The Battle Against Illicit Activities: Understanding the Corporate Transparency Act

ARTICLE | May 16, 2024

Since the launch of the Corporate Transparency Act (CTA) as part of the National Defense Authorization Act on January 1, 2021, there has been a significant change in the Bank Secrecy Act and related anti-money laundering rules. The CTA was designed to deter money laundering, terrorism financing, and other illicit activities by obligating certain entities, primarily small and medium-sized businesses, to disclose beneficial owner information to the Financial Crimes Enforcement Network (FinCEN).

Entities Required to Comply

Entities that are required to comply with the CTA, referred to as Reporting Companies, include U.S. corporations, limited liability companies (LLCs), and other types of companies created by filing with a Secretary of State or equivalent official. The CTA also applies to non-U.S. companies that register to do business in the U.S. 

Exemptions to the CTA

The CTA does provide exceptions for certain entities, primarily those already subject to regulation by federal or state governments and thus already disclosing beneficial ownership information to governmental authorities. Large operating companies are a notable exception, defined as entities that employ a minimum of 20 full-time employees in the U.S., maintain an operating and physical presence in the U.S., and report gross revenues exceeding $5 million on the previous year’s tax return.

Who are the Beneficial Owners?

A beneficial owner is any individual who exercises substantial control or owns at least 25% of the company's ownership interests, either directly or indirectly. This may include senior officers, individuals with authority over the appointment or removal of any senior officer, or individuals who have considerable influence over significant decisions made by the Reporting Company.

Implementation of Reporting Requirements

The CTA’s reporting requirements will be phased-in in two stages: 

1. All NEW Reporting Companies – those formed or registered on or after January 1, 2024 – must report required information within 90 days after their formation or registration.
2. All EXISTING Reporting Companies – those formed or registered before January 1, 2024 – must report required information no later than January 1, 2025.

The Impact of Recent Court Ruling

Concerns have arisen regarding a Federal District Court ruling in Alabama in March 2024 that declared the CTA as unconstitutional. While the ruling currently only affects the plaintiffs, and FinCEN has appealed the decision, the Ohio Society of CPAs and other state CPA societies have recommended suspending enforcement of BOI until one year AFTER all judicial activity around the case has concluded.

Preparing for the CTA

Companies are encouraged to determine their obligations under the CTA, considering factors such as their exemption status, the calculation of ownership interests, and the identification of individuals exercising substantial control. 

Penalties for Non-Compliance

Non-compliance with the CTA can result in severe penalties. The willful provision of false or fraudulent beneficial ownership information, or the willful failure to report complete or updated beneficial ownership information to FinCEN, can result in civil or criminal penalties. These include civil penalties of up to $500 for each day that the violation continues, or criminal penalties including imprisonment for up to two years and/or a fine of up to $10,000.

The implementation of the CTA marks a significant shift in the U.S. anti-money laundering landscape. As such, organizations should proactively assess their obligations under the Act and take the necessary steps to ensure compliance.