Four Takeaways from First Final CTA Rule 

The final rule embodies and advances the spirit of the CTA in several key areas 

 

1. The final rule casts a wide net when it comes to the kinds of legal entities that will be required to report their beneficial ownership information to the federal government. 

Perhaps the single most consequential piece of the rule is its scope—what kinds of legal entities will be required to report their beneficial ownership information?

In Transparency International U.S.’s written comment on the implementation of the CTA, we encouraged the Treasury Department to broadly define the key phrase “other similar entity” to ensure that the rule adequately covered the corruption threats and other problems posed by anonymous shell companies.

To reach this interpretation, the rule ultimately grounds this definition in how an entity is created—that is, by the filing of a document with a Secretary of State or any similar office—and refrains from limiting the law’s scope to a finite list of specific types or kinds of entities. In doing so, the rule provides appropriate flexibility and applicability, as determined by state practice. For example, if a state requires that certain non-CTA-exempted trusts be formed by the filing of a document with its secretary of state, then those trusts will be considered covered entities and will be required to report their beneficial ownership information.

 2. The final rule also broadly defines who all are properly considered the “beneficial owners” of a legal entity. 

Under the CTA, a covered entity is required to provide four pieces of information for each beneficial owner of an entity—the name, date of birth, current address, and unique identification number (for example, a passport or driver’s license number). But the scope of who all would be properly considered a “beneficial owner” of an entity still required some interpretation and clarification. In particular, the CTA states that a beneficial owner is someone who “exercises substantial control” over the entity, necessitating that Treasury further define the concept of “substantial control.”

Importantly, when considering the scope of “substantial control,” Treasury’s call for comments entertained the potential interpretation that no entity could have more than one beneficial owner who is considered in “substantial control” of the entity.

Fortunately, the final rule rejects this approach, and instead outlines a non-exhaustive list of those types of people who will be considered to exercise such substantial control. This includes, but is not limited to, anyone:

• who serves as a senior officer of the entity;
• with authority over the appointment or removal of any senior officer or a majority of the board of directors of an entity;
• who directs, determines, or has substantial influence over “important decisions” made by the entity—including, but not limited to, major expenditures or investments; the geographic focus of the entity; decisions regarding the nature, scope, and attributes of the business; compensation schemes; and the entry into (or termination) of significant contracts; and
• who has “any other form of substantial control” over the entity.

Such an inclusive rule casts an appropriately wide net, and will ensure that the beneficial ownership information of key decisionmakers is properly reported.

  3. The final rule requires covered entities to file their beneficial ownership information in a truly “timely” matter. 

The CTA states that a newly formed or newly registered covered entity must report its beneficial ownership information “at the time of formation or registration.” It also states that in the event of any change in an entity’s beneficial ownership information, updated information must be reported “in a timely manner, and not later than one year after the date on which there is a change.”

When it came to the specific meaning of both of these key phrases—”at the time of” and “in a timely matter”—our written comment encouraged Treasury to look to the beneficial ownership directories in France and Luxembourg, which require covered entities to update their information within 30 days of any changes.

The final rule adopts this approach, specifying that:

• covered entities will have 30 days from their creation or registration to file an initial report;
• covered entities that experience changes in their beneficial ownership will have 30 days to file an updated report;
• exempted entities, if and when they no longer meet the criteria for any exemption, will have 30 days to file a report; and
• covered entities that later qualify for an exemption will be required to file an updated report within 30 days.

  4. The final rule mostly addresses a notorious loophole in the law.

The text of the CTA contains a key exemption—known as the “subsidiary exemption”—that exempts entities “of which the ownership interests are owned or controlled, directly or indirectly, by 1 or more” other specific exempted entities (including certain nonprofit organizations, political organizations, or trusts, among many others).

Our written comment strongly encouraged the Treasury Department to limit this exemption to only those entities of which the ownership interests are wholly owned or wholly controlled by such specific exempted entities. The final rule goes most of the way toward expressly adopting these limitations, exempting: “Any entity whose ownership interests are controlled or wholly owned” by the specific exempted entities, where the term “controlled”—per the rule’s accompanying discussion— “covers the intended concept of control set out in the CTA” and “prevents entities that are only partially owned by exempt entities from shielding all of their ultimate beneficial owners.”

 

For any questions or comments, please contact Scott Greytak, Director of Advocacy, Transparency International U.S. 
sgreytak@transparency.org
+1 202-642-1515
@TransparencyUSA