Rules Proposed for Corporate Transparency Act
Congress enacted the Corporate Transparency Act at the end of 2020 as part of the National Defense Authorization Act. See 31 U.S.C. § 5336. The statute was designed to combat crime and terrorism by targeting corporate forms and shells used to facilitate money laundering and other criminal activities. The statute also requires domestic and foreign entities to report their beneficial ownership information. But as written, the “CTA” contains a good amount of ambiguity. The Financial Criminal Enforcement Network, or “FinCEN,” has now published proposed rules to implement the CTA and to clarify some, but not all, of the ambiguities.
Questions About the Corporate Transparency Act
One area of ambiguity in the CTA relates to exceptions to the general rule that enterprises must report beneficial ownership information. The CTA excepts “large operating companies” from the general reporting requirements—but the scope of and reason for this exception are not identified in the statutory language.
FinCEN’s proposed rules define this exception as an entity that has:
- More than 20 full-time employees in the United States,
- Reports more than $5 million in gross receipts or sales on the previous year’s federal income tax return (excluding foreign income), and
- Operates at a physical office within the United States.
The “physical office” requirement is defined to mean:
- A place where the entity regularly conduct business,
- That is owned or leased,
- That is not a residence, and
- That is physically distinct from the place of business of another unaffiliated entity.
At first glance, a criminal or terrorist enterprise could seemingly meet this definition and be excepted from the CTA’s reporting requirements with little difficulty.
Beneficial Owner Definition
Another CTA ambiguity relates to the definition of “beneficial owner.” FinCEN’s regulations contain both a “bright line” and a “balancing test” definition. The “bright line” definition states that a “beneficial owner” is a person who possesses or controls at least 25 percent of the enterprise’s ownership interest. The “balancing test” definition states that a “beneficial owner” is a person who, directly or indirectly, “exercises substantial control” over the entity. Exercising “substantial control” can be accomplished through a contract, arrangement, understanding, relationship or otherwise. Other examples include acting as a board member or being a senior officer, having the ability to appoint or remove senior officers or a majority of the persons on the entity control body (like the board of directors), or possessing the ability to make or have substantial influence over major entity decisions through, for example, rights granted by financing arrangements or trusts.
For entities that must report beneficial ownership under the CTA, the proposed rule requires that the entity report the owner’s name, address, a unique identifying number (such as a driver license number) and a copy of the document showing the unique identifying number.