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The End of the Shell Game

Significant Expansion of Beneficial Ownership Disclosure Requirements in the United States

December 14, 2020

On Friday, the U.S. Senate joined the House of Representatives and passed the 2021 National Defense Authorization Act, a defense spending bill, which included the Corporate Transparency Act (the “Act”).  That Act sets forth an expansion for the disclosure requirements for certain US and non-US companies doing business in the United States.  In short, if the law is enacted,[1] corporations and limited liability companies established in the United States (the “reporting companies”) will have to start disclosing their real/beneficial owners to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).  The measure appears to end the ability of individuals to establish companies in the United States without disclosing their beneficial ownership.

Registrations of new reporting companies in the United States will have to include the full name, current residential or business address and date of birth of the real owners, along with a unique identification number such as a driver’s license or passport.  Companies will have to provide updated information within one year whenever changes in beneficial ownership occur.  For companies in existence prior to the law’s enactment, the disclosure will have to be completed within two years.

The Act provides a list of entities that will be exempted from these requirements.  Among those entities are public companies and companies that have more than 20 full-time employees, report more than $5 million per year in gross receipts to the Internal Revenue Service and have an operating presence at a physical office within the United States.

The Act defines “beneficial owner” as any person that i) owns a 25% stake or ii) exercises substantial control over the entity.  It is important to highlight that the information on beneficial ownership provided to FinCEN will not be publicly available.  However, FinCEN will be able to share the information, upon request and through appropriate protocols, with i) local, state or federal law enforcement agencies, ii) U.S. federal agencies requesting information on behalf of a law enforcement agency of another country, and iii) financial institutions with the consent of the reporting company for due diligence purposes.

Penalties for failing to comply with the new requirements or willfully providing false information include civil fines of up to $10,000 and/or imprisonment for up to three years.

Reporting companies (both U.S. and non-U.S. companies doing business in the United States) should carefully review the new requirements to determine if they will be required to comply.

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The foregoing is for informational purposes only.  It is not intended as legal advice and no attorney-client relationship is formed by the provision of this information.

[1] Although President Trump has threatened to veto the bill because it does not impose limitations on social media platforms that he has demanded, he is unlikely to hold up funding national defense because of an unrelated issue, and if he does, the bill passed with a clearly veto-proof super majority.