On Friday, January 1, 2021, the Senate voted to override President Trump’s veto of the 2021 National Defense Authorization Act (“2021 NDAA”) by a vote of 81 -13. The Senate’s override follows the House of Representatives’ override on December 28, 2020, and the 2021 NDAA is now law.
Included in Title LXIV of the 2021 NDAA (Title 64 for those of us rusty on Roman numerals), are new information reporting requirements intended to identify individual beneficial owners of certain business entities. Subject to a number of exceptions, the law requires certain U.S. and foreign entities to file annual reports with the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) that will disclose information regarding the beneficial owners of reporting companies. Overall, the reporting will identify those individuals exercising “control,” as the term is defined, over those entities required to report. According to the legislation, over two million corporations, LLCs, and similar entities are formed under state law in the United States each year, and many “malign actors seek to conceal their ownership” of various entities intended to facilitate illegal activity. Accordingly, the reporting mandated by the law is intended to help protect national security interests and interstate and foreign commerce, as well as counter the financing of terrorism.
The reporting requirements are set forth under sections 6401 through 6403 of the 2021 NDAA. The Act defines a “reporting company” as a corporation, limited liability company (“LLC”), or other similar entity that is created by the filing of a document with a secretary of state or similar State office under the State law (to include any U.S. State, D.C. or other U.S. commonwealth, territory, or possessions) or tribal law in the case of Indian Tribes. Further, non-U.S. entities that register to do business in the United States by filing documents with similar State or tribal authorities are similarly included within the scope of a reporting company. Each reporting company must disclose certain identifying information related to its beneficial owners.
Specifically, information that must be reported to FinCEN includes the beneficial owner’s full legal name, date of birth, residential or business street address, and unique identifying number (e.g., passport, license, or FinCEN identifier). A beneficial owner is an individual who directly or indirectly (i) exercises substantial control over the reporting company or (ii) owns or controls not less than 25% of the ownership interests of the reporting company.
Key Exceptions Curtail Reporting Requirements: Tax-exempt and political organizations are among the organizations that don’t have to report
The scope of the reporting is significantly curtailed based upon exceptions that generally include the following:
- Companies that issue securities registered under section 12 of the Securities Exchange Act of 1934, or that are required to file supplementary and periodic information under section 15(d) of the Securities Exchange Act of 1934);
- Entities established under the law of the United States, an Indian Tribe, a State, or a political subdivision of a State, or under an interstate compact between two or more States that are designated to exercise governmental authority on behalf of such governments;
- Banks, federal or state credit unions, bank holding companies;
- Money transmitting businesses registered with the Secretary of the Treasury;
- Brokers or dealers as defined in section 3 of the Securities Exchange Act of 1934;
- An exchange or clearing agency, as defined in section 3 of the Securities Exchange Act of 1934, that is registered under section 6 or 17A of the Securities Act of 1934;
- Any other entity not otherwise described that is registered with the SEC under the 1934 Securities and Exchange Act;
- An entity that is an investment company or investment adviser properly registered with the SEC;
- An investment adviser described in section 203(l) of the Investment Advisors Act of 1940 that has filed designated schedules with the SEC;
- An insurance company as defined in section 2 of the Investment Company Act of 1940;
- An entity that is an insurance producer authorized by a State and subject to supervision by the state insurance commissioner or similar official and has an operating presence and physical office in the United States;
- A registered entity or various other specified entities under the Commodity Exchange Act;
- A public accounting firm registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002;
- A public utility;
- A financial market utility;
- Any pooled investment vehicle operated or advised by a bank, credit union, broker/dealer, entities acting as an investment company or investment adviser, or an investment adviser;
- Any of the following —
- An organization described in section 501(c) of the Internal Revenue Code (the “Code”) without regard to section 508(a) of the Code, and exempt from tax under section 501(a) of the Code;
- A political organization under section 527(e)(1) of the Code that is exempt from tax under section 527(a) of the Code;
- A trust described in section 4947(a)(1) or (2) of the Code;
- An entity that operates exclusively to provide financial assistance to, or holds governance rights over, any entity described immediately above;
- Any entity that (1) employs more than 20 full-time employees, (2) filed a federal income tax return reporting gross receipts exceeding $5 million, and (3) has an operating presence in the United States;
- Any corporation, LLC, or similar entity that is owned or controlled, directly or indirectly, by certain entities described above; and
- Any corporation, LLC, or similar entity that has existed for more than one year with very minimal activity (see language of bill).
The legislation also authorizes the Secretary of the Treasury, with the written concurrence of the Attorney General and Secretary of Homeland Security, to issue regulations identifying other entities or classes of entities that should be exempt from the reporting requirements.
The information reported to FinCEN will not be public information, although FinCEN may disclose information to the following:
- A federal agency for national security, intelligence, or law enforcement activity;
- A State, local, or tribal law enforcement agency, if a court authorized the agency to seek the information;
- A foreign authority, pursuant to a treaty, agreement, etc.;
- A financial institution, with consent of the reporting company and in the form provided by the regulations; and
- A federal regulatory agency, including the IRS.
The new reporting requirements include civil and criminal penalties for the willful failure to provide accurate beneficial owner information or to report such information. Any person who willfully fails to provide accurate beneficial owner information or to report such information may be subject to civil penalties of up to $500 per day for every day the violation continues. In addition, a person may also be subject to criminal penalties that include a fine of up to $10,000, up to two years imprisonment, or both. The statute provides a limited safe harbor that allows any person to avoid the imposition of the reporting penalties if the person voluntarily submits corrected information within 90 days after the date of submission, unless the person knowingly filed false beneficial owner information with the intent of evading the reporting requirements.
The imposition of civil penalties based upon a willfulness standard could make it difficult for FinCEN to enforce such penalties in certain cases, particularly when the reporting company is compliant with respect to its other compliance obligations. The IRS has encountered difficulty enforcing intentional disregard penalties under section 6721(e) of the Internal Revenue Code when the evidence does not support that the underlying failures were intentional. The government has had more success imposing willfulness penalties for Foreign Bank Account Report (“FBAR”) (FinCEN 114) failures, where courts have acquiesced to a willful blindness standard. That success has been aided in part by the plain English certification of the existence of foreign bank accounts on Form 1040 Schedule B making it more difficult for taxpayers to argue they were unaware of the filing obligation.
The law requires the Secretary of the Treasury to promulgate regulations within one year after the date of enactment of section 6403 of the 2021 NDAA. The statutory language of the reporting requirements does not define several key terms and raises various questions. For example, for purposes of the definition of “beneficial owner,” it is unclear what constitutes “substantial control” over an entity. (One potentially similar concept that Treasury could look to is that of “controlling persons” under AML/KYC rules that were incorporated into FATCA intergovernmental agreements.) In addition, the definition of “reporting company” includes “similar entities” to corporations and LLCs, but it is not clear where this line should be drawn. For example, will it include limited partnerships, limited liability partnerships, etc.? Moreover, although many tax-exempt entities are not required to report, it is not clear whether the law also excludes taxable nonprofits. Accordingly, FinCEN’s regulations and any related guidance will be important to understanding the full scope of the 2021 NDAA’s reporting requirements.
As discussed above, the 2021 NDAA became law on January 1, 2021.
The effective date of the reporting requirements is tied to the effective date of the regulations, which may not be later than one year after the date of enactment of the statute. Any reporting company formed or registered before the effective date of the regulations must file a report to FinCEN not later than two years after the effective date of the regulations.
We will provide further coverage of the new FinCEN reporting requirements when Treasury publishes regulations at some point over the next year.