On January 1, 2021 Congress enacted the Corporate Transparency Act (CTA) aimed to counter money laundering, terrorist financing and other illicit activities. In this article, we will cover what compliance professionals need to know about the CTA.
The Corporate Transparency Act
On January 1, 2021, Congress enacted the National Defense Authorization Act (NDAA). Congress passed the Act after overriding a presidential veto.
The NDAA contains a variety of acts, one of them being the Anti-Money Laundering Act of 2020 (AMLA). AMLA includes various amendments to combat money laundering and terrorist financing by expanding the regulatory responsibilities and authority of the Financial Crimes Enforcement Network (FinCEN). One addition in AMLA that expands FinCEN’s responsibilities is the Corporate Transparency Act. The CTA, as of the publication of this article, is not fully implemented, as FinCEN has not yet released final regulations or a proposed effective date.
On December 8, 2021, FinCEN released the Notice of Proposed Rulemaking (NPRM) in order to clarify the CTA’s reporting requirements.
On September 29, 2022, FinCEN issued its Final Rule, implementing the CTA requirements.
View our timeline of BSA/AML regulations for an overview of key compliance legislation.
CTA Reporting Requirements
The CTA will require both domestic and foreign ‘reporting companies’ that are registered to do business in the U.S. to disclose to FinCEN certain identifying information about the businesses’ beneficial owners, senior officers, company applicants and other control persons. Entities subject to the CTA’s requirements will also have to update any changes to their ownership information within a year of the changes taking place.
Additionally, the CTA has directed FinCEN to create a non-public registry that will track the beneficial owners of reporting companies, which can be shared with both law enforcement and in certain circumstances with financial institutions conducting due diligence.
Reporting Companies Defined
One key term to understand in the CTA’s reporting requirements is ‘reporting companies’. According to the NPRM, there are two types of ‘reporting companies’ – domestic and foreign.
Domestic Reporting Company
A domestic reporting company is any corporation, LLC or similar entity that is created through filing a formation document with a secretary of state or similar office.
Foreign Reporting Company
A foreign reporting company is any corporation, LLC or similar entity created under the law of a foreign country that is registered to conduct business in the US.
Beneficial Ownership Defined
According to the CTA, a ‘beneficial owner’ is any individual that owns/controls 25% or more of an entity, or has ‘substantial control’ over an entity, either directly or indirectly.
For further information, view our answers to frequently asked questions about beneficial ownership.
What Defines Substantial Control?
The CTA provides three indicators of substantial control:
- Senior officer of a reporting company
- An individual with the authority to appoint or remove any officer or dominant majority of the board of directors (or a similar body) of a reporting company
- An individual with the direction, determination or decision (or substantial influence over) important matters of a reporting company
- ie. sale, lease or transfer of principle company assets, major expenditures and investments, the entry or termination of important company contracts
Further specificity is expected in coming FinCEN regulations.
What Defines Ownership Interest?
The regulation broadly defines ownership interest as:
- Equity in the reporting company and other forms of interest
- i.e. capital, profits, partnership, convertible instruments, warrants or rights and options or privileges to gain equity, capital or other interests
- An individual with the ability to control another individual with ownership interest in the entity
Ownership is broadly defined by FinCEN, stating that ownership interests can be controlled by both directly and indirectly in a variety of ways.
Company Applicants Defined
Company applicants is an important term to define, as they will also be required to be disclosed to FinCEN. Like the definition of ‘reporting companies’ there are differing definitions for foreign and domestic entities.
Domestic Company Applicant
A domestic company applicant is the individual who filed the document that formed the entity. It also includes any individuals who directed or controlled the filing.
Foreign Company Applicant
A foreign company applicant is the individual who has filed the documents to register the entity to conduct business in the US. It also includes any individuals who directed or controlled the filing.
What Identifying Information Needs To Be Disclosed?
Reporting companies must disclose the following identifying information about their beneficial owners and company applicants:
- Full legal name
- Date of birth
- Current residential or business street address
- Unique identifying number from a FinCEN identifier or an acceptable identification document
According to the NPRM there is no current clarification on whether a residential or business address should be disclosed, or if they must be domestic or foreign. As a result, beneficial owners and company applicants who do not act as formation agents should report residential addresses.
Company applicants acting as corporate, or formation agents should disclose their business address.
All other individuals should disclose the same residential address used for tax residency purposes.
The proposed rule will additionally require reporting companies to disclose the following information in their beneficial ownership information report:
- Entity name, along with alternative names
- Street address of the business
- Jurisdiction of the formation or registration
- Unique identification number
- i.e Legal Entity Identifier, Taxpayer Identification Number with an Employer Identification Number, or a Dun & Bradstreet Data Universal Numbering System
CTA Exemptions
Under the regulations, there are a variety of businesses that would be exempt from the CTA reporting requirements. Twenty-three types of businesses that already operate in highly regulated industries, such as banks, insurance companies and domestic credit unions will not be subject to the CTA requirements.
The list of 23 entities that are specifically exempt at this time include:
- Banks
- Insurance companies
- State-licensed insurance producers
- Domestic credit unions
- Securities issuers
- Domestic governmental authorities
- Money transmitting businesses
- Brokers/dealers in securities
- Registered investment companies and advisors
- Venture capital fund advisers
- Depository institution holding companies
- Accounting firms
- Public utilities
- Financial market utilities
- Pooled investment vehicles
- Tax-exempt entities
- Entities assisting tax-exempt entities
- Subsidiaries of certain exempt entities
- Securities exchange/clearing agencies
- Other Securities Exchange Act of 1934 entities
- Registered entities of the Commodity Exchange Act
- Inactive businesses
- Large operating companies
A company qualifies as a ‘large operating company’ if it meets the following requirements:
- A physical office in the US
- More than twenty full-time employees in the US
- Has filed more than $5 million in gross receipts or sales as shown on the previous year’s federal income tax return
When Will the CTA Be Enforced?
The CTA will take effect on January 1, 2024. It is important to note that any reporting company that exists or is registered prior to this date must file their intial report within one year, by January 1, 2025.
Currently under the proposed rule domestic companies that are formed either on or after the effective date of the regulations will have to file initial reports within 14 calendar days of their formation. Foreign companies will have to file initial reports within 14 calendar days of them becoming a foreign reporting company.
Companies that were previously exempt but are now subject to CTA regulations will have to file reports within 30 calendar days of them no longer meeting exemption criteria.
Deadlines for Updating Information
According to the NPRM, reporting companies must disclose any updated information to FinCEN within 30 calendar days of the change being made.
Deadlines for Updating Incorrect Information
If information is inaccurately reported, a correct report must be filed within 14 calendar days after the company becomes aware, or has reason to know, of the inaccuracy.
Looking Ahead
While the CTA is not implemented at this time, it is important for compliance professionals to understand its requirements. While dates are not currently set in stone, it is expected that final rules will be published in 2023.
As compliance professionals, it is vital to stay informed on changing regulations and be aware of updates given by regulatory bodies. Ensure you are informed on any updates from FinCEN by frequenting our regularly updated FinCEN blog.
In addition to staying informed on regulatory changes, you need to have solutions that assist you in your compliance duties.
Alessa is an anti-money laundering compliance solution that assists with regulatory reporting, watchlist and sanctions screening, transaction monitoring and more.
Contact our risk specialists today to learn how Alessa can simplify compliance with the Corporate Transparency Act.
Sources
https://www.congress.gov/bill/116th-congress/house-bill/6395/text
https://www.congress.gov/bill/116th-congress/house-bill/2513/text
