Fanny Evans, Senior Associate, Morgan & Morgan

What is the CTA?

The CTA was enacted on January 1st, 2021 as part of the National Defense Authorization Act to prevent the use of companies to evade anti-money laundering rules or to hide other illegal activities. Under the CTA companies will be required to report information regarding its beneficial owners with a beneficial ownership registry maintained by the United States Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

When is the effective date for the CTA and regulations?

The CTA will become effective on the date that its regulations are prescribed and issued by the Secretary of the United States Treasury, which shall be promulgated within one year after the enactment of the Act- that date being January 2022.

Who must report?

Entities required to report are called “reporting companies” under the CTA. A reporting company is broadly defined under the CTA as a corporation, limited liability company or other similar entity that is created under state law or formed under laws of a foreign jurisdiction and registered to do business in the United States. It is unclear whether a similar entity includes partnerships or trusts, and it is expected that the regulations will provide some clarity in this regard.

Who is exempt from reporting?

The CTA contains the exclusion of categories of entities from the definition of reporting company. An entity that falls into one of these categories will not be required to submit beneficial ownership information to FinCEN. To review the list of the exclusions CLICK HERE.

Who is considered a beneficial owner?

An individual who exercises substantial control over the company or who owns or control at least 25% of the company, and applicants, defined as anyone who files an application to form the company or register a foreign company in the United States. The CTA does not explain what constitutes “substantial control” and it is expected that the regulations will provide some clarity in this regard.

What information on the beneficial owner will be reported?

1. Full legal name,
2. Date of birth,
3. Current residential or business street address, and
4. A unique identification number, which can be from a non-expired US passport, non-expired US or state government ID, non-expired driver’s license, or a valid foreign passport.

Every reporting corporation must file a report within one year of the beneficial ownership information changing. Changes that trigger this report include (i) a change in substantial control of the reporting company, (ii) a change in contact details for a beneficial owner or applicant, and (iii) beneficial ownership exceeding or dropping below 25%.

Who has access to the FinCEN database?

The information collected in the FinCEN database will not be publicly available; but will be available to federal agencies engaged in national security, intelligence, or law enforcement activity, state or local law enforcement if authorized by a court.

Financial institutions may also receive this information with the consent of the reporting company.

What are the deadlines to report?

a)  Any reporting company that is existing at the time regulations are effective must file the report within two years of the effective date of the regulations.

b)  Any reporting company created after the effective date of the regulations must file the report while forming the corporation.

What are the sanctions?

Any person who willfully provides, or attempts to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, or fails to file complete or file accurate reports or fails to provide updated reports will face penalties of up to $10,000 (accruing at $500 per day that the report is outstanding) and/or imprisonment for up to two years.

Disclosing or using beneficial ownership information without authorization is also subject to a $500 per day penalty and a penalty of up to $250,000 and/or 5 years imprisonment.

For more information, we suggest you contact a suitable attorney in the United States.

Disclaimer

The information contained herein should not be interpreted, accepted, construed, or used and is not provided as legal advice and should not be treated as a substitute for legal consultations with a professional. It is merely a summary of the Corporate Transparency Act recently issued in The United States. Please note that the legislation referred to herein may be modified.

Following the introduction in the British Virgin Islands (BVI) of the Economic  Substance (Companies and Limited Partnerships) Act, 2018 (ESA), which became effective on January 1st, 2019, some questioned the sustainability of BVI’s position as a leading international financial centre.

While we cannot underestimate those concerns, we believe that there is also evidence that ESA will not have a negative impact on the BVI. In fact, it will help to curb any irrational fears that may have been detrimental to businesses, families, investors, and professionals using BVI vehicles in the recent times.

Although the economic substance reporting period has not concluded, my recent research supports the premise that despite introduction of this new legislation, BVI’s legal system and corporate services platform will remain stronger than other jurisdictions for international business activity.

You may be asking how can we be so positive? It is because for years we have witnessed the BVI maintain the crucial “philosophy” of a financial centre that is necessary for its success.

This philosophy is composed of human capital, technology, and the ability of regulators to make effective new laws with the support of highly sophisticated service providers. This means that any issues arising from rapidly evolving financial markets or instructions given by the European Union and the OECD in their efforts to enhance tax transparency can be dealt more efficiently. Expertise, talent, and technology are the key driving forces for the world’s leading financial centres.

Over the last decade BVI has had various changes in its legislation that have impacted the financial industry positively such as:(1) maintaining beneficial owner’s due diligence in its territory, (2) the private registry of beneficial owners (BOSS), (3) mandatory filing of company’s register of directors (ROD), (4) maintaining accounting records and underlying documentation and, (5) reporting obligations on ESA just to name a few in no particular order. Some of these changes have been more challenging than others but they all have one thing in common: BVI´s successful “philosophy”.

By reading the ESA and the Rules issued by the International Tax Authority you can tell that the regulator consulted professionals from law firms, trust companies and corporate service providers of the highest caliber with presence in the BVI when drafting the legislation. Whereas, in other jurisdictions it seems that they just decided to play safe and please the requests of the European Union overlooking what their financial industry needs to, not only survive, but grow.

We have reviewed the law and guidance notes on the economic substance of various jurisdictions and concluded that the ESA has provisions that makes it practical and convenient. We will give you three important and clear examples. The first, is the treatment of the companies that serve as holding businesses under the ESA. BVI took a straightforward approach by only placing its interest on the pure equity holding companies which are subject to a reduced substance test that can be met through the company´s registered agent; instead of having different categories of holding businesses as it is in other jurisdictions. This has allowed us at Morgan & Morgan to develop suitable solutions for our clients.

The second example is the treatment of the financial periods. ESA has two financial periods depending if the company was incorporated before or after the implementation date of the ESA. Therefore, just by looking at the incorporation date of the company you can tell its financial period. This method is valuable for a corporate service provider because it may have positive impact in their workload when reporting and advising clients. Furthermore, this approach makes simpler the management of a portfolio of companies for a corporate service provider rather than having the financial period defined by the company´s fiscal year, as it is very likely that will be different for all the companies they represent.

The third example is the reporting period. In some jurisdictions the reporting period is 6 months and in others 9 months; but all jurisdictions have in common that the reporting period is counted from the end of the financial period or fiscal year. Unlike other jurisdictions, in the BVI all companies incorporated before the ESA effective date have the same financial period and therefore the same reporting period. This makes easy to manage the annual reporting obligations for a high volume of companies.

Now, let´s talk about the technical side of ESA. BVI tied the ESA with their Beneficial Ownership Secure Search System Act, 2017 (the “BOSS Act”). Same as in other jurisdictions, annual reporting is mandatory, but it is so easy to do that this should not scare clients away. The BVI government partnered with the same auditing firm that developed the BOSS system to create the system for ESA, called BOSSes. At Morgan & Morgan we developed a similar system that facilitates clients providing us with the information on their companies and also makes it easier for us to report to the competent authority because we both are up to the same level of technology. It is difficult for corporate services providers to convince clients to comply with economic substance legislation in jurisdictions where the reports are to be submitted manually. BVI knows that its stability and future prosperity is inextricably tied to the efficient and safe use of digital technologies.

In June 2020, the BVI Financial Services Commission published its Statistical Bulletin. We were pleased to read that at said date the Registry of Corporate Affairs has the impressive total of 375,832 companies that have placed their confidence in the BVI philosophy. This figure and the past decade show us BVI is very aware that it has a financial sector that is becoming increasingly complex. With a more discerning and savvier clientele, and the competition among financial centres is heating up, the BVI is ready to prevail as one of the world´s premier jurisdictions.

For more information on these topics, please contact:

Fanny Evans

Senior Associate

Morgan & Morgan

[email protected]