Preparing for the US Corporate Transparency Act

October 2023 | FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

October 2023 Issue

After a long and storied journey, the process for reporting beneficial ownership in the US is finally changing. On 1 January 2024, the final rules of the Corporate Transparency Act (CTA) will come into place, allowing the US to create the first robust and comprehensive database of beneficial ownership information.

Aimed at preventing corrupt business practices, such as money laundering and the financing of terrorism, it will provide essential information to law enforcement agencies. These rules will affect a huge volume of entities. Businesses need to start preparations to ensure compliance for their beneficial owners.

The CTA and reporting requirements aim to combat money laundering, tax fraud and other corrupt activities which use corporate structures to obfuscate perpetrators’ identities.

The final rules coming into effect will complete a multi-year process of development. On 1 January 2021, Congress enacted the CTA as part of the Anti-Money Laundering Act of 2020. Subsequently, on 30 September 2022, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) finalised the reporting requirements to implement the CTA and published guidance on the final regulation. The rules will become effective on 1 January 2024 for new companies and 1 January 2025 for existing companies.

Once the rules come into effect, FinCEN will, via an information collection and management system, be able to track the beneficial owners of business entities. The data collected from every ‘reporting company’ – which covers any domestic or foreign corporation, limited liability company or other entity created or registered to do business by the filing of a document with a secretary of state or similar office under the laws of any state – will have to submit a disclosure report to FinCEN.

“While the CTA is aimed at curbing money laundering, terrorist financing and other financial crimes, its broad regulations will have a sweeping impact on many companies doing business in the US.”

The disclosure reports must include the full legal name of the reporting company, its trading name if any, a complete current address, the state, tribal or foreign jurisdiction of formation or registration, and its IRS Taxpayer Identification Number (TIN) and Employer Identification Number (EIN).

Disclosure reports must also include, for each beneficial owner of a reporting company, their full legal name, date of birth and current residential address, an identification number such as a non-expired ID, driver’s licence or passport number, and an image of the corresponding identifying document.

While there are exemptions to the rules, including SEC-reporting companies, regulated financial services companies such as banks and credit unions, insurance companies and tax-exempt entities, among others, it is imperative that covered companies adequately prepare for CTA implementation.

Failure to comply may result in both civil and criminal penalties. An individual or entity that fails to provide the required information will be liable for a civil penalty of up to $500 for each day a violation continues. Criminal violations may result in a fine up to $10,000 and imprisonment up to two years. Individuals could face criminal liability under the federal criminal code, which prohibits knowingly and wilfully providing false information or concealing a material fact to any of the three branches of the federal government.

Consequently, it would be prudent for companies to conduct a thorough review of their corporate structures to identify beneficial owners, be it shareholders, directors and officers (D&Os), members or managers. Compiling an accurate and complete register of beneficial owners now will hold companies in good stead for CTA compliance.

A compliance programme should include policies and procedures for identifying and verifying beneficial owners, maintaining the beneficial ownership register, reporting beneficial ownership information to FinCEN, and safeguarding the beneficial owners’ personal information collected by the company.

For smaller firms, the risks posed by the CTA could be significant. Smaller firms are less likely to be compliant with the Act’s stringent reporting requirements, such as filing annual reports, taking votes of stockholders and directors, and maintaining corporate books on transfer of ownership. Without external professional help and advice, business owners may inadvertently find themselves in breach of the CTA.

While the CTA is aimed at curbing money laundering, terrorist financing and other financial crimes, its broad regulations will have a sweeping impact on many companies doing business in the US.

Changes are being reflected at state level, too. For example, in June the New York State legislature approved the LLC Transparency Act which, if enacted, will require all limited liability companies formed or registered to do business in New York to disclose the name, date of birth, business street address and a unique identifying number of all beneficial owners. The New York law draws upon the CTA definitions of entities that will be exempt from reporting and what constitutes a ‘beneficial owner’. If a limited liability company is already subject to reporting under the CTA, it can submit a copy of its federal disclosure statement to New York’s Department of State instead of making a separate disclosure.

The CTA brings a notable shift in US corporate law. Companies should start preparing for its implementation as soon as possible to ensure their house is in order ready for compliance. Acting now will reduce operational interruption and transactional delays once the reporting requirements go into effect.

Richard Summerfield