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The U.S. Corporate Transparency Act (CTA), enacted on January 2021, has created additional reporting obligations for legal entities who now have to disclose their ultimate beneficial owners to the Financial Crimes Enforcement Network (FinCEN). The new law targets the practice of using shell companies to hide illicit activities and will affect over 25 million existing legal entities, as well as all new entities opened after the regulation comes into effect.
While the CTA will help the US align its legislation with a global regulatory movement to counteract financial crimes, the new law creates additional challenges for legitimate businesses that have to address the changes in their corporate subsidiary management practices. Here is more on what the CTA entails for businesses, how organizations can ensure compliance and how legal technology and entity management software can assist lawyers and their clients address their new reporting obligations.
The law defines new disclosure obligations for companies registered to do business in the United States. The CTA sets specific requirements for reporting companies, beneficial owners and applicants, determining pre-defined timelines and penalties for non-compliance. Meanwhile, the new enactment provides several exceptions to regulated businesses, large operating companies and inactive entities.
The Corporate Transparency Act sets reporting obligations for both domestic and foreign entities operating in the United States. According to the Act, an entity formed through filing to a secretary of state's office can be considered a reporting company. Meanwhile, the term Ultimate Beneficial Owner includes individuals who exercise control over the entity and own not less than 25% of its equity.
Under the Corporate Transparency Act, companies have to file information to FinCEN about themselves and individuals who have founded these companies, own equity or shares and control their operations. The reporting companies have to file information about their legal names, their d/b/a names, business address, jurisdiction and ID number.
The ultimate beneficial owners, aka UBOs, should provide their personal information, including their name, date of birth, residence address, ID number and a copy of their identification document. In addition, the law may require the submission of the same personal details by so-called applicants involved in forming a legal entity, for example, by lawyers, attorneys and other third-party providers.
The law provides one year period to make the initial filing to FinCEN for existing entities formed before the new regulation took place. All new entities formed after the regulation comes into effect will have to report beneficial owners within 30 days from the formation.
The CTA doesn't set any annual reporting obligations after the initial report. However, legal entities must report any changes in their details or changes in information about beneficial owners, for example, name change or address change.
While the CTA sets numerous exceptions from the definition of a reporting company, most of them relate to larger entities that have already reported all their information under applicable regulations. Thus, companies with a physical office in the United States that earned more than $5M during a previous year and have more than 20 US employees do not fall under the scope of CTA reporting requirements.
The CTA also excludes companies working in regulated industries, including banks, financial institutions, insurance companies and similar organizations. Finally, the law doesn't set reporting obligations for existing non-active domestic entities which don't hold any assets and are not engaged in active business.
While companies have a certain grace period to correct errors in their reported data, the law is stringent on intentional non-compliance. Thus, those who fail to report to FinCEN as required by CTA or those who provide intentionally false information can face a civil penalty of up to $500 per day, a criminal fine of up to $10,000 and imprisonment of up to two years or both.
While the law is yet to come into effect, many organizations are already taking steps to meet their disclosure obligations, given the required time commitment and cost of CTA compliance. These steps include identifying and taking necessary governance actions, adapting business processes and adopting legal technology to implement the required changes.
Following the requirements of the new regulation, businesses are looking into developing relevant internal policies and procedures to comply. Many companies have already formed CTA compliance committees to integrate new procedures into their existing framework. In addition, organizations have to dedicate administrative resources to collect, manage and report necessary data and provide necessary training to the teams on the required procedures and systems.
Following the enactment of the CTA, new legal entities will have to report their ultimate beneficial owners, which will require full KYB at formation. Companies must include procedures for reporting any changes to their information or information about their beneficial owners within 30 days of the change.
To this end, companies have to ensure collaboration with the ecosystem of actors around entity formation, including accountants, registered agents, law firms and in-house legal teams, among others. Such collaboration will require providing for the technical aspect of compliance, including setting automatic reminders, ensuring access rights, data safety and sharing information across the board.
Given the scope of compliance work, law firms and in-house legal teams will have to utilize technology tools to ensure data accuracy, timely reporting, data privacy and overall efficiency.
For example, reporting to FinCEN for just 100 entities, with each having 5 beneficial owners/applicants, will require gathering 2,000 personal private information data points such as the name, address, ID number and photo of the valid ID document. Managing such volumes of data would be impossible, highly risky and inefficient without the application of reliable entity management software operating on a secure cloud and providing for necessary checks, automation and reminders.
The Corporate Transparency Act is expected to come into effect by the end of 2022 or early 2023, which leaves companies and their legal counsel with very limited time for initiating new policies and processes. The scope of new regulation leaves no room for inefficient manual processes and calls for the immediate application of entity management software.
For many companies who are looking to improve the efficiency of their compliance work, it can be the right moment to investigate legal technology that could help them bring their entity management and corporate subsidiary management to a new level. Please don't hesitate to book a free demo with the Athennian team to learn more about how entity management software can help you ensure compliance with the Corporate Transparency Act.
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