Corporate Transparency Act - What it is and What to Do Right Now

Millions of corporations, LLCs and other legal entities are formed in United States each year. These companies play an essential role in our country’s and the global economy. But they can also be used to facilitate corruption. There are many states where people who create a legal entity don’t even have to disclose who actually owns the company, which creates opportunities for criminals to remain anonymous.

In part because of this, America has become the money laundering capital of the world. How do criminals use companies for money laundering? One way is they will create bogus companies and open bank accounts in their names. Then they transfer illegal money between these various bank accounts and then back to their original account. Then they dissolve the bogus companies which eliminates the chain of customer from the beginning to the end.

The United States now has a new law called the Corporate Transparency Act (CTA) which is going to make this a lot more difficult. Here's how.

CTA requires that all new and existing companies begin reporting on their ownership to the Financial Crimes Enforcement Network, or FinCEN. It’s part of the U.S. Treasury Department and it receives and maintains financial transaction information. For example, you may know that banks have to report suspicious activities such as when there’s any deposit over $10,000. The place they report to is FinCEN, and it is also going to be at the center of all of this new activity related to the CTA.

From now on, any legal entity that is registered with the Secretary of State of any state will have to file a report with FinCEN that discloses its beneficial ownership. The reporting applies to anyone who controls or owns at least 25% of the ownership interest. The information that must be reported includes the full legal name, date of birth, address and unique identifying number from an acceptable document like a passport or driver’s license.

It’s going to be very difficult from now on for anyone to remain anonymous.

There are many exceptions to the filing obligation. Certain entities are specifically excluded, because the ownership is already known to the government. The idea behind this law is to provide access to law enforcement of the ownership information, and so if a company is already required to disclose that information in some other way, then it is excluded from this law.

Also exempt are larger companies that employ more than 20 full time employees, have a physical location and reported more than $5M in sales in previous year.

But note that many companies that may be exempt might have subsidiaries which are not exempt.

I expect that you will have a lot of questions about how this new law applies to your specific situation. I would be glad to work with you on this.

When is this requirement going to kick in?

The biggest practical implication of this ongoing compliance requirement is the need to file an amendment within 30 days after any change to the information previously submitted. So, if an owner has a change of address, or even just gets a new drivers’ license photo, an amendment will need to be filed within 30 days of that change. Failure to comply comes with both civil and criminal penalties, including potential jail time.

There is a lot to do to prepare for the CTA, and companies should start acting right now, before the end of the year.

First Steps – before December 31:

First, identify all business entities that you have and work with your business attorney to review each one:

• Does it qualify for an exemption?

• Which owners meet the criteria for reporting?

Second, amend the operating or shareholder agreement to require all owners to submit the required information and to update the company immediately if there’s any change so the company can file its report.

This is a great time to dust off those agreements and see what other changes might need to be made.

Third, if any of those legal entities are unneeded or inactive, dissolve them before December 31. Likewise, if you know that you will want to form a new entity in 2024, do it before the end of the year, to give yourself more time to file the report.

Finally, many people have estate plans that include trusts and LLCs that own real estate and other investment vehicles. It might be a strategy that needs to be reconsidered now. Contact your estate planning attorney to review your estate plan in light of these new requirements.

Second Steps – December/January – Implement New Procedures

Next, the company will need some new procedures. Appoint someone within the company who will be responsible for CTA compliance. They should think about:

• How the information on its owners should be collected?

• How will it be stored securely?

• How will changes be tracked?

Set up a process to make sure the changes are captured and reported timely.

Forever

The compliance obligations under the CTA are forever ongoing, it never ends until the company is dissolved or becomes inactive.

Watch out for Fraudsters

Of course, there are already fraudsters out there trying to take advantage. You or your employees may get official looking emails that may be titled "Important Compliance Notice" and asks the recipient to click on a URL or to scan a QR code.

Please don’t click on any links unless you’re sure of the source. Neither FinCEN nor any other government entity is going to send you an email about your compliance obligation. You’re just expected to comply.

Should you have any questions or want additional information, do not hesitate to contact me at tanya @ osenskylaw (dot) com.