On Friday, Jan. 1, 2021, one of the last acts of the 116^th Congress was to override a presidential veto of the fiscal year 2021 National Defense Authorization Act (NDAA).

While this action was notable and somewhat historic in itself, it also passed into law the Corporate Transparency Act of 2019, which was amended to the NDAA earlier in the session.

The New Corporate Transparency Act

The Corporate Transparency Act, or legislation similar to it, has been introduced in the past few congressional sessions as a tool to fight money laundering and “other misconduct” through the use of limited liability companies and corporations formed in the United States.

In adopting the legislation, the U.S. House of Representatives stated in its findings that nearly 2 million corporations and limited liability companies are formed each year under state law in the United States. These entities are typically not required to disclose any information about their beneficial ownership under most state laws. This lack of transparency has led to abusive use of these entities to launder money and undertake other misconduct.

Reporting Requirement

The Act requires the Unites States Treasury Department to set up a registry by the end of 2021 through the Financial Crimes Enforcement Network (FinCEN) to collect the name, address, birth date, and a unique identifying number for each beneficial owner of every corporation and limited liability company existing or formed in the future in the U.S. The unique identifying number can be a nonexpired driver’s license number, passport number, or personal ID card.

The Act defines a beneficial owner to be a person who owns 25 percent or more of the equity of the entity or receives substantial economic benefits from the entity. States are required to establish data collection and reporting procedures. Existing entities will be given two years to report this information.

There are criminal penalties, including fines and imprisonment, for failure to provide or by providing false information as required by the Act.

Exceptions

There are several exceptions to this reporting requirement.

Most notably, entities that are required to report similar information pursuant to existing laws, such as publicly traded companies under the Securities Act, are exempt.

Also exempt are companies that have more than 20 employees, $5 million in annual revenue, and a physical location within the U.S. It is not clear how entities will meet the burden of proof for exemption from this reporting requirement.

Data Collection Notes

Once the data is collected, FinCEN is only allowed to disclose it to law enforcement agencies and to financial institutions if so requested (with customer consent) to comply with the Bank Secrecy Act, the USA Patriot Act, or other laws. The Act requires rule-making related to the security of this data, but currently it is unclear how security of the data will be maintained.

Implementing the Act

Obviously, there is still work that needs to be completed to implement the regulatory and procedural steps for this data collection and distribution.

Currently, due to the recent adoption of the Act, there is little guidance available from states on how they intend to implement that Act’s requirements. However, it is easy to anticipate that each state will undertake the administration of this data collection process in a different way. Practitioners with multijurisdictional practices that involve entity formation, particularly real estate and mergers and acquisitions work, will be well advised to review each state’s data collection procedures.

The Act will further burden existing entities with an additional reporting requirement. Again, due to the newness of the Act, little information is available as to how this will be undertaken or enforced.

A New Consideration for Entity Formation

Finally, the Act does create another item of discussion and advice that practitioners will need to consider when clients are entertaining entity formation discussions.

Practitioners will need to advise clients on the process of data collection and the use of the collected data.

Parties with high levels of concern about the privacy of their information may need to consider alternatives to corporations and limited liability companies when it comes to the ownership of assets. It is speculative at this point, but the use of trusts in certain circumstances may increase as a result.

Conclusion: A Mixed Reaction

It is understandable why law enforcement agencies involved in financial crimes and money laundering will be pleased with the passage of this law. For the typical practitioner who advises clients and assists with entity formation and maintenance, the Act will create more headaches.

This article was originally published on the State Bar of Wisconsin’s Business Law Blog. Visit the State Bar sections or the Business Law Section web pages to learn more about the benefits of section membership.