Wednesday, December 16, 2020

NDAA to require beneficial ownership reporting for private corporations and LLCs

By Anne Sherry, J.D.

The Corporate Transparency Act, Title LXIV of the National Defense Authorization Act, seeks to crack down on "malign actors" by making it more difficult to conceal their ownerships of corporations, LLCs, and similar entities. The law, if enacted, will require private companies to report their beneficial owners to FinCEN. The NCAA passed both houses with a veto-proof majority, but President Trump has pledged to veto the bill.

Representative Carolyn Maloney (D-NY) introduced a version of the Corporate Transparency Act in each Congress since 2009 and celebrated its inclusion in the NDAA. Ultimately, however, the congresswoman voted against the NDAA, saying that she "cannot, in good conscience, vote for legislation that continues to explode the Pentagon’s budget while millions of Americans are suffering from the COVID-19 pandemic and stays silent on the 1033 program." She nevertheless lauded the passage of the Corporate Transparency Act. The NDAA overall passed the House by a vote of 335-78 and the Senate 84-13.

Exempt companies. The Act exempts public companies whose securities are registered under Section 12 of the Exchange Act, as well as companies that are required by Section 15(d) to file reports. Also exempt from the bill's requirements are investment companies, investment advisers, broker-dealers, registered exchanges and clearing agencies, and registered entities under the Commodity Exchange Act. The Act also excludes other companies that are already required to disclose their beneficial owners, including federally regulated banks, credit unions, state-regulated insurance companies, churches, and charitable organizations, as well as companies with a physical presence in the U.S. that have over 20 employees and over $5 million in gross receipts or sales. Conversely, domestically-owned companies that do not hold assets, are not engaged in active business, and have existed for at least a year do not have to file beneficial ownership reports.

Requirements. When a reporting company is formed, it must disclose its beneficial owners (meaning, anyone with actual control or at least a 25 percent ownership stake) to FinCEN. Companies that are already in existence when the applicable Treasury regulations become effective must disclose beneficial ownership "in a timely manner, and not later than two years" after the effective date of the regulations. Reporting companies must report any changes in beneficial ownership also in a timely manner and within 1 year of the change.

The report to FinCEN must include each beneficial owner’s full legal name, date of birth, current business or residential address, and identifying number (such as driver’s license number or current passport number, or FinCEN identifier). If a beneficial owner is an exempt entity, the reporting company need only list the name of the exempt entity.

Penalties and reports. The bill includes civil and criminal penalties for anyone who willfully submits false or fraudulent beneficial ownership information, or who knowingly fails to provide complete or updated beneficial ownership information. It authorizes the Inspector General of Treasury to investigate FinCEN cybersecurity practices in the event of a data breach. The Act also requires the Treasury Secretary to report annually to the Senate Banking Committee and House Financial Services Committee and requires the Director of FinCEN to testify to the committees regarding FinCEN issues. The Comptroller General is to audit Treasury’s procedures and safeguards every year for six years.