What is the Corporate Transparency Act (CTA)?

In the past, businesses created in the United States were not obliged to publicly disclose or maintain a record of the names of their shareholders or ultimate beneficial owners (UBOs). This lack of transparency meant it was possible for anonymous shareholders to have control over businesses and create shell companies as a tool to disguise and move illicit funds. 

To deter such activity, Congress deemed federal legislation necessary to collect beneficial ownership information (BOI) for entities formed under US state laws. Known as the Corporate Transparency Act, this legislation was passed by Congress in January 2021 and came into effect on January 1, 2024.

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a US federal law aimed at increasing transparency in corporate ownership. The regulation requires certain individuals who establish a company in the United States to provide the Financial Crimes Enforcement Network (FinCEN) with specific information relating to the company’s beneficial owner(s), including:

• Full name.
• Date of birth.
• Current address.
• A distinctive identification number, such as from a passport or driver’s license.

Those subject to the law, known as “reporting companies”, must also update FinCEN with any changes to previously reported information. 

The CTA falls under the scope of the Anti-Money Laundering Act of 2020 (AMLA) and is part of the National Defense Authorization Act 2021 (NDAA), which required FinCEN to create a beneficial ownership registry that would oblige over 32 million businesses to file details of their beneficial owner with the US government.

How did the CTA come about?

Prior to the CTA, multiple legislative proposals were introduced to Congress to address the lack of transparency in corporate ownership. These proposals, including the 2008 Incorporation Transparency and Law Enforcement Assistance Act (ITLEA), aimed to require companies to disclose information about their beneficial owners to government agencies. However, ITLEA and the similar bills that followed were not passed into law as some argued that regulation of business entity formation within the US should remain a state matter. 

To help close the gap in US AML legislation that remained, FinCEN introduced the Customer Due Diligence (CDD) Final Rule in 2016 as an amendment to the Bank Secrecy Act. This set out an extended range of CDD obligations for certain financial institutions (FIs), including a new requirement of establishing ultimate beneficial ownership. 

However, since the CDD Final Rule did not require the establishment of a centralized corporate registry, the US Congress began holding more hearings to address the persisting corporate transparency issue. Combined, these hearings helped provide the necessary momentum for the CTA’s passage. 

What are the objectives of the CTA?

The CTA aims to enhance AML efforts by improving transparency and accountability in corporate ownership structures. Its primary objectives include:

• Beneficial ownership disclosure: Require reporting companies to report information about their beneficial owners to FinCEN.
• Prevent illicit activities: Combat money laundering, terrorist financing, tax evasion, and other financial crimes by providing law enforcement with access to BOI.
• Enhanced data collection: Improve the accessibility and accuracy of BOI to facilitate investigations and enforcement efforts.
• Streamlined compliance: Simplify the process for firms to comply with their reporting requirements while maintaining data security and privacy.
• National security: Enhance national security by identifying and tracking entities with opaque ownership structures that may pose a risk. 

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Who needs to comply with the Corporate Transparency Act?

Reporting companies must comply with the CTA, which, according to the AMLA, refers to any corporation, limited liability company (LLC), or other similar entity that is:

1. Created by filing a document with the secretary of state or similar office in a state or Indian tribe under their respective laws, or;
2. Formed under the law of a foreign country and registered to do business in the US by filing a document with the secretary of state or similar office under the laws of a state or Indian tribe.  

This includes C-corporations, S-corporations, domestic and foreign LLCs, general partnerships, limited partnerships, and business trusts. 

Who is exempt from complying with the CTA?

The CTA outlines 23 exemptions and exceptions to some of these legal entities, including:

• Securities reporting issuers.
• Governmental authorities.
• Banks.
• Credit unions.
• Depository institution holding companies.
• Money services businesses.
• Brokers or dealers in securities.
• Securities exchanges or clearing agencies.
• Other Exchange Act registered entities.
• Investment companies or investment advisers.
• Venture capital fund advisers.
• Insurance companies.
• State-licensed insurance producers.
• Commodity Exchange Act registered entities.
• Accounting firms.
• Public utilities.
• Financial market utilities.
• Pooled investment vehicles.
• Tax-exempt entities.
• Entities assisting tax-exempt entities.
• Large operating companies.
• Subsidiaries of certain exempt entities.
• Inactive entities.
  

What are the benefits and challenges of the Corporate Transparency Act?

Beyond being a moral obligation, there are compelling business reasons to prioritize transparency, particularly with regard to governance and anti-corruption measures. When it comes to the CTA, firms and authorities may experience the following benefits:

• Ease of access to information: Creating a national beneficial ownership database will make it easier for authorities to access and cross-reference corporate ownership information and enhance accountability among US companies.
• Reduced risk of fraudulent activity: The CTA plays an important role in the Biden administration’s strategies for countering corruption and combating terrorist and other illicit financing by making it harder for individuals to use shell companies and anonymous corporations to hide their income and assets. 
• Aiding law enforcement: The CTA helps national security agencies assess potential threats and vulnerabilities by identifying who controls and benefits from corporations.
• Investor confidence: In light of enhanced BOI disclosures, improved due diligence, and additional legal protections – such as penalties for non-compliance – the CTA is expected to boost investor confidence by reducing risks associated with hidden ownership and illicit financial activities. 

However, the CTA can create challenges for some firms, particularly smaller businesses that may not have an existing infrastructure in place to meet the new reporting requirements. Specific challenges may include:

• Data collection: Gathering accurate and up-to-date information about beneficial owners can be challenging, especially when dealing with complex corporate structures or multinational companies.
• Data privacy: Balancing the need for transparency with privacy concerns of beneficial owners can be delicate. Some entities may resist disclosing their ownership stakes for personal or security reasons. 
• Administrative requirements: Compliance with the CTA can impose an administrative burden on firms, particularly smaller businesses or start-ups without dedicated compliance departments.

To address these challenges, firms should seek legal counsel, invest in Know Your Business (KYB) compliance tools and training, and stay informed about updates to the CTA and related regulations. For challenges specific to the US real estate industry, compliance professionals can consult our Guide to AML/CFT Reforms, which discusses the implications of the CTA on the sector in detail. 

How can companies comply with the Corporate Transparency Act?

While the new reporting requirements will come into effect in early 2024, new and existing entities will have different reporting deadlines. Companies that are already established had to submit their initial report to FinCEN by January 1, 2025, whereas companies formed after January 1, 2024, have only 30 days to file. 

For those who fail to comply with the reporting requirements or knowingly provide false or fraudulent information, the regulation establishes criminal and civil penalties of $500 per day (up to $10,000) and imprisonment for up to two years.

For additional guidance on how to comply with the CTA, smaller entities can also review FinCEN’s BOI compliance guide.

Maintaining corporate transparency through comprehensive due diligence

In addition to reporting BOI information to FinCEN, firms can help establish their corporate customers’ ownership structure by deploying suitable know your customer (KYC) measures as part of their anti-money laundering and combatting the financing of terrorism (AML/CFT) solutions. In practice, this should include:

• Customer due diligence (CDD): Firms should collect identifying information about their customers, including the names and addresses of company directors and company incorporation details.
• Transaction monitoring: By monitoring transactions, firms can identify shell companies and be vigilant for unusual transaction patterns or transactions involving high-risk countries.
• Adverse media: News stories may indicate that customers are involved in UBO-related money laundering offenses before official sources reveal the same information. Firms should implement negative news screening on an ongoing basis for adverse news stories that involve their customers.
• Sanctions screening: Customers who are subject to international sanctions may use shell companies to access financial services. Therefore, firms should screen high-risk customers against the relevant sanctions lists.
• PEP screening: Politically exposed persons (PEP), such as government officials or politicians, pose an elevated AML risk and may attempt to use shell companies to conceal their identities. Firms should screen their customers to establish their PEP status.
• Corporate screening: Firms must confirm the legitimacy of a company before entering into a business relationship with them. Once the business has been onboarded, ongoing KYB verification checks are performed periodically to ensure any changes in the entity’s risk profile are captured.