The Corporate Transparency Act: An Overview

The U.S. Corporate Transparency Act (CTA) marks a significant step towards greater corporate transparency and the fight against financial crimes. Passed in 2021, this important legislation targets anonymous shell companies often used for money laundering, tax evasion, and terrorist financing. The CTA requires businesses to disclose their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). 

According to FinCEN’s 2024 reports, the implementation of the CTA has been effective in unveiling shell companies and protecting the U.S. financial system from misuse by various criminals, including money launderers and sanctioned individuals. 

This blog offers a clear overview of the CTA’s history, its main provisions, and its impact on businesses. Read on to understand these requirements and learn how your business can stay compliant and support a transparent financial system.

History and Background

Legislative History

The Corporate Transparency Act was passed by Congress in 2021 as part of the National Defense Authorization Act (NDAA). This bipartisan legislation was introduced to address the growing concern over anonymous shell companies being used for illicit activities such as money laundering, tax evasion, and financing terrorism.

Key Motivations Behind the Act

The primary motivation for the CTA was to close the loopholes that allowed bad actors to hide behind anonymous entities. By requiring companies to disclose their beneficial owners, the CTA aims to create a more transparent and accountable business environment, making it harder for criminals to exploit the corporate system.

Main Provisions of the Corporate Transparency Act

The Corporate Transparency Act requires businesses to report information about their owners in order to increase transparency and combat financial crime. It is essential that you understand what data to report, who can see it, and how to stay compliant. This helps avoid penalties and ensures your business adheres to legal standards.

Beneficial Ownership Information (BOI) Reporting Requirements

The Corporate Transparency Act (CTA) mandates that most corporations, limited liability companies, and other entities created in or registered to do business in the United States report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The key elements of these reporting requirements include:

• Identifying Information: Companies must disclose the names, dates of birth, addresses, and unique identification numbers (such as a driver’s license or passport number) of their beneficial owners. A beneficial owner is defined as an individual who directly or indirectly exercises substantial control over the company or owns or controls at least 25% of the ownership interests in the company.
• Reporting Deadlines:
  • Entities formed or registered before January 1, 2024, must submit their initial BOI reports to FinCEN by January 1, 2025.
  • Entities formed or registered on or after January 1, 2024, have 30 days from their formation or registration date to submit their initial BOI reports.
  • Any changes in beneficial ownership information must be reported within 30 days of the change.

Steps to Prepare and Submit BOI Reports

1. 1. Identify Beneficial Owners: Find out who controls or owns at least 25% of your company.
   2. Gather Information: Collect full names, birth dates, addresses, and ID numbers (e.g., driver’s license or passport) for each beneficial owner.

• Prepare Initial Report:

1. • Companies created before January 1, 2024, must file by January 1, 2025.
   • Companies created between January 1, 2024, and January 1, 2025, file within 90 days.
   • Companies created after January 1, 2025, file within 30 days.
2. Submit Electronically: Use FinCEN’s BOI E-Filing System at boiefiling.fincen.gov.
3. Update Information: Report changes within 30 days. Correct errors within 30 days of discovering them.

Access to Beneficial Ownership Information

The CTA outlines specific guidelines on who can access the reported BOI:

• Government Agencies: Federal, state, local, and tribal law enforcement agencies can access BOI for authorized purposes, such as investigations and regulatory oversight.
• Financial Institutions: Under certain conditions, financial institutions can access BOI to comply with customer due diligence requirements under the Bank Secrecy Act and other regulatory obligations.
• Regulatory Agencies: Agencies that supervise financial institutions can access BOI during compliance checks and examinations.

Exemptions from Reporting

Not all entities are required to report their beneficial owners. The CTA provides exemptions for certain categories of entities, including:

• Large operating companies that employ more than 20 full-time employees, have filed a tax return reporting more than $5 million in gross receipts or sales, and have an operating presence at a physical office within the United States.
• Regulated entities, such as banks, credit unions, securities brokers, and insurance companies, are already subject to similar reporting requirements.
• Dormant entities that were in existence on or before January 1, 2020, and have no assets and no change in ownership in the preceding 12 months.

Penalties for Non-Compliance

Non-compliance with the CTA can result in significant civil and criminal penalties:

• Civil Penalties: Entities that fail to report, or provide false or fraudulent information may face civil penalties of up to $500 per day for each day the violation continues.
• Criminal Penalties: Willful violations, such as knowingly providing false information or willfully failing to report, can lead to fines of up to $10,000 and imprisonment for up to two years.

Implementation and Enforcement

The Financial Crimes Enforcement Network (FinCEN) is responsible for enforcing the CTA. FinCEN’s role includes:

• Monitoring Compliance: Conducting audits and checks to ensure entities are meeting their reporting obligations.
• Investigating Violations: Following up on suspected violations and imposing penalties as necessary.
• Providing Guidance: Issuing detailed guidance and resources to help businesses understand and comply with the new reporting requirements.

Summing Up!

The Corporate Transparency Act introduces important rules to make businesses more accountable and transparent. By following these rules, companies help create a fairer financial system. Using platforms like Corporate Transparency Filing can make it easier to comply with these new regulations.