The Corporate Transparency Act (CTA) represents a shift in corporate governance and regulatory compliance. The aim of the act is to enhance transparency and prevent financial crimes such as money laundering. The CTA imposes new reporting requirements on businesses, which fundamentally alters the beneficial ownership information. Here are 5 critical things you need to know about the legislation and how it affects your business.
1. What Is the Corporate Transparency Act?
Corporate Transparency Act was introduced as a part of the Anti Money Laundering Act of 2020. Under the act, some companies are required to submit their beneficial ownership information (BOI) reports to the Financial Crimes Enforcement Network (FinCEN). It regulates this policy to corporations, limited liability companies (LLPs), and similar entities. The act helps to create a comprehensive national database of ownership information to prevent illegal activities, such as money laundering and terrorism financing.
2. Who Needs to File Under the Corporate Transparency Act?
According to CTA, all reporting companies need to file Beneficial Ownership Information (BOI) reports. The CTA defines reporting companies as corporations, limited liability companies, and other similar entities. There are some exemptions for larger operating companies, regulated entities, and certain inactive businesses, which are not required to report. In the case of a non-US company that is registered and qualified to do business in the US is also recognized as a reporting company.
3. Who is a Beneficial Owner?
A beneficial owner is someone who directly or indirectly has substantial control over the reporting company or owns or controls at least 25% of the ownership interests of a reporting company. Any individual who has substantial control over the reporting company exercises the following rights:
- The individual is a senior officer
- The individual has the authority to appoint or remove certain officers or a majority of directors of the reporting company
- The individual is an important decision-maker
- The individual has any other form of substantial control over the reporting company
Also, an ownership interest can be any of the following:
- Equity, Stock or Voting Rights
- Capital or Profit Interest
- Convertible Instrument
- Options or other non-binding privileges
- Any other instrument, contract, or other mechanism used to establish ownership interest
4. Key FinCEN Reporting Requirements
Companies must report the following information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN):
- Name
- Date of Birth
- Address
- Unique Identification Number (such as driver’s license or passport number)
This information is crucial to establish a national database that law enforcement and other authorised parties can access as and when required.
5. Filing Requirements and Deadline
All new entities must file their beneficial ownership information at the time of formation. Existing companies must comply with the CTA within a specified period after the effective date of regulations. Additionally, any changes in beneficial ownership must be reported promptly. Anyone who violates the reporting requirements will be liable for penalties of up to $500 for each day of violation. It can also include up to two years of imprisonment and up to a $10,000 fine. Any mistakes must be corrected within 90 days of the deadline of the original report.
Conclusion
The Corporate Transparency Act marks a significant shift in how businesses handle beneficial ownership information. Understanding the CTA’s requirements and implementing effective compliance strategies is important for businesses to comply with the regulations, avoid penalties, and enhance their transparency and credibility. So, businesses must stay informed and aware of these regulations for a secure and compliant business environment.