In January 2021, U.S. Congress made a major commitment to expanding corporate transparency and Anti-Money Laundering (AML) regulations. The Corporate Transparency Act (CTA) was enacted as a part of the National Defense Authorization Act for Fiscal Year 2021.
Despite being over one year out from the passage of the bill, the CTA has yet to be fully implemented, much to the frustration of its original lawmakers. Once put into action, the CTA has the potential to revolutionize corporate reporting.
Widespread Ownership Disclosure
Aimed at deterring the flow of illicit funds into the American financial system and preventing the proliferation of shell corporations, the CTA called for the creation of a beneficial ownership registry within the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). It requires certain companies, both foreign and domestic, to disclose beneficial ownership information.
With this information, FinCEN hopes to fight the misuse of corporate structures that facilitate various criminal enterprises, such as money laundering, terrorism, tax fraud, human and drug trafficking and other financial-related criminal acts. While the data the CTA collects is confidential and not publicly accessible, the act is still widely considered one of the most significant developments for anti-money laundering efforts.
Implementation Comes to a Halt
Despite being enacted in early 2021, FinCEN has yet to implement the CTA. In December 2021, FinCEN issued a Notice of Proposed Rulemaking (NPRM) to begin the implementation of the act and clarify who must file a report, what constitutes beneficial ownership, what information must be disclosed in a BOI report and when such information must be reported.
However, that plan has still not come to fruition. In May 2022, Senators Marco Rubio (R-FL) and Elizabeth Warren (D-MA) sent a letter to the U.S. Treasury Secretary Janet Yellen and Acting Director of FinCEN Himamauli Das urging action to be taken.
“The Treasury Department has yet to finalize the implementation of the CTA—or even set a timetable for its completion,” stated the letter. “In various hearings last month, both of you could only commit to proposing the second CTA rule by the end of ‘this year.’ These delays run contrary to the clear instructions of Congress, undermine American efforts to respond to Russia’s war against Ukraine, and hinder broader efforts to protect the U.S. financial system against the threat of illicit finance.”
The timeline for CTA implementation is still murky, but is likely coming as soon as late 2022 or early 2023. That is, if FinCEN has the budget to enforce the law. In July 2022, the Senate Appropriations Committee released its draft for Fiscal Year 2023 that provided just $189 million to FinCEN. While this is a considerable amount over the Fiscal Year 2022 budget, it falls short of the amount requested by President Biden by $21 million.
The CTA has the potential to significantly expand the current state of corporate transparency and put a stop to the abuse of anonymous U.S. shell companies, so funding for FinCEN will be crucial for enforcement.
Millions of Entities Facing Disruption
The Corporate Transparency Act could impact over 25 million existing entities and nearly 4 million new entities conducting business in the United States that had not previously been subject to information sharing obligations.
The NPRM issued by FinCEN last year outlines two types of “reporting companies” that are required to disclose ownership. These two categories are defined as such:
- Domestic Reporting Company: Any “corporation,” “limited liability company,” or “other entity that is created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian tribe.”
- Foreign Reporting Company: Any entity that is a “corporation,” “limited liability company,” or other entity formed under the law of a foreign country and “registered to do business in the United States by the filing of a document with a secretary of state or equivalent office under the law of a state or Indian Tribe.”
Companies that fall within these categories and fail to disclose beneficial information can face civil penalties of up to $500/day, plus a possible criminal fine of $10,000 and up to 2 years in prison, or both. Additionally, knowingly disclosing or using beneficial ownership data for an unauthorized purpose could be subject to civil penalties of $500/day, plus a mandatory criminal fine of up to $250,000 or up to 5 years in prison, or both.
Excluded from the reporting requirements of the CTA are the following companies:
- Publicly traded companies
- Companies closely regulated by the federal government (banks, bank holding companies, registered money transmitting businesses, insurance companies, and others)
- Companies with a physical U.S. office with more than 20 full-time, U.S.-based employees which reported at least $5 million in gross receipts or sales to the IRS in the previous year
- Companies owned or controlled by exempt companies
The upcoming implementation of the CTA will signify a major win for the AML community. More reporting and transparency requirements will ultimately make it easier for investigators and regulators to identify beneficial ownership, and harder for illicit actors to launder money through the United States.
If you’d like to know more about automating beneficial ownership discovery, read our latest report for practical tips.