What is the Corporate Transparency Act?

Almost ten years ago, the United States was criticized by the globally recognized Financial Action Task Force for failing to comply with the anti-money laundering standards of collecting beneficial ownership information of corporate entities. See The Corporate Transparency Act, H.R. 2513, 116^th Cong. § 2(6) (2019). Little progress has been made to comply with these standards as the lack of access to adequate, accurate, and current beneficial ownership information is missing in the United States’ efforts to combat money laundering and terrorist finance. The U.S. Government originally left it up to the states and urged them to obtain beneficial ownership information for corporate entities but to no avail. Id. at § 2(7). Now, the Federal government has stepped in and mandates beneficial ownership information to be reported in all fifty states. While there are ways to protect private information from the general public (see here), under a new law,  the government will now have access to all of a corporate entity’s ownership information.

The Corporate Transparency Act (“CTA”) was signed into law in the United States in 2020 and aims to increase transparency and prevent illicit activities within the corporate sector. The CTA will require businesses to disclose beneficial ownership information to the Financial Crimes Enforcement Network of the Department of the Treasury (“FinCEN”) and will go into effect in 2024.

What is Beneficial Ownership Reporting?

Under the CTA, most small to medium-sized corporations, limited liability companies, and similar entities will be required to report beneficial ownership information to FinCEN.  Although, an exception to the law may be available to banks, credit unions, insurance companies, or any company with more than 20 full-time employees, gross receipts or sales of $5,000,000 or more in a single year, including all of the subsidiaries, and has an office within the United States. A full list of exempt businesses can be found at 31 U.S.C. § 5336(a)(11)(B). Beneficial ownership refers to individuals who directly or indirectly own or control a significant percentage of the company. If someone owns 25% or more of the equity in a company or exercises substantial control over the corporation, they will have to report. These individuals must disclose their names, dates of birth, addresses, and unique identification numbers, such as a driver’s license or passport number. Additionally, entities with more complex ownership structures must provide detailed ownership chains of parent and subsidiary companies.

What is the purpose?

The CTA was enacted to address perceived gaps in corporate transparency, which previously allowed illicit actors to exploit anonymous shell companies for their nefarious activities. These activities included money laundering, fraud, corruption, and financing terrorism. By mandating beneficial ownership disclosures, the CTA seeks to establish a more robust system that enables law enforcement agencies and regulatory bodies to effectively investigate and prevent such crimes.

How will information sharing, and privacy considerations be protected?

To balance transparency with privacy concerns, the CTA restricts public access to the disclosed information. While law enforcement agencies, financial institutions, and other entities can access the data for legitimate purposes, public access is limited. Along with restricted public access, federal and state agencies will also have protocols they must follow when trying to obtain this information. . Furthermore, any officer or employee of these agencies and those who receive it will be prohibited from disclosing this information to the public. Agencies of other countries may be entitled to beneficial ownership information if it is requested as part of an investigation by that foreign country. Lastly, financial institutions subject to due diligence requirements may receive the information with your consent. However, as mentioned above, anyone receiving this information will be bound by the same prohibitions on disclosing such information.

What happens when businesses fail to report?

Like tax filings, there are criminal and civil penalties for providing false information on the report or failing to report in general. Persons will be assessed a $500 fee for each day a violation continues and may be fined up to $10,000, imprisoned for up to 2 years, or both. Mistakes do happen, so there is a 90-day safe harbor for you to fix any reports by submitting a report containing the correct information.

Why is this important?

It is important for small to medium-sized entities to be aware of upcoming reporting requirements and file these reports on time to avoid any of the penalties mentioned above. Until now, ownership of small companies has not been burdened by significant regulation, making it easy to form these entities and operate them. Even so, many companies in Texas are forfeited each year for failing to file simple forms on an annual basis.  It is unclear at this time how difficult it will be to comply with this regulation; however, given the steep penalties, it would be beneficial to speak with a corporate attorney in advance, to create a plan for timely filing all necessary paperwork and making sure it is properly updated.