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What is the Corporate Clarity Act?
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The Corporate Transparency Act (CTA), enacted as part of the Anti-Money Laundering Act of 2020, requires most U.S.companies to report beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN) to prevent illicit financial activity.
Prior to the CTA, the lack of readily available information about who truly owned and controlled companies facilitated money laundering, tax evasion, and other crimes. The CTA aims to address this by creating a national registry of beneficial owners, making it harder for criminals to hide behind shell companies.The law applies to entities created or registered in the United States, even if the beneficial owners are not U.S. citizens or residents.
For example, on December 13, 2023, FinCEN issued its final rule detailing the requirements for reporting under the CTA, including the types of information to be collected and the procedures for filing reports. https://www.fincen.gov/rules/cta-final-rule
Who must Report Under the CTA?
Most U.S. entities, including corporations, limited liability companies (LLCs), and other similar structures, must report beneficial ownership information to FinCEN.Though, certain entities are exempt.
The CTA’s reporting requirements apply to entities created or registered on or after January 1, 2024.Entities existing before that date have until January 1, 2025, to file their initial reports. Exemptions include companies that are already subject to notable regulation, such as those registered with the Securities and Exchange Commission (SEC) or certain banking institutions.
As of November 2023,FinCEN estimated that over 32.7 million entities will be required to report under the CTA. https://www.fincen.gov/sites/default/files/documents/notices/2023/FinCEN-CTA-Small-Business-guide.pdf
What Information Must Be Reported?
Reporting companies must disclose information about their beneficial owners, which includes individuals who directly or indirectly own or control at least 25% of the company’s ownership interests, or who exercise substantial control over the company.
Required information includes the beneficial owner’s full legal name, date of birth, address, and an identifying number from an acceptable document, such as a U.S. driver’s license or passport. Companies must also report information about company applicants – the individuals who directly file the document that creates the entity.
FinCEN provides a detailed list of acceptable documents and reporting procedures on its website. As a notable example, the Small Entity Compliance Guide published by FinCEN in November 2023 outlines the specific data elements required for each type of filer. https://www.fincen.gov/sites/default/files/documents/notices/2023/FinCEN-CTA-Small-Business-Guide.pdf
What are the Penalties for Non-Compliance?
Failure to comply with the Corporate Transparency Act can result in significant civil and criminal penalties.
Civil penalties can reach up to $10,000 for each violation. Criminal penalties include fines of up to $10,000 and imprisonment for up to two years. Additionally, knowingly providing false information can lead to even harsher penalties, including fines of up to $250,000 and imprisonment for up to five years.
On January 26, 2024, the Department of Justice announced its commitment to vigorously enforce the CTA, emphasizing the importance of accurate and timely reporting. https://www.justice.gov/opa/press-release/justice-department-announces-commitment-enforce-corporate-transparency-act
Recent Developments and Challenges
The implementation of the CTA has faced legal challenges, and FinCEN has been actively addressing concerns raised by stakeholders.
In March 2024, a federal judge in Ohio ruled that the CTA was unconstitutional, finding that it exceeded Congress’s authority. However, the Biden administration has appealed this decision, and the law remains in effect pending the outcome of the appeal.FinCEN continues to provide guidance and resources to help companies comply with the CTA, despite the ongoing legal uncertainty.
On February 7, 2024, FinCEN issued guidance addressing concerns about the privacy and security of the beneficial ownership information collected under the CTA, outlining measures to protect sensitive data. https://www.fincen.gov/news/news
