Congress recently passed the Corporate Transparency Act (CTA) requiring private companies to disclose their beneficial owners to the United States Department of the Treasury’s Financial Crime Enforcement Network (FinCEN).
The CTA is designed to ban the anonymous shell companies criminals may use to hide and move corrupt proceeds and other illicit financing. Thus, the CTA gives FinCEN significant authority to adopt necessary regulations in an effort to thwart money laundering.
The CTA requires domestic companies to file a report that provides the name, date of birth, current address and unique identification number (from a passport or driver’s license, for example) of the company’s beneficial owner(s), which includes a yearly update requirement to reflect any changes.
While there are several exemptions allowing some companies and financial institutions to avoid reporting, typically exempt organizations using holding companies or special purpose entities will likely still be required to report. The CTA will also affect closely held companies, private wealth entities and any other document that is created by the filing of a public document with the secretary of state or similar office.
Reporting violations under the CTA carry hefty fines with civil penalties of up to $500 every day the violation continues, and criminal fines up to $10,000 and/or imprisonment for up to two years. It’s unclear if these fines may be combined with other regulatory penalties, but there is no provision precluding the combination.
Under the CTA, a “beneficial owner” is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise:
- Exercises substantial control over an entity; or
- Owns or controls at least 25% of the ownership interests in an entity.
The CTA contemplates different timing requirements for compliance based on the stage of entity formation and changes in beneficial ownership. The timing requirements are as follows:
- Entities formed after the FinCEN regulations are effective must file this information at the time of formation or registration;
- Entities existing before the date the regulations are effective must report this information, in a timely manner, and not later than two years after the effective date of the regulations; and
- A reporting company must update the information provided to FinCEN upon a change in beneficial ownership.
If you’re a financial institution, the CTA reporting requirements will sound nearly identical to the Customer Due Diligence Rule (CDD) issued by FinCEN in 2016. The CDD imposed obligations on certain financial institutions to obtain beneficial ownership information for particular types of customers as part of an institution’s AML program. It’s important to note that the CTA will not allow FinCEN to repeal financial institutions’ requirements to identify and verify beneficial owners of legal entity customers under the CDD.
The CTA will impose new regulatory reporting requirements on many entities operating in the U.S., including those that may typically be exempt based on an initial reading of the act. Assuming exemption is a corporate risk that should be weighed, especially if the organization in question uses holding companies and/or special purpose entities to conduct its business. Conducting a CTA reporting review is a new requirement that should be included in yearly compliance audits and evaluations.