Randy Gilbert, J.D.
Chief Happiness Officer
Florida’s Title Insurance Company
(954) 500-Title (8485)
On January 1, 2021, Congress passed the Corporate Transparency Act (“CTA”) establishing new mandatory self-reporting requirements for corporations, LLCs, and similar entities. As of this article, reporting forms are not available, however the Department of Treasury charged FinCEN (Financial Crimes Enforcement Network ) with creating regulations and implementing the CTA. The CTA itself, is found deep within The National Defense Authorization Act (“NDAA”) on page 1217. The CTA was passed by Congress, vetoed by President Trump, and then resurrected to become law when Congress overrode the President’s veto (civics lesson: overriding a veto requires at least a 2/3 vote in both the House and Senate).
Purpose of CTA. The CTA is the first significant U.S. anti-money laundering law in 20 years. When businesses are formed, most states do not require ownership information. The CTA is designed to ban anonymous shell companies.
Why Shell Companies are Attractive to Criminals? To remain anonymous, criminals form shell companies, usually in the form of LLCs, to purchase real estate and high valued assets. The assets are purchased in the shell company’s name, thereby concealing the true individual owners’ identities. Anonymous shell companies are used to rapidly launder large amounts of money for: financing terrorism, tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, acts of foreign corruption, and otherwise hide illicit wealth.
Corporate Layering Like Russian ‘‘Matryoshka’’ Dolls. To evade detection, business layer their ownership, like Russian ‘‘Matryoshka’’ dolls, across various secretive jurisdictions so each time an investigator obtains ownership records, the newly identified owner is yet another corporate entity.
States Allowing Anonymous Company Ownership Directly and Indirectly. Reportedly, some states do not disclose ownership information for LLCs on the internet such as: Colorado, Georgia, Indiana, New Mexico, Alabama, Delaware Virginia, and Wyoming. Other states do not require disclosure of information to the State at all such as: Colorado, Georgia, Indiana, and New Mexico. Yet further, states such as Nevada, Delaware, and Wyoming, do not require ownership information to be updated, thus allowing temporary owners, directors, managers, or general partners called nominees to form the LLC. The nominee’s name and contact information will show up on the public record, and immediately thereafter, the nominee will resign allowing the true owner to assume control as the undisclosed manager of the LLC.
Florida’s Anonymous Shell Company Loophole. In Florida, LLCs are formed in minutes using Florida’s Secretary of State online portal Sunbiz.org and paying a $125.00 fee. When forming an LLC in Florida either a “member” or a “manager” must be listed. So what’s the loophole? Instead of identifying the individual “Members” (i.e. those with ownership interests in the LLC), Florida alternatively allows incorporators (those forming the LLC) to list “Managers” who are authorized to act on behalf of the LLC. The Manager, can be an individual person or another business entity such as another LLC. In other words, a Florida, LLC managed by another LLC. This layering of LLCs is the loophole in Florida allowing for anonymity in company ownership. So if one were to form “Florida, LLC” and identify its manager as “New Mexico, LLC”, then based on the foregoing, a creditor who is following the paper trail from Florida to its manager in New Mexico (where no ownership information is required to be disclosed) may find itself at a dead-end.
Reporting – Do “Beneficial Owners” of New or Existing Businesses Have to Report to FinCen? Reporting requirements apply to “Beneficial Owners” of corporations, LLCs, and other similar entities which: Already exist; Will be newly formed; and Those formed in a foreign country and registered to do business in the US through its filing with the Secretary of State.
Exemptions from Reporting to FinCen. Larger companies, heavily regulated companies, and companies that already provide information to a relevant government agency. The CTA explicitly exempts: (1) Companies employing more than 20 people, report more than $5 million in revenues on tax returns, and have a physical presence in the United States; (2) Most financial services institutions, including investment and accounting firms, securities trading firms, banks, and credit unions that report to and are regulated by government agencies such as the Securities and Exchange Commission, the Office of the Comptroller of the Currency, or the FDIC; and (3) Churches, charities, and other nonprofit organizations.
Who are “Beneficial Owners?” The CTA will require “beneficial owners” of non-exempt businesses to file “beneficial ownership” information with FinCen. Under the CTA, a “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
- Exercises substantial control over an entity; or
- Owns or controls 25% or more ownership interests in an entity.
Five (5) Exceptions to Who is Considered a Beneficial Owner. There are five (5) general exceptions from the term “beneficial owner”:
- Minor children, if the information of the parent or guardian is reported;
- Individuals acting solely as an employee and whose control over or economic benefits from such entity is derived solely from being an employee;
- Individuals whose only interest in the entity is through inheritance;
- Creditors, unless the creditor meets the requirements of a beneficial owner; and
- Individuals acting as a nominee, intermediary, custodian, or agent on behalf of another individual;
What Owner information must be reported to FinCen? Each Beneficial owner’s:
- Full legal name;
- Date of birth;
- Current residential or business street address (as of the date the report is delivered,); and
- ID number from a:
- Nonexpired US Passport;
- Nonexpired ID issued by a State, local government, or Indian Tribe to the individual acting for the purpose of identification of that individual;
- Nonexpired driver’s license issued by a State; or
- Nonexpired passport issued by a foreign government.
Can’t evade the CTA’s Beneficial Ownership by using “Bearer instruments.” You can’t just issue the shares or interests in the business to “bearer.” “Bearer” means anyone holding something, like a check, promissory note, or in this case a stock certificate, or LLC’s membership interest, which states that it is “payable to bearer,” means whoever holds this paper can receive the funds due on it without their name specifically appearing on it. Under the CTA, “A corporation, limited liability company, or other similar entity … may not issue a certificate in bearer form evidencing either a whole or fractional interest in the entity.”
Time for Reporting for Existing Businesses, and Newly Formed Businesses. The CTA obligates the Secretary of Treasury to draft regulations. Business entities existing before those regulations go into effect will have two (2) years to submit their report to FinCEN. Business entities formed on or after those regulations go into effect will just submit their report to FinCen at the time the new business entity is formed or registered.
What if the Business Owners Change? Report the change to FinCen within one (1) year.
Will my Ownership Reporting Information be Public? No. “beneficial ownership information … is sensitive information and will be directly available only to authorized government authorities, subject to effective safeguards and controls….” The information will be stored “in a secure, nonpublic database, using information security methods and techniques that are appropriate to protect nonclassified information systems at the highest security level.”
Who May Obtain my Ownership Information? (1) Federal agencies engaged in national security, intelligence, or law enforcement activity; (2) State, local, or Tribal law enforcement agency, if a court of competent jurisdiction including any officer of such a court, has authorized the law enforcement agency to seek the information in a criminal or civil investigation; (3) Financial Institutions; (4) Department of treasury for Tax purposes.
What if I fail to Report my Ownership Information. “lt shall be unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, … false or fraudulent identifying photograph or document, … or fail to report complete or updated beneficial ownership information to FinCEN.” Penalties include: “(i) US civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and “(ii) may be fined not more than $10,000, imprisoned for not more than 2 years, or both.” I can only assume these stiff penalties are aimed at severely curtailing criminals from even trying to use anonymous shell companies.
Penalties for Unauthorized Disclosure of Ownership Information. A person who misuses the information (presumably a government employee or financial institution who maliciously releases the information) can be liable for a “civil penalty of not more than $500 for each day that the violation continues or has not been remedied; and “(ii)(I) shall be fined not more than $250,000, or imprisoned for not more than 5 years, or both….”
DISCLAIMER: Topics discussed are general concepts, not intended to constitute legal advice, accuracy, nor completeness, and may not be relied upon as such; consult an attorney or accountant. The author is neither an attorney nor an accountant. FTIC is a national award winning title insurance company known for its white glove customer service and “No Junk Fee Guarantee.” ®
