Under The Anti-Money Laundering Act of 2020, which was part of the National Defense Authorization Act for FY 2021, the Corporate Transparency Act (“CTA”) was made into law and requires a certain number of business entities to prepare and file “beneficial ownership” information with the Treasury Department, particularly the Financial Crimes Enforcement Network “(FinCEN”). CTA was designed and passed to promote transparency in an effort to combat illicit financial activities. The CTA is a step toward greater corporate accountability, but some of its complexities and ambiguities demand a thorough exploration.
The CTA primarily targets money laundering, terrorism financing, and other financial activities that support illegal activities and aims to deter individuals and entities from exploiting U.S. corporations and limited liability companies for illegal purposes.
Breaking Down the Principal Provisions:
Beneficial Ownership: The definition of “beneficial ownership” is a central component of the CTA. The 2019 Transparency Proposal, first introduced by former Congressman Sean Patrick Maloney, defined a beneficial owner as a “natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise.” Here are some additional ways in which it defines a beneficial owner:
-
Exercises substantial control over the corporation or LLC
-
Owns 25% or more of the equity interests of a corporation or LLC
-
Receives substantial economic benefits from the assets of a corporation or LLC
The Act requires businesses to report specific information, but in the absence of clear definitions for terms like “substantial control,” there is ample room for confusion and ambiguity. Without clear guidelines, companies risk non-compliance. Interpreting and identifying the individuals influencing the company’s assets or direction has never been more critical.
Navigating Exemptions: The CTA, in Section 5336(a)(11)(xxii), identifies certain exempt entities, which includes some of the following:
-
An issuer of securities under Section 12 of the ‘34 Act;
-
A government entity;
-
A bank;
-
A federal or state credit union;
-
A bank or savings and loan holding company;
-
A registered money transmitting business;
-
A broker or dealer registered under Section 15 of the ‘34 Act;
-
An Exchange or clearing agency registered on the ‘34 act;
-
Any other entity registered with the SEC;
-
An investment advisor required to file with the SEC;
-
A business with 20 or more full time employees and who has gross receipts for $5,000,000 and an operating presence in the US; and
-
Inactive business entities.
Penalties for Violating the Corporate Transparency Act
The potential penalties for violations of the Act are both civil and criminal. Any person who wilfully provides (or attempts to provide) false beneficial ownership information or who fails to report such information will receive civil penalties up to $500 per day and criminal penalties of up to $10,000 and potentially two (2) years of imprisonment. These potential imposed penalties underscore the need to report all required information correctly.
Applicants defined by the CTA.
The CTA defines an “Applicant” as any individual who (a) files an application to form a corporation, limited liability company, or other similar entity under the laws of a State or Indian Tribe or (b) registers or files an application to register a corporation, limited liability company or other similar entity formed under the laws of a foreign country to do business in the United States by filing a document with the secretary of state of similar office under the laws of a State of Indian Tribe.
Even with the government’s definition, we believe certain additional information is required in order to further differentiate between a company “applicant” – and those doing work on behalf of the application like an attorney.
Charting a Path Forward with Legal Counsel
Congress hopes that the CTA is a step towards a more transparent business environment; however, the reporting requirements are complex – depending on the specific circumstances of your business. Additionally, the government having access to vast amounts of sensitive data – on a business, their owners, and those who advise them, is concerning and potentially problematic. Constructive dialogue between businesses, the Treasury, and other regulatory bodies are needed to ensure that our data is being used for its intended purposes. If you have additional questions about the CTA and how it applies to your business directly, contact our office to set up a consultation.
Private Wealth Law Group, P.C.
