The Corporate Transparency Act’s efforts to fight crime can affect small businesses
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The National Defense Authorization Act, passed by the US House and Senate at the end of 2020, contained a law to increase transparency in mailbox companies to combat money laundering and criminal behavior: the Corporate Transparency Act (CTA). The CTA will maintain an extensive register of “beneficial owners” of “reporting entities” with the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN). A “beneficial owner” is any person who owns a 25% stake in a reporting company or exercises significant – as yet undefined – control over the reporting company. In simple terms, a “reporting company” is (excluded for brevity with a few exceptions) any small, privately owned, for-profit corporation incorporated or registered in the United States. In particular companies with (i) more than 20 full-time employees; (ii) more than $ 5 million in gross annual revenue or sales; and (iii) an operational presence in a US office is exempt from reporting requirements as the regulations are intended to provide insight into the ownership structure of US companies with small or limited business operations. But of course, many small businesses that do not engage in money laundering or criminal behavior will also be carried away by these requirements.
For some time now, banks and financial institutions have been obliged to inquire about the identity of the beneficial owner – for example, many readers are familiar with the “know your customer” requirements of banks. However, the CTA shifts the burden of collecting and reporting ownership information, including name, date of birth, address, and unique identification number (e.g. driver’s license or passport number) to the businesses themselves. Businesses must submit this information when they are incorporated and are up to date hold. The registration information is not public but can be shared in many cases, such as following a request from a law enforcement agency.
The deliberate transmission of incorrect information to the FinCEN can be punished with fines and a possible imprisonment. In addition, any company that performs a separate verification or due diligence process, such as
Regulations to implement the CTA are expected later this year and will hopefully answer many of the outstanding questions to clarify who has to report when. In particular, many eagerly await information on how “ownership” is calculated and what “substantial control” means, expecting the final rules on both issues to be lengthy and complex. In addition, developing the government infrastructure to collect, store, and update this information will be a daunting undertaking in itself. We are closely monitoring developments in this area as the CTA is likely to be the greatest burden (in terms of time required for legal fees) for our smallest clients.
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.
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