Navigating the Corporate Transparency Act (CTA): A Comprehensive Guide for Businesses in 2024

Too-long-didn’t-read Summary of Article: Starting in 2024, in a purported effort to curb money laundering, virtually all small business owners will be required to submit a report to the U.S. government that lists all persons who have significant ownership or control over their business. After 2024, all new entities will have 90 days to submit the report; all entities that existed before January 1, 2024 will have until January 1, 2025 to submit the report. Penalties are steep for not reporting or reporting late.

Introduction

Beginning January 1, 2024, the Corporate Transparency Act (CTA) will significantly alter the U.S. anti-money laundering/countering the financing of terrorism (AML/CFT) compliance framework. This act requires most entities formed or registered to do business in the United States to disclose detailed information about their owners, officers, and people with control or influence over the business (all of which are defined within the statute as “beneficial owners”) to the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). This landmark legislation aims to enhance transparency and combat illicit activities facilitated through corporate structures.

Overview of the CTA

The CTA represents the most substantial revision to the U.S. AML/CFT compliance framework in over two decades. It broadens the scope of beneficial ownership disclosure requirements, impacting a wide range of U.S. businesses and foreign entities with U.S. business interests. The act received bipartisan support and introduces stringent penalties for noncompliance, including fines and imprisonment.

Disclosure Requirements

  • Who Must Report: Corporations, LLCs, and similar entities created by filing a document with a state secretary or similar office in the U.S. are required to report. Notably, trusts are typically not covered by the rule, as they are usually created by an agreement rather than a state filing.

  • Exemptions: There are 23 exemptions, including publicly traded companies and nonprofits. (You can read the entire list of exemptions at 31 C.F.R. § 1010.380(c)(2).)

  • Reporting Details: Reporting entities must provide legal names, addresses, formation jurisdictions, Taxpayer Identification Numbers (TINs), and information about beneficial owners and company applicants.

  • Beneficial Ownership: Individuals with substantial control or owning at least 25% of a company's interests are deemed beneficial owners.

Implementation Challenges

The CTA’s implementation is marked by uncertainties and ambiguities, particularly regarding the operation and enforcement of the new law. FinCEN is not prepared to provide access to the reporting database until January 1, 2024, raising concerns about the readiness of affected entities to comply with these complex rules. (In other words, the statute goes into effect in a few weeks, but they don’t even have a mechanism for submitting reports complete.)

Compliance Considerations

Entities impacted by the CTA should consider the following to ensure compliance:

  • Develop a CTA Compliance Policy: Establish an organization-wide policy documenting compliance decisions, designating responsible individuals, and discussing monitoring of changes to beneficial ownership.

  • Maximize Reporting Efficiencies: Consider corporate reorganization to leverage CTA exemptions and streamline reporting.

  • Inventory Existing Entities: Larger organizations should inventory and gather required information for all affiliated entities formed before January 1, 2024, to meet the January 1, 2025, reporting deadline.

  • Adopt FinCEN Identifiers: Encourage or require CTA reportable beneficial owners to obtain and use FinCEN IDs for streamlined reporting and risk mitigation.

Reporting Timelines

  • Initial Reporting: Entities formed after January 1, 2024, have 90 days to file their initial reports in 2024. For entities formed before this date, the deadline for initial filing is January 1, 2025.

  • Updates and Corrections: Reporting Companies must report any changes within 30 days. Corrections to inaccuracies must be filed within 30 days after becoming aware of the inaccuracy.

Exemptions Explained

  • Large Operating Companies: Entities with over 20 full-time employees in the U.S., a physical office in the U.S., and more than $5 million in gross receipts or sales are exempt.

  • Public Company Exemption: U.S. public companies and their wholly-owned subsidiaries are exempt.

  • Pooled Investment Vehicle Exemption: Investment vehicles operated or advised by exempt entities, such as banks or credit unions, are exempt.

  • Tax-Exempt Entity Exemption: Entities with tax exemption under specific sections of the Internal Revenue Code are exempt.

  • Inactive Entity Exemption: Entities not engaged in active business and meeting specific criteria are exempt.

  • Subsidiary Exemption: Subsidiaries controlled or wholly owned by exempt entities are generally exempt.

Liability for Non-Compliance

Violations of the CTA can result in civil penalties of $500 per day and criminal penalties, including imprisonment. Willful violations, including providing false information or failing to report complete information, are subject to stringent penalties. It’s crucial for individuals involved in the filing process to be aware of their responsibilities and potential liabilities.

Access to the CTA Database

FinCEN’s proposed access rule to the CTA database is highly restrictive, primarily limited to U.S. federal agencies engaged in national security,

intelligence, or law enforcement activities. The proposed rule also includes provisions for limited access by financial institutions, subject to specific conditions and the consent of the Reporting Company.

Final Thoughts

The CTA introduces significant changes to the corporate transparency landscape in the United States. With stringent reporting requirements and severe penalties for non-compliance, it is imperative for affected entities to understand their obligations under the CTA and take proactive steps to ensure compliance. The act’s focus on transparency and the fight against illicit activities through corporate structures necessitates a thorough understanding and adaptation by businesses to align with these new requirements.

 

Zachariah Parry