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The Corporate Transparency Act (CTA) is landmark legislation to upgrade the United States’ anti-money laundering laws (AML) by addressing the biggest weaknesses in the country’s AML safeguards.
Enacted in 2021 as part of the National Defense Authorization Act, the CTA sets a new course for corporate transparency by requiring the Treasury’s Financial Crimes Enforcement Network (FinCEN) to create and maintain a national registry of beneficial owners of companies in order to stop financial criminals being able to hide behind anonymous shell companies.
The CTA has three rules
The Reporting Rule – this covers the scope of the beneficial ownership information (BOI) reported to FinCEN and which entities are subject to the CTA.
The Proposed Access Rule – this covers who can access the beneficial ownership registry
The Customer Due Diligence Rule – this covers how to revise existing consumer due diligence rules to comply with the CTA
The CTA's effective date is set for January 1, 2024, but the journey towards establishing the final rules necessary for full implementation has been problematic, with significant delays and challenges.
January 2021: The CTA became part of the Anti-Money Laundering Act of 2020, contained within the National Defence Authorization Act for Fiscal Year 2021 requiring companies to disclose their BOI to a non-public database which will be maintained by FinCEN.
December 2021: FinCEN released the first Proposed Rule – the Reporting Rule – addressing who must report beneficial information, when they must report, and what information they must provide
September 2022: FinCEN published the first Final Rule (Reporting Rule) providing guidance on which entities were covered by CTA, what they need to report and when.
December 2022: FinCEN released the second proposed rule, the Proposed Access Rule - outlining the access protocols for authorized users of BOI. Stakeholders were given until February 14, 2023 to submit written comments on the proposed rule. As yet, the final rule on access has not been published.
September 2023: The release of the second Final Rule, governing access protocols for authorized users, is anticipated to occur in September 2023, just a few months before reporting is scheduled to commence on January 1, 2024.
January 1, 2025: The third and final rule will revise FinCEN's existing Customer Due Diligence rule (2018) to ensure it complied with the CTA. This is due to be implemented no later than one year after the effective date of the Final BOI Reporting Rule (January 1, 2024).
Each Reporting Company is required to file general company-level information as well as information about its beneficial owners to FinCEN. A Beneficial Owner is defined as any individual who directly or indirectly owns or controls 25% or more of the equity in the Reporting Company, or exercises “substantial control” over the Reporting Company.
Legal name, trade name and any dbas (Doing Business As)
Street address
The jurisdiction where is was first formed/first registered
Taxpayer Identification Number
Name
Date of birth
Street address (in most cases, a residential address)
Unique identification number (e.g., passport or driver’s license number) along with an image of the document containing such unique identification number
The CTA also obligates reporting companies to provide identifying information for the “company applicants”. A company applicant is either the individual who is responsible for filing the documents that created the entity/ first registered the foreign reporting company to conduct business in the US or the individual who is primarily responsible for directing or controlling the filing of the relevant formation or registration document of the company.
Any corporations, partnerships, LLCs, and other businesses that were created by a filing with a secretary of state or equivalent office and any foreign entities that are registered to do business in any US state are required to file.
Given that the CTA has been designed to identify instances where financial criminals are using company structures to hide their illicit activities, the CTA contains 23 exemptions that cover the majority of large companies, below is a partial list of exemptions;
Large operating companies, which are defined as having more than 20 full-time employees, more than $5 million in annual revenues sourced from the US, and an operating presence in the US.
Issuers that are registered with the SEC.
Banks, credit unions, and bank holding companies registered with the Financial Crimes.
Enforcement Network.
Registered Commodity Exchange Act entities, investment companies, investment advisers, and venture capital fund advisors.
Insurance companies or insurance producers licensed at the state level.
Public utilities
Accounting firms
Any existing entities that were formed or registered before January 1, 2024, have until January 1, 2025 to file their initial report with FinCEN. Any Reporting Companies formed or registered on or after January 1, 2024, will have only 30 days to file their initial report and this will be the case going forward. The CTA states also that any corrections or updates to a previously filed report must be made within 30 days.
While there are a number of businesses that are exempt, there is no exemption for law firms and in fact, the new CTA reporting requirements will have a significant impact on law firms:
Many law firms will be defined as reporting companies so will be required to file under the CTA.
Lawyers, paralegals, or other staff are often the “company applicants” for clients or former clients and therefore subject to reporting rules under the CTA
Law firms will need to inform any of their clients that are defined as reporting companies of their requirements under the CTA
Reporting Companies will turn to law firms to help and advise of their reporting requirements under the CTA
Nearly two million corporations or limited liability companies are being formed in the US every year so the full implementation of the CTA will impact a huge number of businesses.
The person forming a corporation or limited liability company within the United States - more often than not, this is someone from a law firm - typically has to provide less information about that company than they would need to obtain a bank account or driver's license. Furthermore, the formation process typically does not require them to name a single beneficial owner.
Therefore, for many law firms looking to help clients access the UBO information they need to comply – and to comply themselves – may be challenging.
However, there are steps that law firms and other reporting companies can take to help prepare for the implementation of the new regulations:
Review Your Corporate Structure to identify the beneficial owners of your own firm and any clients subject to the CTA rules.
Create a Beneficial Ownership Register which will need to include the name, address, date of birth, and photo ID (such as a passport or driver’s license) of each beneficial owner in each firm.
Develop a Compliance Program including policies and procedures for identifying and verifying beneficial owners, maintaining a beneficial ownership register, reporting beneficial ownership information to FinCEN, and safeguarding the beneficial owners’ personal information that is collected by your firm
The easiest way to put all these steps in place is to use a third-party compliance platform, like SmartSearch. Our Ultimate Beneficial Owner (UBO) check enables clients to quickly and accurately identify UBOs and then run full checks on them to ascertain the information needed to satisfy CTA rules.
When you run a UBO check using SmartSearch our database will return three categories of results to you:
Individual UBOs – we can identify any individuals within the corporate structure with over 10% of the total shares or voting rights.
Director UBOs – we will flag if any of the individuals with more than 10% of the total shares or voting rights are also directors
Additional entities – we will also list any other companies within the corporate structure which have a share in the business
Then, once a UBO has been successfully identified, SmartSearch can carry out a full AML check on that individual or entity – including sanctions screening and customer due diligence – to ensure you meet the CTA requirements and gives you the peace of mind that they do not pose a threat to your business if you were to work with them.
The platform will also monitor all checks every night for any changes to their status and flag anything you need to be aware of.
