How Businesses Can Prepare for Compliance with the Corporate Transparency Act

Compliance with the Corporate Transparency Act (CTA), passed by Congress in 2021, goes into effect on January 1, 2024. The CTA contains a new disclosure scheme that will require more than 27,000,000 businesses in the United States to file annual reports with the federal government, specifically with the U.S. Department of Treasury’s Financial Crimes Enforcement Network (known by the dystopian sounding acronym “FinCEN”). The CTA mostly flew under the radar until recently, but now that the effective date is nearly here, businesses need to prepare for their new reporting obligations, and the risk they face if they fail to make annual reports to FinCEN. 

The Corporate Transparency Act
The CTA was enacted as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2021. The Treasury issued the final rule implementing the CTA in September 2022. The CTA represents a significant step in addressing issues related to corporate transparency and preventing the illicit use of anonymous shell companies for illegal activities such as money laundering, terrorism financing, and tax evasion. It does this by requiring corporations, LLC’s, and similar entities in the United States to disclose information about their ownership. The thought being that providing such information to the federal government was needed to protect national interests and enable effective law enforcement. 

Key Features of the Corporate Transparency Act

• Fundamentally, the CTA is a disclosure regulation. The CTA requires certain corporations, limited liability companies (LLCs), and similar entities to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. 

• Domestic reporting companies are corporations, LLC’s, LLPs, or any other entity that was created by the filing of a document with a secretary of state or any similar office under the law of a state of Tribal government.

• Foreign reporting companies are corporations, LLC’s, LLP’s, or any other entity under the law of a foreign country that is registered to do business in any state or Tribal jurisdiction by the filing of a document with the secretary of state or any similar office. 

• Sole proprietors that do not use a single member LLC are not considered a reporting company.

Exemptions
While the CTA’s reach is expansive, several exemptions apply. These include: 

• Recognized non-profit organizations; 

• Publicly traded companies; 

• Certain financial institutions; and 

• Small businesses.

Exempt entities are generally those which have regular reporting obligations under other federal laws.

Disclosure of “beneficial owner”
As noted, the CTA requires reporting organizations to disclose their “beneficial owner”.  A beneficial owner, defined as any person who directly or indirectly, either exercises substantial control over a reporting company or owns and controls at least 25% of the ownership interest in the reporting company. “Ownership” interest here includes either capital or equity ownership in the company. 

Companies covered by the CTA are required to report the names, addresses, dates of birth, and unique identification numbers (such as a driver’s license or passport number) of their beneficial owners to FinCEN.

Access to Beneficial Owner information
CTA’s purpose is to enhance law enforcement efforts in certain areas. To this end, the CTA includes a liberal information sharing provision that allows law enforcement agencies and certain other governmental authorities to have access to the information reported to FinCEN, helping them in investigations related to financial crimes. As of the date of this post, the final regulations are unclear on whether beneficial owners will be made aware their information is being shared. It may also be the case that information may be shared without probable cause being shown. 

Enforcement
Reporting companies must ensure their compliance with the CTA. Failure to make required filings with FinCEN can result in financial penalties that range from $500 to $10,000 per violation, and potential jail time of up to two years. All new entities organized after January 1, 2024, must disclose their beneficial ownership within 30-days of creation. Entities organized before January 1, 2024, must file their disclosures with FinCEN by January 1, 2025. 

Our attorneys can assist your enterprise in understanding and navigating your obligations under the Corporate Transparency Act. Contact us to learn how we can help.