The corporate transparency act: Top five considerations for foreign investors

The Corporate Transparency Act (CTA) was signed into law in January 2021, and in September 2022, the Financial Crimes Enforcement Network (FinCEN) issued highly anticipated final rules implementing the beneficial ownership reporting requirements of the CTA.

The CTA may have significant implications for U.S. companies and foreign investors. Foreign investors should carefully consider the following when planning their investments in the United States:

• Reporting requirements
• Effective dates
• Penalties for noncompliance
• Privacy concerns
• Process for obtaining an identification number

Beneficial ownership refers to the individuals who own or control an entity, either directly or indirectly, which includes individuals who own 25% or more of the company, or any individuals who exercise substantial control over the entity.

The United States has been grappling with the issue of beneficial ownership transparency for years. Historically, it had been considered a haven because there weren’t requirements to disclose the identity of beneficial owners to the U.S. government.

The CTA intended to bring the U.S. into compliance with international standards regarding Anti-Money Laundering (AML) and Combatting the Financing of Terrorism (CFT). The law is modeled after similar legislation passed in Europe, such as the European Union’s (EU’s) Fifth Anti-Money Laundering Directive, which requires EU member states to establish centralized beneficial ownership registers for companies operating within their borders.

Top five corporate transparency act considerations

Foreign investors looking to invest in the United States should be aware of the following considerations with respect to the CTA.

1. Reporting requirements

The CTA requires reporting companies to file a report with FinCEN that includes information about their beneficial owners. The report must include each owner's:

• Name
• Date of birth
• Address
• A unique identifying number, such as a passport or driver's license number

While the rules will apply to most domestic entities with a few exceptions, the reporting requirements will also apply to foreign companies — subject to limited statutory exceptions — including corporations, limited liability companies, and other entities formed in a foreign country that have registered to do business in the United States.

2. Effective date

The CTA will become effective on Jan. 1, 2024. The regulations mandate that reporting companies formed or registered before Jan. 1, 2024, have one year to file their initial reports, while those formed or registered on or after that date will have 30 days following formation or registration to submit initial reports.

3. Penalties for noncompliance

The CTA provides that any violation of beneficial ownership reporting requirements can lead to significant penalties, including:

• Civil penalties of up to $500 per day that a violation has not been remedied
• Criminal penalties of up to $10,000 and imprisonment of up to two years

Furthermore, the CTA final regulations clarify that a violation can be for direct or indirect acts or omissions.

4. Privacy concerns

Due to privacy concerns, an individual may submit an application for a FinCEN identifier — a unique number issued by FinCEN to individuals and reporting companies — that contains all of the information otherwise required in the initial report about that individual.

An individual who has obtained a FinCEN identifier may provide it to reporting companies, which report only the FinCEN identifier in lieu of the information otherwise required.

5. Impact on foreign investors

The CTA is likely to have a significant impact on foreign investors in the United States, particularly those who use U.S. shell companies to conceal their ownership of assets or investments.

However, the CTA may also provide greater transparency and security for legitimate foreign investments in the United States.