Anti-Corruption Legislation and New FinCEN Reporting Requirements (Clayton & McKervey)

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February 11, 2021 - Clayton & McKervey PC

This is a thought leadership article by North American member firm Clayton & McKervey discussing new anti-corruption legislation in the United States. 

The Corporate Transparency Act (CTA) is an anti-corruption legislation that was passed on January 1, 2021 as part of the larger National Defense Authorization Act (NDAA). It includes new requirements for certain entities to report beneficial ownership interests to the U.S. government. While the CTA is aimed at finding and preventing anonymous shell companies in the U.S. established for illegal activity, tax evasion and threats to national security, it is important for all applicable companies to understand and meet the new reporting requirements. For example, because the CTA will impact businesses with less than 20 employees, a foreign-owned subsidiary newly established in the U.S. may be required to complete the new reporting of beneficial ownership interests due to its initial size of operation. To help clients, prospects, and others, Clayton & McKervey has provided a summary of the key considerations below.

CTA Beneficial Ownership Reporting

The new CTA beneficial ownership reporting is different from, and does not change, the current requirements for foreign-owned U.S. corporations to disclose direct and indirect foreign ownership in their annual tax filings with the Internal Revenue Service (IRS). Instead, the focus of the CTA is to capture the ownership information at a federal level when a company is formed or is registered to do business in a state because currently most states require very little information about the actual owners of a company. The CTA now sets a federal standard to require disclosure of beneficial ownership and to facilitate law enforcement and national security activities. It is important to note there is no requirement to report financial information included in the CTA.

While the Secretary of Treasury has until January 1, 2022 to issue regulations to implement the CTA, here’s what we know now:

Who is a Reporting Company?

New reporting requirements will be applicable to “reporting companies” which includes generally any corporation, limited liability or similar entity organized in any state as well as foreign companies registered to do business in the U.S. unless exempted.

Exempted entities include:

1. Public companies, financial institutions, governmental entities, tax exempt entities and other companies meeting the below criteria:

  • More than 20 full-time employees in the U.S.,
  • A U.S. tax return filed for the prior year that is more than $5M in gross receipts or sales, AND
  • An operating presence in a physical location in the U.S.

2. Any entity owned or controlled by an exempt entity

Who is Considered a Beneficial Owner?

The new requirement includes filing reports with the Financial Crimes Enforcement Network (FinCEN), disclosing all “beneficial owners” and “applicants” of a reporting company.

  1. Beneficial owners – generally are any individual directly or indirectly controlling the reporting company or owning 25% or more of the ownership interest of the reporting company; more guidance is expected in the regulations regarding the reporting of indirect ownership
  2. Applicants – generally are any individual filing an application to form or register the reporting corporation

What Information is Required to be Reported?

The information a reporting company will be required to report for beneficial owners and applicants includes:

  1. Full legal name
  2. Date of birth
  3. Current residential or business address
  4. Identifying number such as from a passport or other state issued document

When is the Reporting Required?

Once regulations are in effect:

  1. Companies existing before the effective date have two years to report
  2. Companies not in existence before the effective date will report when formed or registered
  3. Reporting of changes in ownership will be required

Final Notes

  1. Reported information is not available to the public but CTA authorizes FinCEN to share beneficial ownership information with domestic and foreign law enforcement authorities.
  2. Civil and criminal penalties are authorized in the CTA for willfully failing to report or providing false information.

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Clayton & McKervey PC

Headquartered near the international border of the U.S. and Canada, Clayton & McKervey is a Detroit-based, full-service accounting and business advisory firm focused on global business. The firm’s clientele includes closely held, middle-market, growth-oriented companies. Since 1953, Clayton & McKervey has created a strong reputation, both domestically and internationally, with four types of clients, U.S. entities with operations in other countries, foreign entities expanding to the U.S., businesses with international growth plans and clients in need of transfer pricing service.

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