On January 1, 2021 Congress enacted the Corporate Transparency Act (CTA) aimed to counter money laundering, terrorist financing and other illicit activities. In this article, we will cover what compliance professionals need to know about the CTA.
The Corporate Transparency Act
On January 1, 2021, Congress enacted the National Defense Authorization Act (NDAA). Congress passed the Act after overriding a presidential veto. The NDAA contains a variety of acts, one of them being the Anti-Money Laundering Act of 2020 (AMLA). AMLA includes various amendments to combat money laundering and terrorist financing by expanding the regulatory responsibilities and authority of the Financial Crimes Enforcement Network (FinCEN). One addition in AMLA that expands FinCEN’s responsibilities is the Corporate Transparency Act. The CTA, as of the publication of this article, is not fully implemented, as FinCEN has not yet released final regulations or a proposed effective date. On December 8, 2021, FinCEN released the Notice of Proposed Rulemaking (NPRM) in order to clarify the CTA’s reporting requirements. On September 29, 2022, FinCEN issued its Final Rule, implementing the CTA requirements. View our timeline of BSA/AML regulations for an overview of key compliance legislation.CTA Reporting Requirements
The CTA will require both domestic and foreign ‘reporting companies’ that are registered to do business in the U.S. to disclose to FinCEN certain identifying information about the businesses’ beneficial owners, senior officers, company applicants and other control persons. Entities subject to the CTA’s requirements will also have to update any changes to their ownership information within a year of the changes taking place. Additionally, the CTA has directed FinCEN to create a non-public registry that will track the beneficial owners of reporting companies, which can be shared with both law enforcement and in certain circumstances with financial institutions conducting due diligence.Reporting Companies Defined
One key term to understand in the CTA’s reporting requirements is ‘reporting companies’. According to the NPRM, there are two types of ‘reporting companies’ – domestic and foreign.Domestic Reporting Company
A domestic reporting company is any corporation, LLC or similar entity that is created through filing a formation document with a secretary of state or similar office.Foreign Reporting Company
A foreign reporting company is any corporation, LLC or similar entity created under the law of a foreign country that is registered to conduct business in the US.Beneficial Ownership Defined
According to the CTA, a ‘beneficial owner’ is any individual that owns/controls 25% or more of an entity, or has ‘substantial control’ over an entity, either directly or indirectly. For further information, view our answers to frequently asked questions about beneficial ownership.What Defines Substantial Control?
The CTA provides three indicators of substantial control:- Senior officer of a reporting company
- An individual with the authority to appoint or remove any officer or dominant majority of the board of directors (or a similar body) of a reporting company
- An individual with the direction, determination or decision (or substantial influence over) important matters of a reporting company
- ie. sale, lease or transfer of principle company assets, major expenditures and investments, the entry or termination of important company contracts
What Defines Ownership Interest?
The regulation broadly defines ownership interest as:- Equity in the reporting company and other forms of interest
- i.e. capital, profits, partnership, convertible instruments, warrants or rights and options or privileges to gain equity, capital or other interests
- An individual with the ability to control another individual with ownership interest in the entity
Company Applicants Defined
Company applicants is an important term to define, as they will also be required to be disclosed to FinCEN. Like the definition of ‘reporting companies’ there are differing definitions for foreign and domestic entities.Domestic Company Applicant
A domestic company applicant is the individual who filed the document that formed the entity. It also includes any individuals who directed or controlled the filing.Foreign Company Applicant
A foreign company applicant is the individual who has filed the documents to register the entity to conduct business in the US. It also includes any individuals who directed or controlled the filing.What Identifying Information Needs To Be Disclosed?
Reporting companies must disclose the following identifying information about their beneficial owners and company applicants:- Full legal name
- Date of birth
- Current residential or business street address
- Unique identifying number from a FinCEN identifier or an acceptable identification document
- Entity name, along with alternative names
- Street address of the business
- Jurisdiction of the formation or registration
- Unique identification number
- i.e Legal Entity Identifier, Taxpayer Identification Number with an Employer Identification Number, or a Dun & Bradstreet Data Universal Numbering System
CTA Exemptions
Under the regulations, there are a variety of businesses that would be exempt from the CTA reporting requirements. Twenty-three types of businesses that already operate in highly regulated industries, such as banks, insurance companies and domestic credit unions will not be subject to the CTA requirements. The list of 23 entities that are specifically exempt at this time include:- Banks
- Insurance companies
- State-licensed insurance producers
- Domestic credit unions
- Securities issuers
- Domestic governmental authorities
- Money transmitting businesses
- Brokers/dealers in securities
- Registered investment companies and advisors
- Venture capital fund advisers
- Depository institution holding companies
- Accounting firms
- Public utilities
- Financial market utilities
- Pooled investment vehicles
- Tax-exempt entities
- Entities assisting tax-exempt entities
- Subsidiaries of certain exempt entities
- Securities exchange/clearing agencies
- Other Securities Exchange Act of 1934 entities
- Registered entities of the Commodity Exchange Act
- Inactive businesses
- Large operating companies
- A physical office in the US
- More than twenty full-time employees in the US
- Has filed more than $5 million in gross receipts or sales as shown on the previous year’s federal income tax return
