When banks and certain other financial institutions open accounts for entities, among other anti-money laundering (AML) customer identification requirements, they must obtain beneficial ownership information on individuals owning 25% or more of the entity and a person with significant control over the entity such as a president or chief executive officer. We have published several blog posts on the beneficial ownership rule.

These financial institutions long have felt it was burdensome to have to obtain that information and new entity customers may be reluctant to provide it.

However, some relief is coming. In the Corporate Transparency Act, which is Title LXIV of the National Defense Authorization Act, which become law on January 1, 2021, after the US Congress overrode a Presidential veto, nonpublic companies will need to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), the US AML agency.

Here is a look at some significant parts of the beneficial ownership provisions of the new law:

Definitions: Readers should take note of two key definitions:

  • A “reporting company” is a corporation, limited liability company or other similar entity that is established by filing a document (such as articles of incorporation) with a US state secretary of state, Indian Tribe, or under the laws of a foreign country that registers to do business in the United States by making a similar filing with a State or Indian Tribe; there are several exceptions, such as publicly traded companies, regulated financial services organizations and public utilities.
  • A “beneficial owner” is an individual who directly or indirectly exercises “substantial control” over the reporting company or owns or controls a 25% or more ownership in the entity (subject to certain limited exceptions) – this is similar to the definition in the current regulation.

Information to be submitted: Subject to regulations promulgated by FInCEN, a reporting company at the time of formation or registration must submit the following information to FinCEN identifying each beneficial owner of the reporting with:

  • Full legal name
  • Date of birth
  • Current residential or business address
  • “Unique identifying number” such as a driver’s license or passport number, or a “FinCEN identifier,” which is a number to be assigned to an individual or reporting company by FinCEN upon request

Aside from the FinCEN identifier, this is similar to what is required now. There are some special filing requirements with respect to certain companies.

In accordance with a deadline in regulations to be promulgated by FinCEN, the reporting company must file with FinCEN a report of any changes in the reported information (but no later than one year after the change). The legislation requires the Treasury Department in consultation with the Attorney General and the Department of Homeland Security to review whether updates should be provided on a more frequent basis.

The reported information must be retained by FinCEN for at least five years after the date of termination of the reporting company.

Disclosure of the information: The reported information is confidential by law and cannot be disclosed unless otherwise permitted by the legislation or accompanying regulations. Pursuant to protocols to be established by FinCEN, the reported information may be disclosed to: certain Federal or state government agencies, or with the consent of the reporting company to a financial institution that needs the information to comply with its customer due diligence requirements, and the financial institution’s regulator. This information is not to be further disclosed by the recipient of the information.

Miscellaneous: Other sections of interest include:

  • The Secretary of the Treasury must maintain information security protections, including encryption, for the beneficial owner information reported to FinCEN under the new law
  • The Secretary of the Treasury must develop materials to be provided with federal tax or FinCEN forms providing notice of the reporting requirement
  • Corporations, limited liability companies, or similar entities formed under US state or Indian tribe law, may not issue bearer shares
  • Criminal and civil penalties may be imposed for (i) filing false or fraudulent beneficial ownership information or documentation and failing to provide required notice of changes or (ii) unauthorized disclosure or use of the reported information