Historically the formation of limited liability companies and corporations has been a simple matter of filing articles of organization or incorporation with the applicable state. Such filings do not typically require disclosure of any personal information about the owners of the entity—not even their identity.
That is about to undergo monumental change. Included in the National Defense Authorization Act that became law in early January 2021 is a requirement that certain newly-formed and existing limited liability companies, corporations and similar companies file a confidential report with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) disclosing the beneficial ownership and personal information about the owners. The stated purpose of the filing requirement is to curtail the use of subject business entities for money laundering, terrorist activity, and various frauds, and the required disclosures are designed to facilitate detecting such activities. The result will be the creation of a massive new FinCEN-searchable data base containing the personal information of millions of individuals.
The focus of the law is on small U.S. businesses: it exempts businesses with 20 or more full time employees or that have over $5 million of gross sales. Other exempt entities include those not engaged in an active business for one year or that have not sent or received funds in excess of $1000 for 12 months, companies whose securities are registered with the Securities and Exchange Commission, banks, credit unions, SEC-registered securities broker/dealers, investment companies, insurance companies, and multiple other institutions.
“Beneficial owner” is defined as a natural person who exercises substantial control of the entity, directly or indirectly owns 25% or more of the entity, or receives “substantial economic benefits” from the entity (excluding employees whose control or economic benefit derives solely from employment status). The required disclosures are full name, date of birth, address (residence or business) and an identifying number from such things as a passport or state driver’s license. Reporting persons will be issued a unique “FinCEN Identifier” number.
The law goes into effect when implementing regulations are adopted, the deadline for which is one year after passage of the law, which means early January 2022. Newly-formed entities must comply upon the issuance of the regulations, but existing entities will have a reasonable time not exceeding two years to file. Subject companies must update their reports within one year of any change in the information previously reported. The law orders the states to provide notice of the filing requirement to entities formed under their laws.
Consequences of non-negligent failure to file—or providing false information—will be severe: a “civil penalty” of up to $10,000, plus criminal fines and imprisonment for up to two years.
The filing requirement will increase both the burden of new-entity formation as well as the risk due to the non-compliance penalties. The updating mandate is of special concern because it will require subject companies to develop systems to monitor changes that will trigger updated filings—which may be easily forgotten. Another concern is the potential for a data breach despite strict confidentiality provisions. The law does allow the Treasury Department to create additional exemptions, and requires it to review the updating requirement, so it is possible that the number of businesses subject to reporting will be reduced and/or that the updating requirement will be altered. Frantz Ward will be watching this closely and providing updates as the process unfolds.