The Corporate Transparency Act (CTA) of 2024 represents a significant development in the United States' efforts to combat money laundering, terrorism financing, and other illicit activities facilitated through corporate entities. Enacted with the aim of enhancing corporate transparency and preventing the misuse of anonymous shell companies, the CTA imposes new reporting obligations on certain business entities and introduces some issues that professionals such as attorneys and accountants will need to address with their clients and understand for their own responsibilities. The CTA is broad, and it is important for all affected entities to know what they need to do, how to do it, and the consequences of not doing it. Professionals need to be aware of the responsibilities so they can meet their obligations to their clients. The CTA also provides new avenues to provide services to their clients to help them worry more about growing their business and less about the regulatory landscape.
Key Provisions of the Corporate Transparency Act:
- Definition of Covered Entities: The CTA primarily targets "reporting companies," which are broadly defined as corporations, limited liability companies (LLCs), and similar entities that are formed or registered to do business in the United States. Exempted from this definition are publicly traded companies, certain types of regulated entities, and entities that meet specific ownership and operational criteria indicating low risk for illicit activities.
- Reporting Beneficial Ownership Information: Under the CTA, reporting companies are required to disclose information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. Beneficial owners are individuals who directly or indirectly own or control a significant interest in the reporting company, typically defined as individuals owning 25% or more of the ownership interests or exercising substantial control over the entity.
- Information to be Reported: The information to be reported to FinCEN includes the full legal name, date of birth, current address, and a unique identifying number (such as a driver's license or passport number) of each beneficial owner. Additionally, reporting companies must provide a statement confirming the accuracy of the disclosed information.
- Timelines for Reporting: Newly formed reporting companies must submit their beneficial ownership information to FinCEN at the time of formation or registration. Existing reporting companies have a grace period of two years from the effective date of the CTA to comply with the reporting requirements. Furthermore, reporting companies are required to promptly update their beneficial ownership information within one year of any changes.
- Access to Beneficial Ownership Information: While beneficial ownership information submitted to FinCEN is not made publicly available, it can be accessed by authorized government agencies for law enforcement, national security, and intelligence purposes. Access by financial institutions is also permitted for customer due diligence and anti-money laundering purposes.
Exemptions under the Corporate Transparency Act:
While the CTA imposes significant reporting obligations on many business entities, certain exemptions exist to alleviate the regulatory burden on specific categories of companies. These exemptions include:
- Publicly Traded Companies: Entities whose securities are traded on a national securities exchange or registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934 are exempt from the reporting requirements of the CTA. The transparency obligations for such entities are already governed by existing securities laws and regulations.
- Certain Regulated Entities: Entities already subject to robust regulatory oversight and reporting requirements, such as financial institutions, insurance companies, and registered investment companies, are exempt from the CTA. These entities are typically supervised by regulatory bodies that enforce stringent anti-money laundering and know-your-customer protocols.
- Low-Risk Entities: The CTA provides exemptions for entities that meet specific criteria indicating a low risk for illicit activities, such as entities with a physical presence in the United States, a certain number of employees, and a significant operating history. Such entities are deemed less susceptible to misuse for money laundering or terrorism financing purposes.
Responsibilities of Business Owners:
Business owners subject to the CTA must take proactive steps to ensure compliance with the reporting requirements. This includes:
- Identification of Beneficial Owners: Business owners must identify and accurately determine the beneficial owners of their reporting company, taking into account both direct and indirect ownership interests.
- Collection of Required Information: Once identified, business owners must collect the necessary information, including full legal names, dates of birth, addresses, and identifying numbers, from each beneficial owner.
- Submission of Information to FinCEN: Reporting companies must submit the required beneficial ownership information to FinCEN through the prescribed reporting mechanism within the specified timelines.
- Maintenance of Records: Business owners are responsible for maintaining accurate and up-to-date records of beneficial ownership information, as well as any supporting documentation related to the identification and verification of beneficial owners.
Penalties for Non-Compliance:
Businesses failing to comply with the reporting requirements of the CTA may face significant penalties, including:
- Civil Monetary Penalties: The CTA authorizes FinCEN to impose civil monetary penalties for violations of its provisions. Penalties may be assessed for failure to submit or update beneficial ownership information, as well as for providing false or misleading information.
- Criminal Penalties: In addition to civil penalties, individuals and entities found to have willfully violated the CTA may be subject to criminal prosecution. Criminal penalties may include fines, imprisonment, or both, depending on the severity of the violation.
- Revocation of Corporate Status: Non-compliant reporting companies risk having their corporate status revoked or suspended, which could have significant legal and financial consequences, including the loss of limited liability protection and the ability to conduct business.
- Reputational Damage: Non-compliance with the CTA can also result in reputational damage, as businesses may face public scrutiny and loss of trust among customers, partners, and investors.
Responsibilities of Professionals:
In addition to the obligations imposed on business owners, certain professionals, including attorneys and accountants, may have responsibilities related to the reporting of beneficial ownership information under the CTA. While the CTA does not directly impose reporting obligations on these professionals, they may have ethical and legal responsibilities to their clients, including:
- Advising on Compliance: Attorneys and accountants may be called upon to advise their clients on the requirements of the CTA and assist them in understanding their obligations under the law.
- Assisting with Due Diligence: Professionals may be tasked with conducting due diligence on behalf of their clients to identify and verify beneficial owners and ensure the accuracy of the information disclosed to FinCEN.
- Maintaining Client Confidentiality: While assisting clients with CTA compliance, professionals must adhere to strict standards of client confidentiality and ensure that any information obtained in the course of their representation is handled appropriately and in accordance with applicable laws and regulations.
- Referral to Specialists: In cases where clients require specialized expertise or assistance beyond the scope of their practice, professionals may need to refer clients to other specialists, such as compliance consultants or legal experts, to ensure comprehensive compliance with the CTA.
Conclusion:
The Corporate Transparency Act of 2024 represents a significant shift in the regulatory landscape governing corporate transparency and anti-money laundering efforts in the United States. By requiring reporting companies to disclose beneficial ownership information to FinCEN, the CTA aims to enhance transparency, deter illicit activities, and protect the integrity of the financial system. Business owners and professionals alike must familiarize themselves with the requirements of the CTA and take proactive steps to ensure compliance, thereby mitigating the risk of non-compliance penalties and safeguarding against the misuse of corporate entities for illicit purposes.
References:
- Corporate Transparency Act
- Fact Sheet: U.S. Department of the Treasury Actions to Prevent and Disrupt Corruption
- Beneficial Ownership Information Reporting Requirements
- Reporting Requirements for Beneficial Ownership Information
- Penalties for Non-Compliance with the Corporate Transparency Act
About the Author:
Chase Carpenter is a partner in the Business Division of Law Offices of Moffa, Sutton, & Donnini, P.A.. His practice revolves around business transactions and business litigation. Mr. Carpenter handles a wide range of cases including contract drafting, partnership disputes, commercial leases, and construction litigation. These cases encompass diverse industries, including healthcare, technology, real estate investment, and government contracting.
About the Firm:
The Law Offices of Moffa, Sutton, & Donnini, P.A., also known as MSD Business, is a local business law firm in Tampa, FL, serving clients throughout Fort Lauderdale and statewide. Our firm has a long history of helping clients navigate all types of complex legal matters, including local and state tax issues. In our business law practice, we assist clients with everything from mergers and acquisitions to contract disputes, business litigation, general counsel, and more.