In a significant step toward a future of heightened corporate transparency, the bipartisan Corporate Transparency Act (CTA) is prepared to roll out as of January 1, 2024. This new legislation, issued by the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) under the broad provisions of the Anti-Money Laundering Act of 2020, aims to set forth fresh reporting obligations for corporations pertaining to their beneficial ownership and organizers— though it is essential to bear in mind that some exceptions are in place.
The reach of the CTA is vast, with a total of 32 million entities being impacted. These entities are tasked with reporting two crucial categories of information: the beneficial owners and those behind the creation or registration of the entity. No entity is immune—whether homegrown or foreign, if they’re registered to do business in the United States, then it impacts them unless an exemption applies.
Beneficial owner refers to an individual who holds the reins of substantial control over an entity or owns or controls at least a quarter of the ownership interests. Each beneficial owner needs to provide details, including name, birthdate, address, a unique identification number, and the jurisdiction of issue from a valid identification document, along with a copy of the document. Additionally, those who file to form or register an entity share the same disclosure obligations.
It’s important to note that data security and confidentiality aren’t taken lightly. The CTA nods to this concern by ensuring that access to such sensitive data is limited to a select group of government authorities and financial institutions. Exemptions from these reporting requirements do exist, notably for regulated entities like banks, securities brokers, and public companies, as well as entities that report an annual revenue north of $5,000,000, employ more than 20 individuals, or are classified as dormant companies. If an entity’s exemption status is lifted, a report needs to go to the authorities within 30 calendar days.
In regards to the deadline to file CTA reports, it’s a matter of when the entity was formed. Those pre-dating January 1, 2024, have a grace period until January 1, 2025, to submit their initial reports. Those formed after January 1, 2024, have a 30-day window from formation or registration to file their initial reports. If there is a change in beneficial ownership, then there are 30 days to file an updated report.
The penalties for non-compliance could set entities back by $500 per day (up to $10,000), and the stakes get even higher with a criminal penalty of up to two years in prison and a fine of up to $10,000. This underscores the importance of starting the groundwork of gathering and organizing the required information early.
Moreover, entities should be setting up their own systems to keep track of reporting obligations. It’s wise to keep a close eye on the records of beneficial owners and applicants for each entity, ensuring they’re up-to-date and primed for any necessary report updates. Crafting policies and procedures that keep stakeholders informed about reporting requirements and deadlines is also key.
As with all new legislation, there could be more guidance from FinCEN down the line, so it’s prudent to work with a legal team that can help navigate the nuances of reporting requirements, potential exemptions, and more. The CTA is bringing substantial changes, so it is imperative for entities to understand how this new legislation affects them moving forward.