The federal Corporate Transparency Act (“CTA”) goes into effect on January 1, 2024. This legislation aims to enhance transparency among business entities by combatting illicit financial activities and bolstering efforts by the U.S. federal government to prevent money laundering and other financial crimes.

Background

The Corporate Transparency Act, signed into law in December 2020, is intended to address the challenges posed by anonymous shell companies that have been exploited for money laundering, terrorism financing, and other nefarious activities. Prior to the CTA, it was relatively easy for individuals to establish business entities without disclosing the true beneficial ownership of such entities, allowing them to conceal their identities and evade law enforcement scrutiny.

Key Provisions

Beneficial Ownership Reporting

The core of the CTA is the requirement for companies to disclose their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). Beneficial ownership refers to the individuals who directly or indirectly own or control a significant portion of a company. This beneficial ownership information (“BOI Reports”) will be maintained in a confidential database accessible only to authorized government agencies. Existing Reporting Companies created on or registered to do business before January 1, 2024, must file their initial BOI reports by January 1, 2025. Reporting Companies created or registered after January 1, 2024, must file an initial BIO Report within 30 calendar days of the earlier of (1) the date of receipt of actual notice of the entity’s creation or registration; or (2) the date of first public notice provided by the applicable secretary of state or similar office.¹

Reporting Thresholds

Not all companies will be subject to the same reporting requirements. The CTA includes thresholds and exceptions, exempting certain businesses from reporting to prevent undue burden. For example, the CTA contains 23 different exemptions for various types of entities. For the full list of exemptions, please visit: https://www.fincen.gov/boi-faqs. Companies falling within the scope of the CTA must report their beneficial ownership information in accordance with the timelines specified above.

Enhanced Customer Due Diligence

Financial institutions and other regulated entities will be required to conduct enhanced customer due diligence procedures, ensuring they have access to accurate and up-to-date beneficial ownership information when establishing business relationships.

Criminal and Civil Penalties

Non-compliance with the CTA may result in severe penalties, including fines and imprisonment. By imposing strict consequences, the legislation aims to deter individuals from attempting to circumvent the reporting requirements.

Benefits

Combatting Financial Crimes

By mandating the disclosure of beneficial ownership information, the CTA enables law enforcement agencies to more effectively investigate and prosecute financial crimes. This includes money laundering, terrorist financing, and other illicit activities that may have been facilitated through opaque corporate structures.

Conclusion

The Corporate Transparency Act represents a significant change in the reporting requirements of U.S. business entities. As it comes into effect on January 1, 2024, businesses should be prepared to comply with these requirements within the timeframes described in this article.

If you have any questions about this article or the CTA, please contact the author at Nikhil.Mehta@saul.com or at (312) 876-6931.