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This article was reviewed by Emily Sachs, CAMS
Criminals have long used shell corporations — organizations without active business operations or assets, but which are registered as businesses — to obscure their finances and identities. By hiding these important details, it's easier for criminals to engage in illegal activities such as money laundering, tax evasion, and the financing of terrorist activities — while making it harder for law enforcement investigators to “follow the money” when there is suspicious activity.
Thanks to a new federal law designed to strengthen anti-money laundering (AML) regulations, the Corporate Transparency Act (CTA), that may be about to change. As of January 2024, the Financial Crimes Enforcement Network (FinCEN) requires some 25 million businesses currently operating in the U.S. to report information about their beneficial owners under the CTA.
Below, we take a closer look at what the CTA is, why it was passed, and its key requirements. We also highlight the law’s exemptions, violations, and penalties, and discuss what this means for businesses.
What is the Corporate Transparency Act?
The Corporate Transparency Act (CTA) is a U.S. law designed to make it more difficult for criminals to use shell corporations to engage in money laundering, tax evasion, and other financial crimes.
It does this by mandating the creation of a federal, nonpublic database that will contain information about beneficial ownership for all companies required to report it under the law — effectively, any U.S. business, barring the exemptions noted below. This database, maintained by FinCEN, can then be queried by certain government agencies, law enforcement, and financial institutions engaged in customer due diligence (CDD) and Know Your Customer (KYC) or Know Your Business (KYB) processes.
The CTA was signed into law in January 2021 as a part of the Anti-Money Laundering Act of 2020 (AMLA). Together, the CTA and AMLA are meant to update the nation’s AML regulations and are the first major pieces of AML legislation passed in the U.S. since 2004.
What are the Corporate Transparency Act’s reporting requirements?
Businesses subject to the CTA are known as “reporting entities” and include corporations and partnerships, both domestic and foreign, that are required to file a document with a secretary of state.
Reporting entities must report the following information to FinCEN about each beneficial owner and company applicant:
- Full legal name
- Date of birth
- Current residential address
- Unique identifying number and issuing jurisdiction from an acceptable identification document (and the image of such document)
The law identifies the following forms of documentation as being acceptable for identification:
- A non-expired U.S. passport
- A non-expired state-issued driver’s license
- A non-expired identification document issued by a state, local government, or Native American tribe
- A non-expired foreign passport if the individual lacks the above
Company applicant
In the case of a domestic reporting company, a “company applicant” would be the individual who files the document that creates the entity. In the case of a foreign reporting company, a company applicant would be the individual who files the document that first registers the entity to do business in the United States. The regulations also specify that anyone who directs or controls the filing of an entity creation or registration document by another would also be a company applicant.
Other requirements
The Corporate Transparency Act also requires the Secretary of the Treasury to:
- Maintain the reported information in a secure, nonpublic database
- Take all steps, including regular auditing of the database, to ensure that government authorities accessing beneficial ownership information do so only for authorized purposes
- Minimize burdens on reporting companies associated with the collection of beneficial ownership information
- Provide clarity to reporting companies concerning the identification of their beneficial owners
- Collect information in a way that is reasonably designed to generate a database that is highly useful to national security, intelligence, and law enforcement agencies and federal functional regulators.
Corporate Transparency Act exemptions
The CTA specifies that certain types of entities are exempt from the law’s reporting requirements. The largest exempt category is any business that has at least one physical office in the U.S., employs more than 20 U.S. citizens on a full-time basis, and earns at least $5 million in revenue per year. Other exemptions include:
- Securities reporting issuers
- Governmental authorities
- Banks
- Credit unions
- Depository institution holding companies
- Money services businesses (MSBs)
- Brokers or dealers in securities
- Securities exchanges or clearing agencies
- Other Exchange Act registered entities
- Investment companies or advisers
- Venture capital fund advisers
- Insurance companies
- State-licensed insurance producers
- Commodity Exchange Act registered entities
- Accounting firms
- Public utilities
- Financial market utilities
- Pooled investment vehicles
- Tax-exempt entities
- Entities assisting a tax-exempt entity
- Large operating companies
- Subsidiaries of certain exempt entities
- Inactive entities
The CTA also specifies a number of individuals whose information is exempt from being reported, including:
- Minor children when a parent or guardian’s information is reported
- Agents, custodians, intermediaries, and nominees working on behalf of the business or other individual
- Employees of the business whose control over a business or economic benefit is derived solely from their employment status
- Individuals with rights of inheritance to a corporation, limited liability company, or other similar entity
- A creditor to the business, unless they specifically meet the definition of a beneficial owner
When does the Corporate Transparency Act go into effect?
The Corporate Transparency Act went into effect on January 1, 2024.
FinCEN's registry and reporting mechanisms are fully operational so that businesses subject to the law’s reporting requirements can immediately begin reporting their beneficial ownership information. All reporting companies should have a plan in place to ensure compliance.
How long does a company have to file a report under the CTA?
The timeframe for reporting beneficial ownership information varies depending on when the business was created.
Businesses created on or after January 1, 2024 must file their initial report within 30 calendar days of the date of creation. Businesses formed before January 1, 2024, however, have a full year to submit their initial report — and must do so by January 1, 2025.
Additionally, once initial ownership information has been submitted, if any material changes take place, businesses must submit an updated report within 30 days.
Who has access to the CTA’s beneficial ownership database?
Unlike some government registries, the beneficial ownership database created by the Corporate Transparency Act is not public. Access to the information contained in the registry is expected to be tightly controlled.
However, FinCEN has the authority to disclose the beneficial ownership information contained in the registry to certain individuals and entities that request it. This includes:
- Federal agencies engaged in national security, intelligence, or law enforcement activity
- State, local and tribal law enforcement agencies
- Federal agencies making the request on behalf of certain other entities
- Financial institutions complying with customer due diligence (CDD) and Know Your Customer (KYC) requirements
Corporate Transparency Act violations and penalties
If a reporting company willfully* provides (or attempts to provide) false or fraudulent information about its beneficial owners, or otherwise willfully fails to provide information as required, it will be in violation of the CTA. Penalties for such reporting violations include:
- A $500 civil penalty for each day the violation is not remedied, not to exceed $10,000;
- Not more than two years in prison for the individual who submitted the information; or
- Both
*‘Willfully’ means the voluntary, intentional violation of a known legal duty.
Likewise, parties authorized to access beneficial ownership information contained in the registry or provided to the registry are prohibited from disclosing that information to an unauthorized party or using it for an unauthorized purpose. Penalties for unauthorized disclosure or use include:
- A $500 civil penalty for each day the violation is not remedied, not to exceed $250,000;
- Not more than five years in prison for the authorized individual; or
- Both
If the unauthorized disclosure took place as a part of any other crime, maximum penalties are doubled to $500,000 and 10 years in prison.
Prepare for the Corporate Transparency Act with Persona
With the CTA’s reporting requirements now in effect, businesses subject to these requirements should have a plan in place for how they will comply. Given that you should already know who your beneficial owners are, you can use Persona to collect, verify, and safely store their relevant information. With reporting pathways now open, you can then submit that verified information to FinCEN.
Interested in learning more? Start for free or get a demo today.
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