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The Corporate Transparency Act (CTA) is a new piece of legislation aimed at increasing the transparency of corporate entities and preventing illegal activities such as money laundering and terrorism financing. The CTA was signed into law in January 2021 as part of the National Defense Authorization Act. Under the CTA, corporations in the United States are required to disclose the beneficial owners of the company, which is defined as any individual who owns 25% or more of the company or has significant control over the company. This information will be collected by the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Treasury Department responsible for collecting and analyzing information about financial transactions to combat money laundering, terrorism financing, and other financial crimes.
The CTA aims to prevent the use of anonymous shell companies to engage in illegal activities such as money laundering, tax evasion, and financing of terrorism. It is estimated that anonymous shell companies are responsible for billions of dollars in unlawful activities yearly. This Act focuses on people engaged in illicit activities under the corporate “veil” without having to reveal their individual names. This, in turn, makes it very difficult for law enforcement agencies to find the individuals behind such businesses and entities because, during the creation of such, whether internationally or in the United States, there is no requirement to disclose the person’s identity in control of such entities. To overcome this loophole, the CTA requires companies to reveal their names by filing a beneficial ownership information requirement that will be reported to the Department of Treasury’s Financial Crimes Enforcement Network, commonly known as FinCEN. This information will be stored in FinCEN’s databases, and only limited access is provided to certain government law enforcement agencies. There are certain exceptions, like financial institutions, that could have access with an entity’s consent.
To determine which exceptions apply, it is necessary to understand what a beneficial owner and company applicant is. A beneficial owner is any individual who exercises substantial control over the reporting company or has an ownership interest of 25% or more. Conversely, a company applicant is an individual responsible for directly filing documents that aid in the creation of a company or the one who has control over the filing (if more individuals are involved), or the one who registers a foreign reporting company first.
The CTA and the FinCEN are closely connected. The CTA requires corporations to disclose their beneficial owners to FinCEN,. In 2022, FinCEN released a rule describing who has to file the report, the time to file, the details that must be filled in, and when to update the full report. One question that is posed is which entities will have to file beneficial ownership information reports with FinCEN. The recent ruling issued by FinCEN describes two different types of companies-
- Domestic reporting company (a reporting company that is a corporation, LLC, or any other entity that is created by filing with the Secretary of State or similar office.)
- Foreign reporting company (any reporting company created in a foreign country) registered in the United States to do business by filing with the Secretary of State or a similar office.
Thus, are any other corporations or entities under this rule? While the CTA requires most corporations in the United States to disclose their beneficial owners to the FinCEN, there are several exceptions to this requirement. Here are 23 exceptions to the CTA:
- Publicly traded companies: Companies that are traded on a national securities exchange or registered with the Securities and Exchange Commission (SEC) are exempt from the CTA.
- Banks: Financial institutions that are regulated by a federal or state agency are exempt.
- Insurance companies: Companies that are regulated by a state insurance regulator are exempt.
- Public utilities: Companies that are regulated by a federal or state agency as a public utility are exempt.
- Investment companies: Mutual funds, exchange-traded funds (ETFs), and other investment companies that are registered with the SEC are exempt.
- Registered investment advisers: Companies that are registered with the SEC as investment advisers are exempt.
- Broker-dealers: Companies that are registered with the SEC as broker-dealers are exempt.
- Certain nonprofits: Organizations that are tax-exempt under Section 501(c) of the Internal Revenue Code are exempt.
- Governments: Federal, state, and local government entities are exempt.
- Certain trust companies: Companies that are authorized to act as trustees or fiduciaries under state law are exempt.
- Certain regulated entities: Companies that are subject to state or federal licensing or registration requirements are exempt.
- Certain types of trusts: Certain types of trusts, such as employee benefit plans and charitable trusts, are exempt.
- Certain investment vehicles: Certain investment vehicles, such as commodity pools and real estate investment trusts (REITs), are exempt.
- Certain insurance products: Insurance policies that are regulated by state insurance regulators are exempt.
- Certain types of partnerships: Certain types of partnerships, such as limited partnerships and limited liability partnerships, are exempt.
- Certain publicly available companies: Companies that are required to disclose beneficial ownership information under other federal or state laws are exempt.
- Certain non-US entities: Certain non-US entities that are subject to similar beneficial ownership disclosure requirements are exempt.
- Certain merger or acquisition transactions: Companies that are involved in merger or acquisition transactions are exempt for a limited time.
- Certain bankruptcy proceedings: Companies that are in bankruptcy proceedings are exempt for a limited time.
- Certain trusts in connection with loans: Certain trusts that are created in connection with a loan or credit transaction are exempt.
- Certain depository institutions: Depository institutions that are insured by the Federal Deposit Insurance Corporation (FDIC) are exempt.
- Certain money transmitters: Money transmitters that are registered with FinCEN are exempt.
- Certain securities issuers: Companies that issue securities that are registered with the SEC are exempt.
It is important to note that even if a corporation is exempt from the CTA, it may still be subject to other beneficial ownership disclosure requirements under federal or state law.
At the beginning of 2024, companies must start filing their initial beneficial ownership information report with FinCEN for their businesses. The rule also mentions that any and all domestic and foreign reporting companies, whether created or registered on or after January 1, 2024, will have a 30-day timeline to file their initial report from the date of receiving the notice of their creation or registration. While all domestic and foreign reporting companies created or registered before January 1, 2024, must file their initial report by January 1, 2025.
The CTA is also expected to have a significant impact on the financial industry. Financial institutions will now be required to verify the beneficial ownership information of their customers, which will increase their compliance costs. However, increased transparency is expected to reduce the risk of money laundering and other illegal activities, which will benefit the financial industry in the long run. The CTA has been widely praised by anti-corruption and anti-money laundering advocates. However, some critics have raised concerns about the potential for the information collected by FinCEN to be leaked or hacked. There are also concerns about the burden that the increased compliance costs will place on small businesses.
Despite these concerns, the CTA is a significant step forward in the fight against anonymous shell companies and illegal activities such as money laundering and terrorism financing. The increased transparency will make it much more difficult for criminals to hide their activities and help ensure that corporations are held accountable for their actions.
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