A bulletin for friends and clients of the Seward & Kissel Trusts and Estates Group

We hope everyone who receives this bulletin is safe and healthy.

Summary of Key Points

• The recently-enacted “Corporate Transparency Act” (the “CTA”) imposes a new requirement directing many LLCs, corporations and similar entities formed or doing business in the United States to report identifying information about their beneficial owners to the Treasury Department (“Treasury”).
• This requirement likely will apply to most family LLCs (and perhaps to family partnerships and trusts), and will become effective upon promulgation by Treasury of regulations implementing the CTA (the “Regulations”).
• Seward & Kissel will continue to monitor developments in this area and will provide further updates once details of the Regulations become known.

CTA Reporting Requirements

On January 1, 2021, the U.S. Congress enacted the “National Defense Authorization Act for Fiscal Year 2021,” the primary purpose of which is to authorize appropriations for military spending in fiscal year 2021.  Included within the law is the CTA, which is aimed at preventing malign actors from facilitating illicit activity—including money laundering, the financing of terrorism, and serious tax fraud—by concealing their ownership of corporations, LLCs or similar entities (each an “Entity” and, collectively, “Entities”).¹

To inhibit concealment of such ownership, the CTA requires that each Entity formed or doing business in the U.S. file a report with Treasury’s Financial Crimes Enforcement Network (“FinCEN”) listing the full legal name, date of birth and current residential or business street address of each beneficial owner of the Entity and, if the beneficial owner is an individual, that individual’s identifying number from a U.S. government-issued identification document (or from a passport issued by a foreign government if the individual does not have U.S. identification).  The “beneficial owner” of an Entity is defined, subject to certain limited exceptions, as an individual who, directly or indirectly, (i) exercises substantial control over the Entity, or (ii) owns or controls at least 25% of the ownership interests of the Entity.  The CTA does not define what constitutes “substantial control” or how the 25% ownership threshold will be measured.  These omissions may be addressed in the Regulations.  Importantly, individuals whose only interest in an Entity is through a right of inheritance are not considered beneficial owners of the Entity for purposes of the CTA.  Unfortunately, the statute does not define the term “right of inheritance,” and therefore a better understanding of the scope of this exception, including whether it applies to lifetime gifts, must await the issuance of Regulations.  Advisers should note that the Entity’s “applicants,” who are defined as those individuals who filed the application to form a U.S. Entity or who registered a non-U.S. Entity to do business in the U.S., must also provide this reporting information with respect to themselves.

The reporting requirements likely will apply to most family LLCs (and perhaps also to family partnerships, if the Regulations so provide).

Permitted Uses of Collected Information

Information collected pursuant to the CTA will be maintained by Treasury in a secure, nonpublic database and made available, subject to certain information security safeguards, to government authorities to facilitate (i) national security, intelligence and law enforcement activities, and (ii) financial institutions’ compliance with laws regulating anti-money laundering, countering the financing of terrorism, and customer due diligence.  Disclosure may be made solely to Federal, state or local government agencies and to financial institutions, although disclosure by FinCEN to financial institutions may be made only with the consent of the subject Entity.  Additionally, Treasury may obtain access to beneficial ownership information for tax administration purposes.

Effective Date and Timing of Required Reporting

The CTA directs Treasury to issue Regulations implementing the Act no later than January 1, 2022.  The CTA reporting requirements are effective as of the date the Regulations are issued (the “Effective Date”).  The Regulations will specify when reporting obligations under the CTA will begin and will provide instructions for reporting information to FinCEN, information on reporting deadlines, and methods by which FinCEN may provide reported information to financial institutions.

Subject to the Regulations, Entities in existence prior to the Effective Date must submit the required information to FinCEN within two years of the Effective Date; Entities formed in the U.S. or registered to do business in the U.S. after the Effective Date must submit the required information at the time of formation or registration; and if any reported information later becomes inaccurate, Entities must update the information within one year of any change.  Exact deadlines will be specified in the Regulations.

Civil and Criminal Penalties

The CTA imposes civil and criminal penalties on Entities and applicants for failure to satisfy the Act’s reporting requirements (and upon governmental officers or employees for improper use or disclosure of collected information).  Any person who willfully provides false, fraudulent or incomplete beneficial ownership information, or who fails to provide required information or to update reported information when necessary, will be liable for a civil penalty of $500 or less for each day that the violation continues and has not been remedied, and may be subject to a criminal fine of $10,000 or less and imprisoned for two years or less.  The Act provides a safe harbor for individuals who submit corrected reports within 90 days of filing an inaccurate report, and who did not submit the initial report to evade the reporting requirements or who do not have actual knowledge that the information contained in the initial report was inaccurate.

Further Developments

Seward and Kissel will continue to monitor developments in this area and will provide additional updates once details of the Regulations are known.