Corporate Transparency Act takes aim at financial crime

Effective Jan. 1, the Corporate Transparency Act (CTA), requires most small and medium-sized businesses to disclose detailed ownership information directly with the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). The CTA is intended to enhance transparency regarding ownership and control of corporate entities.

The CTA’s primary objective is to assist FinCEN in tracking financial crimes and safeguarding the integrity of the U.S. financial system. FinCEN is requiring disclosure of beneficial ownership information (more than 25% ownership) to help identify those businesses that have been used to conduct illicit financial activities. Such illicit activities include money laundering and tax fraud where the identity of business owners and those who control these entities has been previously concealed.

Reporting companies will be required to provide the name, address, date of birth, identification number (for example driver’s license or passport number) along with an image of the government issued identification for each owner of more than 25% interest in a reporting company and everyone who has substantial control over the business. Substantial control is defined under the CTA as any individual who (1) is a senior officer (president, CEO, CFO, GC, COO,) or regardless of title has similar authority; (2) has authority to appoint or remove officers or directors; (3) is an important decision maker; or (4) has any other form of substantial control over the company.

While there are exemptions for various types of businesses including those that are already reporting to FinCEN, such as financial institutions and publicly traded companies, most of the approximately 33 million small businesses in the United States will not be exempt and will be required to file with FinCEN within 90 days of starting a new business or changing ownership or control of a business beginning on January 1, 2024.

Reporting companies formed before January 1, 2024, will be required to file with FinCEN before January 1, 2025. Beginning January 1, 2024, any individuals who assist new entities with filing formation documents that create or register the new company will be considered company applicants under the CTA and will be required to file the same personal identification information with FinCEN. If more than one person is involved in filing formation documents, then both the individual who is primarily responsible for directing or controlling the filing as well as the individual who files the formation documents will be considered company applicants.

Individuals who need to repeatedly file with FinCEN as a beneficial owner or company applicant can apply to FinCEN for a FinCEN identifier number to use instead of having to continually provide their personal identification information.

The penalties for non-compliance are severe, including imprisonment and $10,000 fines. Understanding the requirements for accurate and timely filing with FinCEN is essential to avoid these penalties. Business owners should evaluate how they will be gathering this sensitive personal information and submitting it to FinCEN. Failing to secure the sensitive personal identification information of beneficial owners and those with substantial control of a business can result in data breaches where this information could be stolen and sold online or used in identity theft transactions. Businesses that fail to properly secure this personal information may have liability under state and federal privacy laws as well as liability to the beneficial owners for any damages resulting from their failure to secure their personal data.

Suggested action items for business owners to consider:

1) Determine if your business qualifies for one of the 23 exemptions.

2) Understand what information you will need to provide to FinCEN and decide if you will do this on your own or with the assistance of a third-party provider.

3) If you will be using a third party, discuss the process with them and make sure you understand how they will be gathering, securing, and filing your beneficial ownership information.

To avoid significant criminal and civil penalties, reporting companies need to understand their reporting obligations under the CTA and determine how they will meet these obligations in a safe and secure manner.

David McCarville is an attorney with Fennemore.