December 6, 2023
In the landscape of financial regulation, the Corporate Transparency Act (CTA), which became law as part of the National Defense Authorization Act (NDAA), marks a significant shift in the United States’ approach to anti-money laundering and countering the financing of terrorism. Administered by the Financial Crimes Enforcement Network (FinCEN), this legislation targets the anonymity of shell companies and tightens the screws on illegal financial activities.
A crucial point of concern is awareness among business owners, particularly those who serve as their own registered agents. These individuals may not receive the necessary notifications and might be unaware of the new reporting obligations.
Purpose of the Corporate Transparency Act
The primary aim of the CTA is to prevent malign actors from using the cloak of corporate structures to facilitate various illegal enterprises such as money laundering, financing terrorism, and other illicit activities. By requiring corporations, limited liability companies (LLCs), and similar entities to file information about their beneficial owners with FinCEN, the act provides law enforcement with critical tools to track the ownership and control of these entities.
How It Impacts Businesses
The CTA impacts an array of businesses, specifically those falling under the "reporting company" umbrella as defined by the legislation. It mandates that these companies disclose information about the individuals who are the beneficial owners – the people who ultimately own or control the company, and those involved in filing the report. This information includes:
- Full legal names
- Dates of birth
- Residential or business street addresses
- Identification numbers from a passport, driver’s license, or other government-issued documents
Exemptions
Notably, there are exemptions. Entities such as publicly traded companies, banks, credit unions, and other entities already regulated by specific federal or state agencies, among others, are exempt because they typically already have to provide this information under other regulatory requirements. Additionally, large companies that employ 20 or more full-time employees, have a physical location within the United States, and net more than $5,000,000 in gross receipts or sales fall under the exempt status. Tax-exempt entities are also exempt.
What Businesses Need to Do
For businesses that fall under the scope of the CTA:
- Identify Beneficial Owners: Companies need to ascertain who qualifies as a beneficial owner under the CTA's definition of individuals with substantial control.
- Identify Company Applicants: An often-overlooked aspect of the CTA is the requirement to identify "company applicants," which refers to the individuals who directed the formation of the entity and who physically filed the formation documents with the state.
- File a Report: They must then file a Beneficial Ownership Information Report (BOIR) with FinCEN containing the required personal information of each person identified.
- Update Information: If there are changes in beneficial ownership, companies have a duty to update this information in a timely manner.
- Develop Compliance Programs: Companies should develop internal compliance programs to ensure they meet the CTA's requirements, which might involve regular audits and employee training.
Compliance Dates
Beginning on January 1, 2024 “reporting companies” will be required to file a BOIR with FinCEN.
The current rule stipulates that this filing must occur within 30 days of receiving notice of the entity's registration or formation. Although not enacted at the time of this writing, it's worth noting that there is a proposed amendment to extend this deadline to 90 days.
For existing companies that have already been formed, after January 1st, you have one year to then file your BOIR report with FinCEN.
Penalties for Non-Compliance
Non-compliance with the CTA can result in significant penalties. Civil penalties can amount to $500 per day for ongoing failures to report accurate information, and criminal penalties may involve fines of up to $10,000 and/or imprisonment for up to two years.
Preparing for the Corporate Transparency Act
Businesses should take several steps to prepare for the implementation of the CTA:
- Stay Informed: Keep abreast of the developments regarding the CTA's implementing regulations and guidance from FinCEN.
- Assess Impact: Evaluate whether your business falls under the reporting requirements and to what extent.
- Gather Information: Start gathering the necessary beneficial owner information if you have not done so already.
- Consult Experts: Engage with legal counsel or compliance consultants to better understand your obligations.
- Implement Systems: Consider setting up or updating internal systems to collect, process, and report the required information efficiently and securely.
The Corporate Transparency Act is a major development in the U.S. regulatory regime aimed at curtailing the misuse of corporate structures for illicit activities. It represents a significant move towards greater corporate transparency and imposes new reporting requirements on businesses. As the implementation phase nears, businesses must take proactive steps to ensure compliance and avoid the severe penalties that come with non-compliance.