The Corporate Transparency Act and Beneficial Interest Reporting Requirements: Understanding the Landscape
In recent years, the U.S. government has intensified efforts to combat money laundering, terrorist financing, and other illicit financial activities by strengthening transparency in corporate ownership structures. One of the landmark legislations designed to address these concerns is the Corporate Transparency Act (CTA), enacted as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2021. The CTA represents a significant shift in how businesses are required to disclose beneficial ownership information, creating new compliance obligations for many U.S. entities.
The CTA’s Beneficial Interest Reporting requirements aim to ensure that corporations, limited liability companies (LLCs), and similar entities disclose the identities of individuals who own or control them. However, this law has sparked controversy, including litigation challenging its constitutionality.
Background of the Corporate Transparency Act
The CTA, effective January 1, 2024, mandates that many U.S. companies must report information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury. This initiative seeks to close the loopholes that allow anonymous shell companies to be used for illicit financial activities, including tax evasion, money laundering, and funding terrorism.
The CTA requires “reporting companies” to provide specific identifying information about their beneficial owners to FinCEN. A reporting company under the CTA is generally defined as any corporation, LLC, or other entity created by filing a document with a secretary of state or similar office. There are exceptions for certain entities, such as large publicly traded companies, governmental entities, banks, and insurance companies.
Key Components of Beneficial Ownership Reporting
1. Definition of Beneficial Owner: The CTA defines a beneficial owner as any individual who, directly or indirectly:
Owns or controls at least 25% of the ownership interest of the company;
Exercises substantial control over the company; or
Receives substantial economic benefits from the assets of the company.
This broad definition encompasses not only those who have a formal ownership stake but also those who may have decision-making power or other forms of influence within the organization.
2. Required Information: The reporting company must disclose the following information about each beneficial owner:
Full legal name;
Date of birth;
Current residential or business street address; and
A unique identifying number from a government-issued ID (e.g., a passport or driver’s license).
3. Filing Deadlines: Existing companies must submit their initial reports within one year of the effective date of the regulations (i.e., by January 1, 2025). Newly formed or registered companies must submit their reports within 30 days of incorporation or registration.
4. Updates to Information: If there are changes in the beneficial ownership information (such as a change in ownership structure or control), reporting companies must file updates within 30 days of the change.
5. Penalties for Non-Compliance: Non-compliance with the CTA can result in significant penalties. Civil fines can be as high as $500 per day for each day the violation continues, and criminal penalties can include fines of up to $10,000 and/or imprisonment for up to two years.
The Purpose and Impact of the CTA
The CTA is intended to create a centralized database of beneficial ownership information, accessible to law enforcement agencies, financial institutions conducting due diligence, and regulators seeking to prevent financial crimes. By requiring greater transparency, the U.S. government aims to:
Prevent bad actors from hiding behind anonymous shell companies;
Enhance national security by reducing opportunities for terrorism financing and other illicit activities; and
Strengthen the U.S.’s compliance with international anti-money laundering (AML) standards, particularly those set by the Financial Action Task Force (FATF).
This centralized registry of beneficial ownership information will not be publicly accessible. Only authorized government agencies, regulators, and financial institutions conducting customer due diligence under the Bank Secrecy Act will have access to this information.
Litigation and Constitutional Challenges
Despite the stated goals of the CTA, the law has faced pushback from various groups, sparking litigation that challenges the constitutionality of the Act. One of the primary concerns raised in these lawsuits is whether the CTA infringes on individuals’ privacy and violates constitutional protections.
Of particular note was the National Small Business United v. Yellen, out of the Northern District of Alabama. In Yellen, a group of plaintiffs including members of the National Small Business Association, alleged that the requirements of the CTA exceeded congressional authority and are therefore unconstitutional. Specifically, the plaintiffs argued that the legislation violated the First, Fourth, Fifth, Ninth, and Tenth Amendments.
Ultimately, on summary judgment, the Alabama federal Court held that the CTA was unconstitutional as “it cannot be justified as an exercise of Congress’ enumerated powers.” The court declined to decide the constitutional arguments made with respect to the First, Fourth, and Fifth Amendments.
Thus, with the CTA effectively neutralized, you might be inclined to think that the requirements no longer apply to small businesses nationwide. However, much to the chagrin of many small business owners, that is not the case. The court’s ruling only applies to the named plaintiffs in Yellen. So, unless you are a member of the National Small Business Association, you will still need to make your BOI disclosures by the January 1, 2025, deadline. At least for now that is.
The Future of Beneficial Ownership Reporting
For now, the status of the CTA will remain uncertain until the appeals process reaches its conclusion (likely before the United States Supreme Court). To navigate this evolving landscape, businesses should seek legal counsel to ensure they fully understand the requirements of the CTA and develop a strategy for compliance. This may involve updating corporate governance policies, establishing systems for tracking beneficial ownership information, and training staff on how to comply with the reporting requirements.
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