The Corporate Transparency Act (CTA) is one small step against money laundering; and an even giant step in international money laundering standards. Anonymous and/or shell companies have been one of the biggest threats to the anti-money laundering standards in the United States. Shell companies have been able to use advance economics to launder money through:
- corporate assets
- luxury goods
The two (2) most important factors of the Corporate transparency act are:
- broad definition of reporting companies
- the identification requirements for beneficial owners.
Corporate Transparency Act (CTA) Overview
What is a reporting company? The CTA defines a reporting company as “corporation, limited liability company, or other similar entity” that is “(i) created by the filing of a document with a U.S. state or Indian Tribe or (ii) formed under the law of a foreign country and registered to do business in the United States….”
A reporting company cannot be companies that are currently regulated by federal government (banks), dormant companies, entity owned by another entity, and companies physical present in the US with over 20 or more employees with filed tax returns documenting gross receipts in excess of $5 million.
Who are the Beneficial owners? A beneficial owner is an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over an entity or (ii) owns or controls at least 25% of the ownership interests in an entity. Beneficial owners cannot be an individual acting as nominee of another, person in control of an entity solely for employment, an individual whose interest is through inheritance, and minors unless their parent’s information has been included.
FinCEN role and Registry access
The Corporate Transparency Act requires a report filed and stored only with the Financial Crimes Enforcement Network (FinCEN). The report identifies each beneficial owner and applicant forming a reporting company. The applicant the individual who files the application to form the entity.
The report must include the
- date of birth
- unique identifying number from an acceptable document for each beneficial owner and/or an applicant.
New reporting companies are required to report beneficial ownership information at formation after the effective date of FinCEN implementing regulations. Existing reporting companies will need to report such information within two years after the effective date of the regulations. Reporting companies will need to update beneficial ownership information with FinCEN within one year of any change in the reported information. The CTA offers a safe harbor from criminal and/or civil liability for incorrect information submitted negligently, if the person submits a report containing the corrected information in 90 days “voluntarily and promptly.”
The reporting company will need to update the information provided to FinCEN upon a change in beneficial ownership. The information will be void from public view, state and/or federal law enforcement agencies require court approval to gain access to the report. Financial institutions with the consent of reporting companies can also gain access if needed to meet customer due diligence and know your customer requirements.
The unauthorized disclosure of information collected under the Act carries the same civil penalty but a higher criminal penalty of up to $250,000 and a higher maximum term of imprisonment of five years. Unauthorized disclosure includes both a disclosure by a government employee and a disclosure by a third-party recipient of information under the Act. The willful failure to provide complete and/or updated information required under the Act or willfully providing false or fraudulent information carry steep civil and criminal consequences. Violations carry civil penalties of up to $500 per day that the violation continues and criminal fines up to $10,000 and/or imprisonment for up to two years. The obligations under the Act apply to beneficial owners and to applicants.
After anonymity is no longer freely available, individuals and/or organizations are no longer emboldened to take certain risks. FinCen creating a registry of beneficial owners aided by millions of reporting companies will greatly deter money launderers, terrorists, and kleptocrats from using anonymous shell companies for illegal activities. Financial institutions must also do their part to ensure the verification of beneficial owners and applicants. In order to be in compliance with the CTA act, MGC can help by:
- Instructing companies of the obligations under the CTA
- Creating systems for accurate reporting of beneficial owners
- Requiring annual reviews for Anti Money Laundering, Customer Due Diligence and Know Your Customer guidelines
- Conducting internal corporate investigations