On Jan. 1, 2021, the U.S. Senate passed H.R. 6395, the National Defense Authorization Act, 2021 (NDAA) over the presidential veto. The NDAA is slated to be enacted. Division F of the NDAA incorporates the Corporate Transparency Act of 2020 (CTA). An earlier version of the CTA, H.R. 2513, was passed by the House of Representatives in 2019. The CTA substantially revised and expanded H.R. 2513. The CTA adds Section 5336 to the Bank Secrecy Act, 21 U.S.C. sections 5311 et seq., originally enacted in 1970 (BSA).
The Conference Report for the NDAA states the purpose of the CTA is “to establish an improved reporting system relating to beneficial ownership information, including building in further protections to ensure that sensitive information is properly used and protected” by the U.S. government. The conference report states, in part, that the disclosure is intended to target “bad actors who own or control businesses that act as ‘fronts’ or shell companies on behalf of those conducting illicit activities.”
Scope of Confidentiality
Under the CTA, beneficial ownership information primarily is for use in law enforcement and national security efforts. The CTA requires beneficial ownership information to be reported to the Financial Crimes Enforcement Network (FinCEN), the financial intelligence unit of the U.S. Department of Treasury. The beneficial ownership reports generally are not made publicly available. Rather, as the Conference Report avers, the beneficial ownership information “will be kept confidential and treated as sensitive information, protected under the highest information security standards.”
Thus, under BSA Section 5336(c)(2)(B)(i)(II), the reported beneficial ownership information may be permitted to be disclosed to state or local governments generally only by court order. Another exception to the general prohibition on disclosure of beneficial ownership information includes disclosure in response to requests of a federal agency on behalf of foreign authorities for an investigation or other activity. Under BSA Section 5336(c)(2)(B)(ii)(II)(aa), providing beneficial ownership information to a foreign authority in response to the foreign request may be for the purpose of compliance with the disclosure and use provisions of a treaty, agreement, or convention and involve publicly disclosing any beneficial ownership information received. Under BSA Section 5336(c)(2)(B)(iii), beneficial ownership information may be disclosed in response to requests by financial institutions for compliance with customer due diligence requirements. BSA Section 5336(c)(2)(B)(iv) permits restricted disclosure of beneficial ownership information in response to requests by federal regulatory agencies.
Whose Information Must Be Reported?
A reporting company must be report to FinCEN information for each applicant and each beneficial owner. Under BSA Section 5336(a)(2), an applicant is generally any individual who files an application to form a corporation, limited liability company (LLC) or other similar entity under state law. Alternatively, an applicant may be any individual who registers or files an application under state law to register a corporation, LLC, or similar entity that initially was formed under the laws of a foreign country in order to do business in the U.S.
On the other hand, a beneficial owner under BSA Section 5336(a)(3) is an individual—other than certain minors, nominees, employees, heirs, or creditors—who either exercises substantial control over the entity or owns or controls not less than 25% of the ownership interests of the entity. To trigger CTA reporting obligations, the entity must be a reporting company, defined in BSA Section 5336(a)(11). A reporting company is a corporation, LLC, or other similar entity formed either under the laws of a state or a foreign country and authorized to do business in the U.S.
BSA Section 5336(a)(11)(B) contains broad exceptions for certain entities or their subsidiaries from CTA disclosure requirements, including broker dealers, pooled investment vehicles, publicly traded or SEC reporting companies, banks, exchanges, clearing houses, investment advisers, insurance companies, commodity exchanges, accounting firms, utilities, tax-exempt organizations, businesses with U.S. physical presence, more than 20 full-time U.S. employees, and annual revenues exceeding $5 million or for certain entities without any foreign ownership.
Comparison with IRS Form 5472 UBO Reporting Requirements
Beneficial ownership disclosure under BSA Section 5336 is more encompassing than Code section 6038A rules that may apply to foreign-owned corporations or LLCs. Generally, Code section 6038A requires a domestic corporation that is 25% foreign owned (reporting corporation) to disclose to the IRS annually on IRS Form 5472 each person that is a related party and had any transaction with the reporting corporation at any time during the tax year, including the ultimate beneficial owner (UBO). By contrast, BSA Section 5336 generally requires beneficial ownership information reporting at the time of formation of the corporation or LLC or registration under state law to do business in the U.S., irrespective of whether any related party transactions occurred during a tax year.
Scope and Manner of Beneficial Ownership Information Reporting
The scope of beneficial ownership information reporting requirements under the CTA shall be set forth in Treasury regulations, pursuant to BSA Section 5336(b)(1). A reporting company will be required to submit a FinCEN report in compliance with Treasury regulations to be promulgated under legislative authority in BSA Section 5336. Pursuant to BSA Section 5336(b)(3), in furtherance of compliance with the CTA, FinCEN will issue to each individual or entity that must disclose information under BSA Section 5336(b)(2) a unique identifying number (FinCEN Identifier).
In general, under BSA Section 5336(b)(2)(A), the FinCEN report must contain the name, date of birth, address, and either a social security number, tax ID or the FinCEN Identifier of each applicant and each beneficial owner of the reporting company. Under BSA Section 5336(b)(3)(A)(ii), the person with a FinCEN Identifier will use the number for FinCEN submissions updating beneficial ownership information as required under BSA Section 5336(b)(1)(D). Limited FinCEN disclosure applies to BSA Section 5336(a)(11)(B) exempt entities or their subsidiaries.
A reporting company may have to disclose beneficial ownership information of an applicant or beneficial owner who was issued a FinCEN Identifier. In that case, stating only the FinCEN Identifier of the individual in the report would be sufficient disclosure under BSA Section 5336(b)(2). Conversely, a reporting company may have to include beneficial ownership information of a beneficial owner who may hold the ownership interest through an ownership interest in an upper-tier entity. In that case, the reporting company may disclose only the FinCEN Identifier of the parent entity in lieu of the beneficial ownership information of the individual for purposes of complying with BSA Section 5336(b)(2)(A).
Timing of Implementation of Reporting Requirements
FinCEN reporting at present is not required for reporting companies, their beneficial owners, or applicants. Instead, under BSA Section 5336(b)(5), reporting will be required as of the effective date of final Treasury regulations, which will be promulgated under BSA Section 5336. The statute mandates that final Treasury regulations take effect not later than one year after the date of enactment of the CTA.
After the final Treasury regulations implementing the CTA requirements become effective, reporting companies in existence as of the effective date of the regulations will have two years to comply with the CTA reporting rules. In turn, reporting companies formed after the effective date of the Treasury regulations generally will have to file applicable FinCEN reports “at the time of” formation or registration to do business in the U.S. under the laws of a state. In addition, a reporting company will have to file an updated FinCEN report within a year of a change in beneficial ownership, as shall be prescribed in the final Treasury regulations.
Corporations, LLCs, and other similar entities either formed under the law of a U.S. jurisdiction or a foreign country must analyze the prospective applicability of FinCEN reporting requirements under the amended BSA, which should become effective within the calendar year. Beneficial owners, investors, and creditors must determine the chain of beneficial ownership of each entity in a holding company structure in order to comply with forthcoming FinCEN reporting rules or to ascertain whether exceptions under the BSA would apply to such individuals or entities. Specific compliance standards have not yet been promulgated, but foreign investors and foreign-owned entities should consult with U.S. tax counsel in anticipation of navigating the new beneficial ownership information reporting regime.
This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.
Marina Vishnepolskaya is principal of Marina Vishnepolskaya, Esq., P.C., an international law firm specializing in domestic and cross-border corporate, tax, employee benefits, executive compensation and exempt organization matters. She is a frequent author and speaker on developments in these practice areas.
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