Insights and Resources

The Corporate Transparency Act 2021: A New Era of Financial Regulation

ARTICLE | June 26, 2024

The Corporate Transparency Act (CTA), a significant reform of the Bank Secrecy Act and related anti-money laundering regulations, came into effect on January 1, 2021. The CTA is a bipartisan effort aimed at combating money laundering, terrorism financing, and other illegal financing activities. It mandates entities, particularly small and medium-sized businesses, to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department.

The CTA's reporting requirements apply to U.S. corporations, limited liability companies, and other companies created by a filing with a Secretary of State or equivalent official. Additionally, non-U.S. companies that register to conduct business in the U.S. are subject to these requirements. However, there are several exceptions, including entities already disclosing their beneficial ownership information to government authorities and "large operating companies" that meet specific employment, revenue, and physical presence criteria.

A beneficial owner is defined as any individual who directly or indirectly exercises "substantial control" over a company or owns at least 25% of its interests. This broad scope includes senior officers, board members, and individuals with significant influence over the company's decisions, regardless of equity interest. Beneficial owners' identifying information, such as legal name, residential address, date of birth, and unique identifier number from non-expired identification documents, must be reported to FinCEN.

The implementation of the CTA's reporting requirements will be in two stages. New companies formed or registered on or after January 1, 2024, must report required information within 90 days of their formation or registration. Existing companies, those formed or registered before this date, must comply with the reporting requirements by January 1, 2025. 

However, a recent Alabama court ruling has raised questions about the CTA's constitutionality. In this case, the judge barred the government from collecting certain ownership data, siding with critics of the law who argue that the requirement for companies to present personal data about their owners is a case of congressional overreach. This ruling, while only applicable to the plaintiff, the National Small Business Association, has led to uncertainty about the immediate impact of the CTA on U.S. small businesses.

Despite this ruling, companies are advised to continue preparations to comply with the CTA. They should assess their status regarding the CTA, calculate ownership interests, determine who exercises substantial control, and implement processes for monitoring changes in beneficial ownership. Legal guidance may be necessary for more complex cases.

Violating the CTA's reporting requirements carries severe penalties, including daily civil penalties, criminal fines, and potential imprisonment. Companies are urged to stay informed about developments regarding the CTA and consult with their legal counsel to ensure compliance.

As the CTA continues to evolve, it's crucial for businesses to remain vigilant, and review the FinCEN's Frequently Asked Questions document for additional insights. Remember, the CTA is not just a regulatory requirement — it's a significant step towards promoting transparency and combating illicit activities in the corporate world.

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