Earlier this year, the Corporate Transparency Act (CTA) became the latest law intended to foil financial crime. This law is part of the National Defense Authorization Act and requires certain entities to disclose the identities of those who own or control it.

Anonymous no longer

Perpetrators of criminal acts such as fraud, drug and human trafficking, and terrorism often use anonymous or shell companies to launder ill-gotten funds and avoid prosecution. By removing anonymity from business ownership, the CTA makes it harder for criminals to engage in criminal activity.

Forcing disclosure of an entity’s beneficial owners enables law enforcement to penetrate corporate walls. In fact, New York Federal Reserve research suggests that the CTA will reduce criminal transactions by approximately 70%.

Covered entities 

Unlike other laws designed to combat financial crime (such as Know Your Customer regulations), the CTA is relatively simple and straightforward. To comply, certain companies must disclose their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN). Most covered companies are small, privately owned, for-profit corporations or limited liability companies.

The CTA defines a beneficial owner as a natural person who:

1. Exercises substantial control over the entity, or
2. Owns 25% or more of the entity.

People may also qualify as beneficial owners if they receive substantial economic benefits from an entity’s assets.

If you qualify as a new company’s beneficial owner, you need to submit your name, address and date of birth to FinCEN. Existing covered companies should provide ownership information within two years of the law’s effective date.

You aren’t required to submit financial information or details about your company’s operations. And once you’ve disclosed ownership, your company doesn’t have to provide regular updates to FinCEN unless ownership changes. Registry information will typically remain private. But regulators can share it with government agencies.

Exceptions to the rule

The act provides exceptions to the beneficial ownership classification. Currently, minor children; individuals acting as nominees, intermediaries, custodians or agents on another person’s behalf; and individuals whose only interest in an entity is through a right of inheritance aren’t considered beneficial owners.

Not all entities are required to report, either. Publicly traded companies, depository institutions, insurers and larger companies with at least 20 full-time employees and $5 million in gross receipts usually are exempt.

Getting ready

The law’s effective date depends on the U.S. Treasury Department, but the Treasury must publish regulations by January 1, 2022. Penalties for noncompliance will include up to $10,000 and three years in prison.

(This is Blog Post #1116)