corporate entities set up by larger companies are not exempt. Typical examples of excluded companies include a majority of financial services institutions, including investment, accounting and banking firms that already report to government agencies like the Securities and Exchange Commission and the Federal Deposit Insurance Corporation. Nonprofit organizations such as churches and charities do not have to report under the Act.
You may be asking what type of information FinCEN will collect? It will collect the name, residential address, date of birth and a unique identifying number from each beneficial owner. This number could be the owner’s driver’s license number, passport number or personal identification card. This information must be updated on an annual basis.
All new business entities must report at the time of their formation. If the entity was formed prior to the enactment of the Act, then those entities will be required to submit reports no later than two years after the effective date of FinCEN’s regulations. If there are changes to the original submissions, then the business entity must provide an updated report no later than one year after the date of the change.
Is your private confidential information protected? The Secretary of the Treasury must establish security protocols to protect the confidentiality of the information collected from the beneficial owner. Once that information is collected, FinCEN is only permitted to disclose the information to government and financial institutions for law enforcement, national security or intelligence purposes. Likewise, the Treasury will not provide access to the information to the general public. Finally, any reports filed pursuant to the Act will be protected and may not be disclosed under the Freedom of Information Act or similar laws.
Failure to provide the required information or giving incomplete or giving false information will result in a civil penalty of up to $500 for each day the violation continues. FinCEN can also impose criminal penalties of up to $10,000 and/or jail time for up to two years. Further, any unauthorized disclosure of beneficial ownership information by a government employee or a third-party recipient of this information will result in civil penalties and criminal fines of up to $250,000 and/or jail time for up to five years.
The takeaway from the Act is that in 2022 business entities and trustees will want to commence the process of gathering their beneficial ownership information from those who have substantial control of the business. As part of that process, they should review their business formation documents or trust documents to confirm that there are no confidentiality clauses or other obligations that will conflict with the requirements of the Act. As well, they may wish to consider revising their governing documents (operating agreements, shareholder agreements and the like) to require business owners of 25% or more of the company to disclose the required information. Settlors and Trustees might want to consider revising their trusts to require disclosure to meet the act requirements. Finally, it is highly recommended that Trustees and business owners work with their advisors to implement a process for meeting the Act’s requirements.
At Cipparone & Zaccaro, P.C., we are available to assist business owners in understanding what beneficial ownership information must be collected and how to properly report it under the Act. If you need assistance compiling and reporting this information, please don’t hesitate to give us a call.
Mark Pancrazio and Joe Cipparone wrote the articles in this edition. No taxpayer can avoid tax penalties based on the advice given in this newsletter. This information is for general purposes only and does not constitute legal advice. For specific questions related to your situation, you should consult a qualified estate planning attorney.
