The recently enacted Corporate Transparency Act (CTA) is set to reshape the landscape of business practices. This legislative milestone signals a significant shift toward greater transparency. According to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, the CTA is designed “to help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity, while minimizing the burden on entities doing business in the United States.”
The purpose of the CTA is to address the longstanding issue of anonymous ownership within companies, which has historically allowed those companies to engage in the activities described above with relative ease. At its core, the CTA requires reporting companies, as that term is defined herein, to disclose beneficial ownership information to FinCEN unless otherwise expressly exempt.
The critical questions that businesses and companies need to ask are: (1) does the CTA apply to me? And if so, (2) what steps do I need to take in order to be compliant with the new requirements?
Key Provisions of the Corporate Transparency Act
Beneficial Ownership Reporting
Under the CTA, companies are now obligated to report information about their beneficial owners to FinCEN. What is defined as “Beneficial Ownership”? The CTA defines a beneficial owner as an individual who exercises substantial control over a company or controls at least 25% of the ownership interests in the company.
The information regarding a beneficial owner that the CTA requires to be disclosed includes details such as names, addresses, and other identifying information, including a unique identifying number from a list of approved documents (i.e. current passport or driver’s license) along with a copy of said document. By shedding light on the individuals who exert significant control over a company, the CTA aims to prevent the misuse of corporate structures for illicit purposes.
Enhanced Corporate Accountability
The Act enhances corporate accountability by requiring regular updates to the reported beneficial ownership information. This ensures that the information remains accurate and up to date, reflecting any changes in ownership or control over time.
Increased Scrutiny on High-Risk Activities
The collected data will not only assist law enforcement agencies in combating financial crimes but will also enable companies to conduct more thorough due diligence when entering into joint ventures, partnerships, or transactions. This heightened scrutiny is expected to reduce the risk of unwittingly engaging with entities involved in illegal activities.
Penalties for Non-Compliance
Failure to comply with the reporting requirements of the CTA can result in substantial penalties, including fines and imprisonment for individuals who knowingly provide false information or intentionally failing to report accurate and complete beneficial ownership information to FinCEN.
Does the CTA Apply to Me?
The Corporate Transparency Act applies to “reporting companies,” which is defined as corporations, limited liability companies, and similar entities that are created or registered to do business in the United States. Certain companies are exempt, including large companies (those with more than 20 full-time employees within the United States, a place of business physically located in the United States, and more than $5 million in gross sales reported on the company’s federal tax returns), certain financial institutions, tax-exempt entities, inactive entities, and governmental authorities or public utilities.
The CTA provides for a phased implementation with varying deadlines for compliance based on the date of formation of the company required to report. Companies formed prior to January 1, 2024, will have until January 1, 2025, to report their beneficial owner information. Beginning on January 1, 2024, companies formed on that date and beyond will have 90 days from the date of formation to report their beneficial owner information.
The Corporate Transparency Act reflects a paradigm shift in corporate transparency and regulatory efforts to combat financial crimes and illicit business activities. As companies adapt, it is crucial for them to stay informed about evolving guidelines and ensure compliance with the CTA to avoid legal repercussions for failure to comply with disclosure and reporting requirements. Companies may have to make changes to corporate governance practices, documentation processes and procedures, and communications strategies.
It’s imperative that companies determine if the CTA applies to them, and if so, identify the steps needed to comply with the new reporting requirements. The attorneys at Boatman Ricci, P.A. stand ready to assist businesses and companies with navigating this new regulatory landscape.
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