The Corporate Transparency Act “CTA” was enacted as part of the Anti-Money Laundering Act of 2020 in the National Defense Authorization Act for Fiscal Year 2021. The law is designed to help combat money laundering, terrorist financing, and other illicit activities by requiring certain companies to report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN).
Reporting Company
A “reporting company” under the CTA is defined as a corporation, limited liability company, or other similar entity that is created by the filing of a document with a secretary of state or similar office under the laws of a state or Indian tribe, or that is formed under the laws of a foreign country and registered to do business in the United States. Reporting companies must submit a report to FinCEN that includes the name, date of birth, address, and unique identifying number (such as a driver’s license or passport number) of each of their beneficial owners. There are exemptions for types of business such as insurance companies, investment brokers, and accounting firms as these entities are already required to report ownership and ownership changes. Large entities are also exempt.
Beneficial Owner
A “beneficial owner” is defined as any individual who directly or indirectly owns 25% or more of the equity interests of a reporting company, or who exercises substantial control over the company. If a beneficial owner is itself an entity, the reporting company must provide information about the individual(s) who own or control that entity.
Company Applicant
A “company applicant” is defined as an individual who directly files the document that creates a domestic reporting company or the individual who directly files the document that first registers a foreign reporting company. Additionally, if more than one individual is involved in the filing of the document, the company applicant is the individual who is primarily responsible for directing or controlling such filing.
The CTA requires reporting companies to provide information about their company applicants to FinCEN. This is because the company applicant is often the individual who is responsible for the formation or registration of the reporting company, and therefore may have information about the beneficial owners that is not readily available to the reporting company itself.
However, the final rule of the CTA has expanded to exempt reporting companies created or registered before the effective date of the regulation from reporting information about their company applicants. This is because identifying company applicants and obtaining their information can be a substantial and unique burden for companies that have been in existence for some time, particularly if the company applicant is associated with a corporate formation service provider.
Reporting Requirements
The CTA also requires reporting companies to update their beneficial ownership information within 30 days of any change. Failure to comply with these requirements can result in civil and criminal penalties.
According to the proposed 31 CFR 1010.380(b)(1)(ii), reporting companies are required to identify each beneficial owner of the reporting company and each company applicant by: full legal name, date of birth, current residential or business street address, and unique identifying number from an acceptable identification document, and to provide an image of the identifying document.
Some commenters have raised concerns about the burden that these requirements may place on small businesses, particularly those that do not have ongoing relationships with their company applicants. However, FinCEN has stated that the reporting company is ultimately responsible for both making the filing and ensuring that it is true, correct, and complete.
The CTA is part of a broader effort to enhance beneficial ownership transparency both in the United States and internationally. The United States G-8 Action Plan for Transparency of Company Ownership and Control, for example, called for increased transparency in beneficial ownership information, and the CTA is seen as a step toward fulfilling that goal.
In conclusion, the Corporate Transparency Act represents an important tool in the fight against money laundering and terrorist financing. While there may be some challenges associated with compliance, it is important for reporting companies to understand and fulfill their obligations under the law in order to help protect the U.S. financial system from illicit use. More information will come in the following months.
[1]This article was written by chat.openai.com and was edited for accuracy by Daniel J. Rohr, CPA/PFS, EA, M.S. Tax.