[Vagmi is a student at Gujarat National Law University.]
Beneficial Owners under CTA: Cracking Open the Corporate Piñata
About CTA
On 1 January 2021, the Congress passed the Corporate Transparency Act (CTA), which aims to combat illicit activities such as terrorism financing, money laundering, and other forms of criminal exploitation within the United States. In 2020, Congress passed the National Defense Authorization Act for Fiscal Year 2021, which included the Corporate Transparency Act. A reporting company must provide key pieces of identifying information about itself, its beneficial owners and members with substantial control, and, only in the case of entities created after 1 January 2024, the applicants that submitted the incorporation filing of the reporting company (company applicants). The US Treasury Department's Financial Crimes Enforcement Network (FinCEN) oversees the enforcement of these provisions. This information shall be submitted to FinCEN through Beneficial Ownership Information Reports on FinCEN’s BOI E-Filing System.
CTA currently faces challenges regarding its constitutionality and potential implications for privacy rights. Following the Federal Court's ruling, FinCEN stated its intention to adhere to the court's decision and refrain from enforcing the beneficial ownership requirements of the CTA against the plaintiffs. However, FinCEN's lack of mention of other parties suggests that all other entities are still expected to comply with the CTA. Hence, it has been appealed further.
Beneficial owners under CTA
This regulation defines a “beneficial owner” as someone who falls into either one of two sets: (1) having controlling influence over the reporting entity directly or indirectly, and (2) owning or controlling at least 25% of the total ownership interests in that company. Under this definition, anyone who has substantial control over a reporting company either directly or indirectly, or owns or controls at least 25% of the ownership interests in a reporting company is seen as a beneficial owner under CTA. For disclosure purposes, the rules on beneficial ownership require an individual’s identity to be revealed if they are involved in producing the information on this topic. Also, they define “substantial control” and “ownership interest” and clearly set out how to determine whether an individual controls or owns/controls at least 25 percent ownership interests in the firm.
Terms as per the definition are discussed below.
Direct or indirect control
Control can be direct or indirect through: (a) board roles; (b) holding most voting power; (c) financial interests; (d) dominance over intermediary entities; (e) ties with nominee entities; (f) any other contractual or relational means, further broadening the CTA.
Ownership interest
"Ownership interest" includes: (a) equity, stock, or similar instruments; joint venture or business trust interests; (b) profit stakes; (c) convertible instruments or related rights; (d) buy or sell options; (e) other ownership-defining contracts.
Direct or indirect ownership
Ownership can be direct or indirect via: (a) co-ownership; (b) nominees or agents; (c) trust roles; (d) control over intermediary entities
Concerns with the definitions
There are still some ambiguities in those definitions. In its definition of “beneficial owner”, CTA uses terms such as “significant influence,” “substantial control,” and “ownership interest,” which are subjective notions that could be interpreted differently.
The definitions of each term include phrases such as "other significant" or "any other contract," which expand the group of people who qualify for the status of beneficial owner. This lack of precision makes it difficult to ascertain the number of individuals covered by these terms specifically, thus leaving a lot of ambiguity and potentially increasing the quantity within this category.
CTA’s standard for “substantial control” includes not only typical senior positions but also those who might have an impact on major decisions or have “any other substantial control.” It expands its scope considerably and is open to a variety of interpretations hence potentially capturing more individuals than it should.
According to CTA, ability to exercise control either directly or indirectly is broad. In addition, the words “any other” used in relation to board membership, voting power, and contractual arrangements serve further to extend this definition thus making it more inclusive yet less precise.
Although some clarity comes from the fact that minors, nominees or mere employees (among others) do not fall under beneficial ownership according to CTA, generally speaking, these definitions are still very broad and vague.
Indian Laws on Beneficial Owner: Unraveling the Maze
In the case of Indian laws, the term “beneficial owner” lacks uniformity in interpretation since there are different regimes portraying and defining it differently. Although the government issued an updated version of FDI regulations effective from 15 October 2020, the determination of the term “beneficial owner” is yet not clarified.
The Companies Act 2013
The Companies Act 2013 (Companies Act), supplemented by the Companies (Significant Beneficial Owners) Rules 2018 (SBO Rules), defines “significant beneficial owners” as individuals possessing specific rights or entitlements in a company. These rights include:
(a) holding at least 10% of shares or voting rights;
(b) entitlement to a minimum of 10% of distributable dividends; or
(c) exercising significant influence or control over the company.
The term “control” in the last right, includes various factors such as the ability to appoint directors or influence management decisions. While the term “significant Influence” is defined as the power to participate directly or indirectly in financial and operative decisions of the company, the same does not include control of those policies. This term is open to interpretation since neither the regulators clarified nor has the court’s interpretation has been helpful in reaching a consensus.
The mentioned entities, such as the Indian government, SEBI-registered investment vehicles (like mutual funds, real estate investment trusts, etc.), and those regulated by RBI and other regulatory authorities, are considered exempt from these rules. The reason behind this exception is that these entities are already heavily regulated and supervised by their respective regulatory bodies. Therefore, the SBO Rules do not apply to them to avoid redundant reporting and regulation.
The Prevention of Money-laundering Act 2002 (PMLA)
Under PMLA, beneficial owners is defined in the context of financial transactions with reporting entities. “Beneficial owners” are individuals who ultimately own or control entities engaged in financial activities. Control is broadly defined, including rights relating to shareholding or management agreements. The law established tests for identifying beneficial owners across different entity types, including companies, partnerships, trusts, and listed entities. These tests focus on ownership thresholds and ultimate control over entities, ensuring comprehensive identification of beneficial owners.
Regulatory bodies such as the Reserve Bank of India and the Securities and Exchange Board of India (SEBI) mandate compliance with beneficial ownership disclosure requirements. SEBI requires at the time of opening securities accounts. Under the applicable guidelines, a beneficial owner is a natural person(s) who ultimately owns, controls or influences a client and/or persons on whose behalf a transaction is being conducted; such beneficial owner could also include those persons who exercise ultimate effective control over a legal person or arrangement.
Beneficial Owner’s Conundrum: A Comparative Lens
To address opacity in corporate structures used for illicit activities, the CTA introduces new concepts as well as compliance standards that require beneficial ownership disclosure. This however raises concerns over privacy right and intrusive data collection; broad definition of beneficial owners leading to ambiguity and possible legal problems. Therefore, proper evaluation of the impact of CTA on corporate governance and regulatory compliance is necessary.
Indian laws relating to beneficial ownership are inconsistent with different statutes prescribing differing tests. For instance, the PMLA and the Companies Act both have subjective definitions of “control” but they differ in terms of thresholds for ownership, as the PMLA requires 25% for “controlling ownership interest,” whilst SBO Rules have 10% for “significant beneficial ownership”. Additionally, control being subjective coupled with lack clear guidelines creates room for interpretation resulting into case-by-case determinations.
This simplifies identification of individual beneficial owners through having an objective threshold of 25%. On the other hand, India’s subjective nature tests regarding control might significantly increase number of cases that would necessitate regulatory approvals under the FDI regulations.
In juxtaposition to Indian corporate legislation, such as the Companies Act and the PMLA, the CTA presents both parallels and deviations. The difference may lie in the method used to assess who is a beneficial owner as per Indian laws. Measures taken include ownership levels, dividend rights and intervention authority while under the CTA, it is more extensive as it also covers individuals having substantial control relationships.
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