By George W. Gregory

Congress has created a new registration requirement designed to target money launderers, tax evaders, and terrorists. As collateral damage it also hits small businesses and probably other entities. This requirement was created by The Corporate Transparency Act, (“CTA”) part of the over 10,000 pages of legislation enacted in December 2020. It has a variety of penalties for non-compliance, the lowest of which is $500 a day. The legislation gives the Financial Crimes Enforcement Network (FinCEN) a lot of leeway in enacting legislative regulations.

The intended target of this new requirement was shell companies used for money laundering, tax evasion, terrorism, and similar activities. The United States entered into agreements with many countries involved in the global financial community. These agreements resulted in the abolition of secret trusts in the Isles of Mann and Jersey; United States citizens having secret bank accounts in Switzerland; secret bank accounts and corporations in the Bahamas, etc. Today many other countries regard the United States as a country with secret accounts and entities. For example, an LLC owned by a South Dakota trust would be sheltered from the prying eyes of most foreign authorities most of the time. The CTA requires tracing through entities down to the individual level to identify both (1) those who own 25% or more of the entity, and (2) those who directly or indirectly exercise substantial control over the entity.

The United States, as one of the founders of the Financial Action Task Force (“FATF”) was the first country to encourage other counties to adopt such legislation but is one of the last to do so. All of the European Union countries have done so. Some of the traditional “offshore” and “tax haven” countries have as well. Closer to home, Ontario requires the name of the entity, each owner’s last name, social insurance number (SIN, comparable to our social security number), date of birth, and complete postal code. Ontario has a registered representative (power of attorney or agent) equivalent. For a business it requires the name of the entity, business number (there is a new assigned number for this), type of entity (Ontario includes sole proprietors and charities as entities), social insurance numbers of owners and each of their mailing and physical addresses, and a description of entity activity. Ontario ties all of this into corporate income tax, goods and services tax, payroll taxes, and more. I have talked to people in Europe and the pattern is similar. Although, all members of the European Union have adopted a National Registry and are in FATF compliance, not all countries are exactly the same. Different counties recognize different types of entities. For example, legislatively, most charities are exempt from the National Registration requirement in the United States.

The United States National Register legislation clearly covers corporations and probably covers limited liability companies. It may cover partnerships and trusts. Much of this will depend on FinCEN Regulations. The National Register will cover a lot of what is regarded as small businesses (corporations with more than $5 million in gross receipts on their Federal income tax return, or who employ 20 or more full time employees are exempt). Small businesses were not the target, but without more information they are indistinguishable from money launderers, tax evaders, terrorists, and the like. The target was shell companies used for such purposes. Because the target groups could acquire legitimate small businesses, changes in ownership need to be reported when they happen.
The legislation is retroactive. FinCEN is supposed to publish guidance and set up a National Register for entities created in 2020. FinCEN is supposed to have a system in place for other entities no later than two years later.

Regulations and guidance now would be useful. On the other hand, having a data base of all small businesses, its address etc.; and the name of its business owners and those in charge including their social security numbers and home addresses would be a tempting target for hackers. The legislation talks about coordinating with the financial industries requirements for Customer Due Diligence (know your customer rules) in other ways. Other parts of the legislation affect the financial industry in particular. The CTA is part of the Anti -Money Laundering Act of 2020 which is part of the National Defense Authorization Act. If a financial institution had access to the data, it would simplify the due diligence requirement. However, some in the financial industry have abused their knowledge or relationships. The CTA allows FinCEN to disclose information to federal law enforcement agencies, including requests on behalf of non-U.S. law enforcement agencies, with consent of an entity to certain financial institutions, and state, local and tribal law enforcement agencies pursuant to a court order.

Not addressed here is what to do about hiding the identity of an owner for traditional business reasons. For example, if the disclosure of the real purchaser of real estate would adversely affect the price, it is not unusual for a lawyer to set up an LLC and provide no information to anyone about the actual owner. Such practices may have to be modified in the future.

WHAT TO DO NOW: Discuss with your advisors who should be monitoring this situation for you, (1) who will make sure you are in compliance and (2) how they should be compensated. This is an area where some entities will assume that their accountant will take care of it, some accountants will think the client’s lawyer will take care of it (in Canada and Europe, lawyers or business owners handle compliance). The legislation imposes ultimate responsibility on the business, the business owner and/or the person in control. $500 a day can add up quickly. We will not have any real guidance until at least September. For some the due date will be December. For others it might be as much as two years later.


For further information regarding these matters, please contact Mr. Gregory at 248.740.5678 or via email.