USA: Navigating the Corporate Transparency Act (CTA)

The United States has an important new law, The Corporate Transparency Act (CTA), which became law in January 2021. It’s designed to combat money laundering and prevent the transfer of illicit funds through shell companies. 

The United States Congress adopted the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 on December 10, 2020. That Act included the Corporate Transparency Act (the “CTA”) at Sections 6401 through 6403. To discuss the intentions of the CTA, Section 6402 states “[i]t is the sense of Congress that:”

1. More than 2,000,000 corporations and limited liability companies are being formed under the laws of the states of the United States each year;
2. Most or all states do not require information about the beneficial owners of the corporations, limited liability companies, or other similar entities; and
3. Malign actors seek to conceal their ownership of these entities “to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interest of the United States and allies of the United States.

That section goes on to state the need for federal legislation “providing for the collection of beneficial information for corporations, limited liability companies, or other similar entities.” The CTA delegates the duty to collect, maintain, and audit such information to the Secretary of the Treasury who is responsible for issuing regulations to implement these beneficial ownership reporting requirements by December 31, 2021. In doing so, § 5336(b)(1)(F) tells the Secretary of the Treasury to “establish partnerships with State, local, and Tribal governmental agencies” and to “minimize burdens on reporting companies” in order to implement the requirements of the CTA. Section 6403 of the CTA establishes the “beneficial ownership information reporting requirements” by adopting 31 U.S.C. § 5336.

The CTA is based around the obligation of “Reporting Companies” to report information regarding their formation and beneficial owners to the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). 31 U.S.C. § 5336(b)(1) requires that each “reporting company . . . submit to FinCEN a report that contains the information described in paragraph 5336(b)(2).” This includes Reporting Companies that had been formed prior to the effective date of the rules to be promulgated by the Secretary of the Treasury and, in other cases, “any reporting company that has been formed or registered after the effective date of the regulations.”

The CTA, its rules, and the reporting obligations that it establishes will be important for every Reporting Company and their advisors -especially their lawyers and accountants. As discussed below and in the papers linked to this summary, there are strict time limits for filing the reports, there is a significant amount of personal information to be contained in the reports, and the reports will be available to law enforcement agencies, customer due diligence for financial institutions, and for other limited purposes as set forth in the rules. To some extent, the information will be available to offshore agencies as well. Since it is a law with which the Reporting Companies must comply, lawyers and accountants can expect to confirm compliance as a part of their normal entity due diligence.

While the CTA as originally adopted anticipated that its reporting requirements and rules would become effective on or before January 1, 2022 (a year after adoption), it now appears that the rules will become effective January 1, 2024. The Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury has been studying the issues and slowly publishing notices of proposed rulemaking.

In September 2022 FinCEN adopted its first set of final rules to implement the CTA beneficial ownership information (BOI) reporting provisions. Following its January 1, 2024 effective date, the rule will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States (“Reporting Companies”) to report information about their beneficial owners. As defined in the final rules, “beneficial owners” are the persons who ultimately own or control the Reporting Company. The rule as adopted addresses the information that Reporting Companies are required to report (Beneficial Ownership Information or “BOI”) as well as the timing for filing the BOI reports.