Issue No. 2 | February 2021
By George W. Gregory
The Coming National Registry of Entities
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 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, 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. 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 National Register legislation clearly covers corporations and probably covers limited liability companies. It may cover partnerships and trusts, but forthcoming FinCEN Regulations will provide more clarity. 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 returns, 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. Because these 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 2021. 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.
Without more clarity, it is unclear how FinCEN plans to prevent entities from suffering potential adverse consequences associated with having to comply with the CTA. Having a data base of all small businesses, their address etc.; and the personal information of their business owners and those in charge 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. 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.
WHAT TO DO NOW: Discuss with your advisors who should be monitoring this situation for you both (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. Discuss with your advisors who should be monitoring this situation for you and how they should be compensated. This could be an internal person.
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