Previously, in many US states, companies that registered to do business often didn’t have to provide information about the individuals who actually owned or controlled them. Unfortunately, this led to many incidents where criminals created illegitimate companies to launder money, evade taxes, or commit other illegal acts. And law enforcement had trouble tracking the people responsible, because criminals would be acting in the names of those illegitimate companies instead of in their own names.
With the passing of the Corporate Transparency Act at the beginning of 2021, all of that will soon change. Starting in January 2024, all businesses registered to operate in the US (with some exceptions) must provide identifying information about themselves, their beneficial owners, and their company applicants (in some cases) to the US Financial Crimes Enforcement Network (FinCEN). That way, if a business entity is involved in illegal activity, the crime will now be able to be traced back to the specific individuals in charge of that company.
This article will offer a discussion of the new legislation, including:
We’ll start by defining what the Corporate Transparency Act is, why it was created, and when it takes effect.
The Corporate Transparency Act is a new US law that mandates the Financial Crimes Enforcement Network (FinCEN) to create an information database on direct or indirect beneficial ownership of businesses. All businesses created or operating within the US are required to contribute to this database.
The information in this database will not be publicly available, but it will be available upon request to law enforcement agencies and other federal authorities acting to fulfill international agreements. It will also be available to financial institutions for the purpose of conducting “know your customer” (KYC) and “know your business” (KYB) checks, if they are given consent from the client in question.
The Corporate Transparency Act’s effective date is January 1st, 2024. At that time, any company operating within the US can either file the information required by FinCEN, or cease business operations and become dormant.
The law was originally passed on January 1st of 2021, but doesn’t take effect until January 1, 2024 to give FinCEN time to build the database necessary for storing the information it will collect. FinCEN will also need time to define who will have access to this database, and how they will do so. It may also need to make changes to its customer due diligence rules related to the implementation of the database.
There are also different timelines for when this information is required to be filed. For businesses created before the effective date, they must file their beneficial ownership information with FinCEN no later than January 1st, 2025. Businesses created after the effective date must submit their information to FinCEN no more than 30 days after being registered.
The Corporate Transparency Act’s purpose is to prevent corporations, LLCs, and other business entities from being used to conceal illicit activities. Such activities include money laundering, terrorist financing, human/drug trafficking, piracy, corruption, and securities fraud.
Primarily, the CTA is meant to combat the practice of bad actors establishing “shell corporations” – companies with no active business operations – to hide money or other assets from tax officials and other authorities. These companies have previously made it difficult for US law enforcement to trace illegal activities back to their individual perpetrators. This is because most states don’t require disclosing beneficial ownership information when forming such companies.
Now, however, many companies will be required to provide this information to FinCEN. This makes it more difficult to use business entities to hide criminals and their misdeeds, as FinCEN will know the names of the individuals who own or control companies.
The following is a summary of Corporate Transparency Act regulations in terms of which entities and individuals are subject to them.
All corporations, LLCs, or other business entities registered to do business in a US state or Aboriginal tribe jurisdiction are obligated to participate in Corporate Transparency Act reporting of beneficial owner information. There are some exceptions, which will be covered in a later section.
The CTA defines “beneficial owner” in two ways relative to entities required to report:
The following categories of people don’t count as beneficial owners and don’t have to have their information reported:
Businesses registered after the effective date of January 1st, 2024 must also report information related to company applicants. This means that lawyers, paralegal workers, or anyone else involved in filing the registration paperwork for a company as part of their business must also register their information with FinSEC.
In addition to the categories of people outlined above, the Corporate Transparency Act allows exceptions for 23 categories of businesses. The broadest of these categories is “large operating company”, which is a company that does each of the following:
Most other categories of exempt businesses are already required to disclose beneficial ownership information, as per regulations in their specific industries. They include:
Each business subject to the CTA must submit the following information about itself to FinSEC:
In addition, it must submit the following information about any beneficial owners (and company applicants, if the business is registered after the effective date):
The CTA places limits on how long a company can take to submit reports to FinCEN. In addition, there are steep penalties for individuals who fail to submit accurate reports by the required deadlines, or intentionally provide false information. Furthermore, penalties can be issued to those who acquire information through the CTA, but then share it with unauthorized parties or use it for other unauthorized purposes. We’ll discuss those elements now.
Companies registered before the CTA takes effect on January 1st, 2024, must file their company information and beneficial ownership information with FinCEN within one year (i.e. before January 1st, 2025).
Corporations registered after the CTA effective date must file their company information, beneficial ownership information, and company applicant information no later than 30 days after receiving confirmation of their registration.
In addition, if a company experiences changes to its beneficial ownership information or structure, it must file an updated report with FinCEN within 30 days. It must also file an updated report within 30 days if the business’s nature changes so as to be exempt from the CTA.
Finally, if a company finds an unintentional inaccuracy in a report filed under the CTA, it has 90 days from the original report’s submission date to file a corrected report.
Any company that fails to file a complete and accurate report of its business information, beneficial owner information, and company applicant information (if applicable) by the relevant deadline will be considered non-compliant with the CTA. Likewise, a company that deliberately falsifies any of this information in a report will also be considered non-compliant.
In addition, information collected by FinCEN under the CTA is meant to be used only by US law enforcement officials, federal agencies acting in accordance with international agreements, and financial institutions for KYC/KYB. Distributing or using any information acquired through the CTA for any other purpose also constitutes non-compliance.
Failure to comply with the CTA can result in civil penalties of up to $500 for each day a business remains non-compliant, up to a maximum of $10,000. Furthermore, individuals responsible for (or who benefit from) non-compliance, including filing false reports or misusing information gained through them, can face prison sentences of up to three years.
The Corporate Transparency Act is a bold step forward in limiting the ways criminals can use businesses to hide illicit dealings and assets. But it’s also going to impose new compliance requirements that will likely impact small businesses the most. So we suggest using tools like Middesk’s entity management system to prepare well in advance for filing your report. Talk to our sales team to find out how you can get started.