The law the federal government enacted in 2021 as part of a sweeping defense authorization bill to prevent bad actors from using legal entities to shield their identities and assets, called the Corporate Transparency Act, applies mainly to companies that have fewer than 20 employees or annual revenues of $5 million or less.
But large companies might not be off the hook to the extent they have U.S.-based subsidiaries that are considered independent entities.
“We’re hearing from some of our clients that larger companies can have subsidiaries that do have to report,” Wolters Kluwer Vice President Ross Aronowitz told Legal Dive. “Even though the law is written for smaller companies, people have been getting advice that they may have to report on some of their smaller entities within their overall operating structure.”
The law and the rules promulgated by the Financial Crimes Enforcement Network, the Treasury division that’s administering the requirements, are unclear on a number of points, legal specialists say.
One area that could use more clarity is what structure FinCEN has in mind for subsidiaries of larger companies that must report. The rules say subsidiaries that would otherwise meet the threshold for reporting that are wholly owned, directly or indirectly, by the exempt entities are exempt. But questions remain.
“The lion’s share of companies large enough to maintain in-house legal and finance teams likely don’t have to comply, but subsidiaries might,” Aronowitz said. “And private equity firms [and family offices] that have operating companies that meet the threshold will want to know which of their companies might have to comply.”
A starting point might be whether or not the subsidiary still files its own tax returns as a separate entity.
“What we’ve heard some companies say is, if they’re still doing distinct income taxes, for that piece, that’s how you describe this as a distinct entity,” said Aronowitz, but, he added, that’s a question for legal counsel or accounting advisors.
Beneficial owners
Under the rules, companies subject to the law must, starting in January, report to FinCEN the name they operate under, including any trade names or DBAs, their business address, the jurisdiction in which they’re organized and their tax ID number.
In addition, each beneficial owner — a person, not a legal entity — who owns at least 25% of the company or otherwise exercises substantial control over its operations must report their full legal name, date of birth and home address, and provide a copy of a government-issued photo ID. Or, if they already have a FinCEN Identifier, they can submit that. What FinCEN means by “substantial control” is another vague area.
After meeting the January 1 deadline, companies are responsible for keeping the information updated. “So, all of the beneficial owners must remain true, and if there’s any change in those, you need to file an amendment,” Aronowitz said. “How they enforce the law is TBD.”
Failure to submit can lead to jail time, of up to two years, in the worst case, and a civil fine of up to $500 per day for each violation. “It’s quite serious,” he said.
Some 32 million companies in all, even after all the exceptions are applied — and there are almost two dozen exceptions — are expected to face the filing requirement.
“This is a huge compliance requirement and it’s coming up,” Aronowitz said, “and many people don’t seem to be aware of it.”
