Corporate Transparency Act — A New Era in U.S. Beneficial Ownership Disclosure

Under the Corporate Transparency Act (CTA), certain companies doing business in the U.S. must report their entity and Ultimate Beneficial Owner (UBO) information to the Financial Crimes Enforcement Network (FinCEN). As of January 1, 2024, any new incorporation or significant UBO change will need to be reported, and any company formed before then will have one year to report.

The use of anonymous shell companies, complex ownership structures that often make it difficult to identify true company ownership, has long been one of the critical weaknesses of Anti-Money Laundering efforts in the U.S. In its 2016 Mutual Evaluation Report (MER) of the U.S. government’s AML/CFT program, the Financial Action Task Force (FATF) noted that the “lack of timely access to accurate beneficial ownership information remains one of the most fundamental gaps in the U.S. context.”

Many states have no requirements for collecting beneficial ownership information. For example, incorporating in Delaware allows companies to form quickly, inexpensively and with no identity requirements. As a result, numerous shell companies were formed there, further resulting in many financial crime investigations. The federal Corporate Transparency Act will overlay all state-based UBO reporting obligations.

While regulated entities in the U.S. have had to identify and verify the identity of the beneficial owners of business customers at the time a new account is opened, as per the Financial Crimes Enforcement Network (FinCEN) Final Rule, it is now the responsibility of the entity itself to provide the beneficial ownership information.

U.S. UBO and Entity Reporting Requirements

When considering the FATF’s Best Practices on Beneficial Ownership for Legal Persons, the Corporate Transparency Act is best categorized as a registry approach. Each reporting company will need to provide FinCEN with four pieces of UBO information:

• Beneficial owner’s full legal name
• Beneficial owner’s date of birth
• Beneficial owner’s current residential or business street address
• A government-issued identifying number assigned to that beneficial owner from an acceptable identification document (such as a passport, driver’s license or other U.S. state-issued identification document).

Reporting companies must also submit an image of the document that contains the unique identifying number. 

Each reporting company must also submit four pieces of entity information:

• Full legal name and any trade name or “doing business as” (DBA) name
•  Current US address of its principal place of business or current address where it conducts business in the US, if its principal place of business is outside the US
•  Jurisdiction of formation or registration
•  IRS Taxpayer Identification Number (TIN) (including an Employer Identification Number (EIN)) or a tax identification number issued by a foreign jurisdiction and the name of such jurisdiction if the foreign reporting company has not been issued a TIN

It’s important to note that the registry will not be publicly available, but the information will be available to law enforcement or financial institutions (with customer consent).

According to a National Law Review article, “Customer Due Diligence requirements for financial institutions will be updated to conform to the requirements of the Act and to take into account access by financial institutions to the information compiled under the Act.” The fact that this UBO information is available to financial institutions implies that the checking and confirmation of UBO registry information might become a necessity for reporting companies. But not all companies will be required to report their UBO information to FinCEN. Exemptions include:

• Companies with more than 20 employees and gross receipts or sales of more than $5 million and a physical presence in the U.S.
• Reporting companies like banks, credit unions and registered brokers or dealers
• Dormant companies
• Unregistered foreign entities (companies that aren’t registered with a state)

The specific definition of a beneficial owner in the Act is:

“A natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:

(i) Exercises substantial control over a corporation or limited liability company;

(ii) Owns 25% or more of the equity interests of a corporation or limited liability company; or

(iii) Receives substantial economic benefits from the assets of a corporation or limited liability company.”

Providing false or fraudulent UBO information carries penalties of up to $10,000 and two years in jail.

Improving AML Practices

Many compliance experts are cheering this development as anonymous shell companies have historically been connected with enabling money laundering, corruption, fraud and tax evasion. According to the Bank Policy Institute (BPI), a nonpartisan public policy, research and advocacy group, the collection of UBO information has a direct connection on reducing crime. BPI points to a study that finds “after anonymity is no longer freely available to domestic and foreign investors, all-cash purchases by corporations fall by approximately 70%, indicating the share of anonymity-seeking investors using LLCs as ‘shell corporations.’”

The FATF best practices document, “A well-resourced and proactive company registry holding beneficial ownership information can be an effective mechanism because it provides a useful basis for competent authorities to access to such information.” But the FATF also notes that it is up to the registry to actively verify and monitor the UBO information for this approach to be successful. There is also the consideration of how the regulations that result from the Act will deal with trusts, estates and other complex financial structures.

The Advantages of Using a FinCEN ID

To speed up and simplify CTA reporting, FinCEN now offers a unique, optional identifying number that can be issued to an individual or an entity. Beneficial owners can provide just their name and their FinCEN ID number to the reporting company instead of all their personal data.

If updating their data, the person would only need to change it once with FinCEN instead of providing that updated information to all companies they are beneficial owners of.

For reporting entities using FinCEN IDs will ease the burden of collecting and updating beneficial ownership information. The time savings might be substantial, especially for entities with complex business structures that must report the same information multiple times.

Corporate Transparency Act 2024 Developments

Companies can report beneficial ownership information to FinCEN.

The Access Rule took effect in February 2024. It outlines what government agencies, regulators, and financial institutions can access beneficial ownership information.

While the CTA is now in force, the legal wranglings are far from over.

In March 2024, A U.S. District Court judge in Alabama ruled the CTA unconstitutional. According to global law firm Gibson Dunn, “the court concluded that the CTA is unconstitutional because it exceeds Congress’ enumerated powers.”

The U.S. government appealed. For now, as the lawsuit was not a class action, it impacts only the approximately 65,000 members of the National Small Business Association.

In April 2024, FATF rerated the U.S. as “largely compliant” with Recommendation 24. This is primarily due to the implementation of the CTA and its more robust requirements for reporting beneficial ownership information. However, there are still some deficiencies.

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