House OKs Beneficial OwnershipOctober 30, 2019
On Oct. 22, the U.S. House of Representatives passed legislation which would require nearly every small-business owner to file new reports and register significant personal identifying information with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) detailing all “beneficial owners” of the company. The Corporate Transparency Act (H.R. 2513) was approved by a vote of 249-173. Even though the bill passed, only 25 Republicans voted for it while 5 Democrats voted in opposition.
NSBA has been strongly opposed to the legislation due to its targeting of small businesses, and has been active in grassroots efforts and beyond. During committee-level votes, Republicans were much more supportive of the bill than they appeared to be during the floor vote–likely due to NSBA members’ activism as well as the efforts of a coalition of which NSBA is a member.
H.R. 2513, or “CTA” would require corporate entities to disclose the identities of beneficial owners to FinCEN, making it harder for bad actors to hide assets through a series of limited liability companies (LLCs). The bill would apply to:
- Existing businesses within 2 years of enactment of the CTA;
- New businesses at incorporation following enactment of the CTA;
- Every business annually and within 60 days of any change in beneficial ownership.
Additionally, the COUNTER Act of 2019 (H.R. 2514), which was approved in a May markup, was merged with the CTA, and would update the framework used by federal investigators to combat money laundering.
Under the overall legislation, millions of small businesses would be required to register with FinCEN, upon incorporation, and file annual reports with FinCEN for the life of the business. Failure to comply with these reporting requirements would be a federal crime with civil penalties of up to $10,000 and criminal penalties of up to 3 years in prison.
Moving forward, efforts are focused on the ILLICIT CASH Act ( S. 2563) in the Senate which is substantially similar to CTA. This bill now has eight cosponsors and is gaining momentum.
NSBA opposes the ILLICIT CASH Act ( S. 1889), and has created an Action Alert for members to also weigh-in with their lawmakers. Click here for that alert.
>>Continued from Weekly Advocate
While this and other related bills are aimed at stemming money laundering and improving transparency of ownership of all U.S. companies, they would create significant unintended consequences with new burdens and complexity for America’s small businesses.
The CTA would amend the Bank Secrecy Act to require an applicant seeking to form a corporation or limited liability company (LLC) to disclose the “beneficial owners” of the entity. The initial filing and the annual reports must include the full legal name of the beneficial owner, his or her date of birth, residential address or business address, and an identification number from either a passport, identification card or driver’s license.
This represents the potential for a massive breach of privacy. This new legislation, which grants broad access to personal information could be used by federal, state, local, or tribal law enforcement agencies for just about any reason — and without a subpoena.
The legislation imposes a “look-through” reporting requirement, necessitating small-business owners to look through every layer of corporate and LLC affiliates to identify if any individuals associated with such entities are qualifying beneficial owners. Ownership of an entity by one or more other corporations or LLCs is common. Corporate and LLC shareholders would already have their own independent reporting obligation under this bill to disclose any beneficial owners, making this provision excessively burdensome.
Under the bill, the term “beneficial owner” is vague. Though one determination is objective — one owning “25 percent or more of the equity” of the business — the other two definitions are open for interpretation. Specifically, the bill would include as a beneficial owner an individual who “directly or indirectly…exercises substantial control” over of a corporation or LLC, or “receives substantial economic benefits from the assets” of the entity. The definition of “substantial economic benefit” is defined, but insufficiently clear, and is open to later rulemaking by government officials. Further, rulemaking authority would be given to the Department of the Treasury that could potentially expand the requirements for businesses and, in turn, widen the scope of potential criminal liability.
For NSBA, what is most concerning and perplexing about these bills is that they target small businesses by explicitly excluding businesses that have over 20 employees and more than $5 million in gross receipts or sales. The bill would create paperwork burdens for these small businesses that will be required to comply with the mandates of the bill. Failure to comply with this legislation would be a federal crime with civil penalties of up to $1 million and criminal penalties of up to three years in prison.