The Corporate Transparency Act aims to prevent money laundering, by requiring companies to report identifying information that would enable law enforcement to track their activities. In this second article in our series, we focus on what information that needs to be filed.
Who Is a Beneficial Owner?
The CTA requires reporting companies to identify their beneficial owners, defined by the FinCEN as any individuals who directly or indirectly:
- Exercise substantial control over the entity
- Own or control 25% or more of the entity’s ownership interests.
Substantial Control
Since “substantial control” is hard to quantify, FinCEN proposes three specific substantial control indicators:
- One of a reporting company’s senior officers
- Having the authority to appoint /remove a reporting company’s senior officers or board-of-director members
- Providing direction and determination, making decisions for, or exercising substantial influence over a reporting company’s important matters
To prevent criminals from abusing loopholes, the regulation also has a proviso clarifying that “substantial control” can have other characteristics, not explicitly listed. Reporting companies must obey the spirit rather than the letter of the law and identify the people who stand behind their company.
What are Ownership Interests?
Ownership interests could include (but are not limited to):
- Equity in the reporting company
- Capital or profit interests (including partnership interests)
- Convertible instruments
- Warrants or rights
- Other options or privileges to acquire equity, capital, or other interests
FinCEN purposely leaves this category broad, to keep wrongdoers from lying about a company’s true ownership. (Dept. of the Treasury).
What Reporting Companies Must Submit
Each reporting company must report certain identifying factors about each individual beneficial owner and company applicant. A “company applicant” is anyone who “files the application to form a corporation, limited liability company, or other similar entity under the laws of a State or Indian Tribe” (Foley & Lardner LLP).
The CTA requires companies to report each beneficial owner’s and company applicant’s:
- Birthdate
- Address
- Unique identifying number from an acceptable official document.
Address
For “beneficial owners”, companies should provide the residential address. Since a business address doesn’t establish a beneficial owner’s tax residency, and may be associated with multiple people, FinCEN has determined that you should provide your beneficial owners’ residential street addresses to clearly establish their identities.
For “company applicants”, it must provide a business address, since they usually work as corporate formation agents and file the applications in the course of their business.
Unique Identifying Number
Beneficial owners must also be identified by a “unique identifying number from an acceptable identification document” (Dept. of the Treasury), like a passport, a state-issued driver’s license, or a FinCEN unique ID (Foley & Lardner), and a full scanned copy of said document.
Unique Business Number
The CTA requires reporting companies to identify themselves not only by name, but by their own unique numbers.
Since companies can have similar or even identical names, they may be hard to distinguish between in a database search. Therefore, having unique identifying numbers in place helps authorities zero in on the right entity.
Specifically, the reporting company can submit their:
- TIN (Taxpayer Identification Number—including an Employer Identification Number (EIN)).
- Dun & Bradstreet Data Universal Numbering System (DUNS) number
- Legal Entity Identifier (LEI)
In the next article, we’ll discuss which companies are required to file, which companies are exempt, and penalties for not filing.
