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• New Corporate Transparency Act Became Effective- read now

New Corporate Transparency Act Became Effective

by Michael A. Stover

On January 1, 2021, the Corporate Transparency Act, a part of the 2021 National Defense Authorization Act, became effective.  The Transparency Act requires new ownership reporting requirements for many companies to: (i) set a new standard for corporate formation practices; (ii) help safeguard national security interests; (iii) better enable intelligence and law enforcement efforts to detect and protect against money laundering, terrorism and other illicit activity; and (iv) bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.

While the Transparency Act will not be fully implemented until the regulations are issued, it is intended to apply to all non-exempted “reporting companies.”  A reporting company is defined by the Transparency Act as “any corporation, limited liability company or similar entity that is (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.”  Thus, the scope of the Transparency Act on its face is extremely broad, but there are several significant limiting exemptions.  The exempt entities include: public companies; governmental entities; banks and bank holding companies; credit unions; broker dealers; registered investment companies; registered investment advisers; insurance companies; registered public accounting firms; public utilities; certain pooled investment vehicles; 501(c) entities; companies with more than 20 full-time employees in the United States, more than $5 million in gross receipts or sales, and an operating presence at a physical office in the United States; and entities owned or controlled by one or more of such exempt entities.

Under the Transparency Act, applicable companies will be required to report to the Treasury Department all “beneficial owners.”  A beneficial owner of a reporting company is “any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise – (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.”  While the definition of a beneficial owner is broad, there are certain exclusions including intermediaries, custodians and agents acting on behalf of another individual and employees (whose economic interest in the reporting company arises solely as an employee.  Companies will also be required to identify any applicant or individual who files an application to form a reporting company or registers or files an application to register a foreign company to do business in the United States.  The Transparency Act requires the Administrator for Federal Procurement Policy to revise the Federal Acquisition Regulations to require any contractor or subcontractor that is a reporting company required to report beneficial ownership information under the Transparency Act to provide such information to the federal government as part of any bid or proposal exceeding the applicable simplified acquisition threshold.  Enforcement of the Transparency Act may entail civil and criminal penalties for willfully providing, or attempting to provide, false or fraudulent information or willfully failing to report complete or updated information.  If you have any questions regarding the 2021 National Defense Authorization Act or the Corporate Transparency Act, please contact any attorney in our Government Contracts Practice Group.

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