How Could the Corporate Transparency Act Impact Your Business?
December 12, 2023
The Federal Corporate Transparency Act (CTA or the Act), is set to take effect on January 1, 2024. CTA represents a major step forward in promoting corporate transparency and combatting illicit activities such as money laundering, tax evasion, and terrorism financing.
CTA, which was passed by Congress as part of the National Defense Authorization Act for Fiscal Year 2021, aims to enhance the anti-money laundering (AML) regime in the United States by establishing new reporting requirements for certain types of companies. Under the CTA, all companies formed or registered in the United States, including corporations, limited liability companies (LLCs), and other similar entities, will be required to submit certain beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of the Treasury.
This information will primarily include the identities of individuals who directly or indirectly own or control the company and their respective ownership percentages. One of the main objectives of the CTA is to close existing loopholes that allow individuals to hide their identities behind anonymous shell companies. By forcing companies to disclose their true owners, CTA aims to improve law enforcement agencies' ability to investigate and prosecute illicit financial activities.
According to the provisions of CTA, companies will need to identify and report the following information for their beneficial owners: full legal name, date of birth, current residential or business address, and a unique identifying number from an acceptable identification document such as a passport or driver's license. The Act also requires companies to regularly update this information and imposes penalties for providing false or misleading information. By establishing a centralized database accessible to federal and state law enforcement agencies, the CTA will enable these entities to swiftly and efficiently trace and analyze beneficial ownership information to identify potential money laundering networks and other illicit activities.
This will help ensure that law enforcement resources are targeted effectively, allowing for more accurate risk assessments and better prevention and detection of financial crimes. The Act represents a significant shift in the AML framework, as it places the burden of transparency on companies themselves rather than just their financial institutions. Until now, financial institutions have been primarily responsible for verifying customer identities and reporting suspicious activities, while companies could operate in the shadows without disclosing their true ownership. The CTA will create a more comprehensive and robust AML system by ensuring transparency at the source—within the companies themselves.
Despite the benefits of increased corporate transparency, some concerns have been raised about the potential administrative burden on companies. Compliance with the CTA may pose challenges, especially for small businesses, due to the additional costs and time required to implement new reporting procedures. However, the Act acknowledges this concern and grants small businesses a longer implementation period to adapt to the new requirements. In addition, failure to timely file the reports to FinCEN can result in civil fines of $500 per day for each delinquent report and criminal penalties of $10,000 and two (2) years in imprisonment or both.
David H. Alexander practices law in New York and Florida, and serves as a foreign legal consultant in Ontario, Canada. His areas of practice include wills, estates and trusts, estate planning and administration, business counseling, corporate law and taxation. He represents Canadian and other foreign corporations in the establishment of United States subsidiaries and in their conduct of business in the United States. He also represents Canadian and other foreign persons who purchase assets in the United States to effect asset preservation. Mr. Alexander can be reached at 716-854-4300 ext. 216 or dalexander@gross-shuman.com
