Client Alert: Congressional Ban on Anonymous Shell Companies in the U.S. Has Huge Implications for Businesses and Financial Institutions

While businesses across the country have been eagerly planning, preparing, and waiting for Congress to pass the latest coronavirus relief package, less attention was paid to the Corporate Transparency Act (CTA), which sailed through the House and Senate in early December.  The CTA was part of the National Defense Authorization Act which the President recently vetoed; however, the House voted to override the veto on December 28, and the Senate is expected to vote to override the veto as well.

The CTA aims to crack down on money laundering, tax evasion, and terrorist financing by effectively banning anonymous shell companies. If signed into law, it would require all “reporting companies,” broadly defined to include all LLCs and corporations formed in the U.S., to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). There are exceptions to the reporting requirement. For instance, it does not apply to companies that are: (i) already regulated by the federal government; (ii) owned by otherwise exempt companies; or (iii) have more than 20 full-time employees, annually report gross receipts of more than $5M, and have a physical presence in the U.S. However, there is no exemption for existing companies, which would be subject to the law to the same extent as companies formed in the future.

The CTA requires reporting companies to provide FinCEN with detailed information about their beneficial owners. A “beneficial owner” is an individual who, directly or indirectly, owns (or has control over the ownership of) at least 25% of a reporting company’s ownership interests or who exercises substantial control over the reporting company. The phrase “substantial control” is not defined in the CTA but will likely be fleshed out in the act’s implementing regulations. The information that must be reported includes each beneficial owner’s name, date of birth, current address, and identifying number from a government-issued form of ID. Newly formed entities will be required to report this information at the time of formation, while existing entities will have two years to do so.

Both reporting entities and their beneficial owners are required to comply with the CTA. Violations of the act can lead to civil and criminal liability, including up to $500 in civil penalties for each day that the violation continues and criminal fines of up to $10,000 and/or up two years of imprisonment.

The implications of the CTA are far-reaching not only for reporting companies, but also for financial institutions who may find the CTA a helpful tool in enabling them to comply with their obligation under the Bank Secrecy Act to maintain information concerning the identity of the beneficial owners of their accounts. Financial institutions and individuals with substantial ownership interests in reporting companies should be closely following this important piece of legislation.

Readers with questions about the Corporate Transparency Act are encouraged to reach out to Erica L. Litovitz, Esq. or another member of Jackson & Campbell’s Business Law Practice Group.