The 116th United States Congress passed the National Defense Authorization Act for Fiscal Year 2021, which includes the Corporate Transparency Act (the CTA). The CTA seeks to provide appropriate safeguards to identify bad actors engaged in terrorism, money laundering, sex trafficking and other heinous acts through “shell companies” that are not actually engaged in a bona fide business venture but instead are created for the principal purpose of shielding the owners from liability for engaging in illicit behavior and, in many cases, their identities.
The CTA requires the disclosure of the full legal name, current residential or business address, birth date and an identification number for each “beneficial owner” of a U.S. corporation or limited liability company as well as foreign entities that are qualified to do business in the U.S. and Indian Tribes (each, a Reporting Entity), with certain exceptions relating to entities that are already subject to regulatory reporting requirements. The CTA defines a beneficial owner as “a natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over a corporation or limited liability company; (ii) owns 25 percent or more of the equity interests of a corporation or limited liability company; or (iii) receives substantial economic benefits from the assets of a corporation or limited liability company” with certain limited exceptions.
Each Reporting Entity is required to complete a beneficial ownership statement and file it with the Financial Crimes Enforcement Network of the U.S. Department of Justice (FinCEN) upon the formation of the Reporting Entity or, if the Reporting Entity is already in existence at the time the CTA is enacted, within two years of adoption of underlying regulations. The beneficial ownership statement is not publicly available, and FinCEN is only permitted to use it for limited national security and anti-money laundering reasons. Failure to comply with the requirements of the CTA could result in substantial penalties, including fines and imprisonment.
Interestingly, and likely unintentionally, the CTA will have an impact on structures that are routinely used for acquisitions and lending transactions that are fully legitimate. Often in these types of transactions a beneficial owner will form one or more entities that could qualify as Reporting Entities and which serve as the contracting party(ies) in an acquisition or a borrower in the lending transaction. These entities are used for a number of valid reasons, including to protect the assets of the beneficial owners/acquirer from unknown liabilities of the target, or to create single purpose entities formed solely to own the collateral securing a loan to protect lenders by insulating the assets of the entity from the financial condition (and any resulting bankruptcy filing) of the equity sponsor or parent entity.
It remains to be seen whether or not the CTA will have a substantial impact on businesses and investors going forward. The goal of the CTA is clear and appropriate in the realm of identifying and stopping bad actors. However, Reporting Entities will now be required to comply with an extra layer of disclosure which will add time, complexity and expense to routine transactions and entity formation, and the beneficial owners and others responsible for the filings could face potential fines and imprisonment in certain circumstances for failing to comply with the CTA. While the new disclosure requirements of the CTA will impact certain clients, especially small and middle market private corporations and limited liability companies that are most likely to qualify as a Reporting Entity, in the coming years the disclosure obligations may just become more of a routine part of entity formation.
The full article in its original form can be found here.
Jennifer R. Santangelo is a partner at White and Williams (the Philadelphia office). She has practiced finance, real estate and transactional law in both the corporate and law firm settings for more than 25 years.
Lori Smith is a partner at White and Williams (the New York office). Her practice focuses on representation of foreign and domestic companies at all stages of development from formation and early and growth stage companies to multi-national public companies, as well as angel, venture capital and private equity investors.
Jeremy M. Miller is an associate at White and Williams (the New York office). He focuses his practice on general corporate, transactional and securities law.