Cracking Down on Financial Fraud: The Impact of the Corporate Transparency Act

ARTICLE | December 14, 2023

The Corporate Transparency Act (CTA), part of the Anti-Money Laundering Act of 2020, is slated to revolutionize the financial landscape in the United States starting from January 1, 2024. The CTA targets financial fraud, money laundering, tax evasion, and terrorist financing by mandating the disclosure of beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN). This legislation is particularly important for small and medium-sized businesses, which will be among the primary entities required to comply with the new reporting rules.

The CTA requires a BOI report to be filed by all non-exempt entities that meet the definition of a "reporting company." This includes domestic corporations, limited liability companies (LLCs), and other entities created by filing a document with the Secretary of State or a similar office. Foreign companies registered to do business in the U.S. also fall under this category. However, certain types of entities, such as family trusts and partnerships, large operating companies, inactive entities, and tax-exempt entities, are exempt from the CTA filing requirement.

A crucial aspect of the new reporting requirement is the definition of a "beneficial owner". Under the CTA, a beneficial owner refers to any individual, whether U.S. or non-U.S., who either exercises substantial control over the entity or owns or controls at least 25% of its ownership interests. This broad definition has significant implications for entities with complex ownership structures or those where control is exercised indirectly.

With the CTA's implementation on the horizon, companies should start preparing to comply with the new reporting requirements. For existing entities formed before January 1, 2024, the initial BOI report must be filed by January 1, 2025. For companies formed on or after January 1, 2024, the initial report must be filed within 30 days of formation. However, FinCEN has proposed extending the filing deadline from 30 to 90 calendar days for entities created or registered between January 1, 2024, and January 1, 2025.

The BOI report requires detailed information about the reporting company and each beneficial owner. This includes the full legal name, date of birth, current home or personal address, and a unique ID number from a non-expired document such as a U.S. passport, state driver’s license, or other government-issued photo ID. For the reporting company, additional information such as trade name, current U.S. address of the principal place of business, the state or jurisdiction where the entity was formed, and IRS tax identification number (TIN) are required.

Non-compliance with the CTA carries severe penalties. Companies that fail to file the required reports or provide false or misleading information may face civil penalties of up to $500 per day, criminal fines of up to $10,000, and/or imprisonment for up to two years.

Given the intricacies associated with the CTA, companies are advised to seek professional guidance. It's important to work with experienced advisors to determine your reporting requirements and ensure compliance. Remember, this disclosure is separate from tax or foreign bank account reporting and will be triggered upon the establishment of a new business or when there is a change in beneficial ownership or individuals with substantial control. It's critical to understand these requirements and stay ahead of the curve to ensure your organization is compliant come January 2024.