Anti-money laundering law will have impact on many businesses

New requirement is to register “beneficial owners” under Corporate Transparency Act

By Steve Ellis

On January 1, 2021, Congress passed the National Defense Authorization Act (NDAA) for fiscal year 2021. The NDAA includes, among other things, the Corporate Transparency Act (CTA), requiring private companies to disclose their “beneficial owners” to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCen).

The CTA was designed to cut down on the anonymous shell companies used to hide illegal businesses and financing. This is the first major update to U.S. anti-money laundering laws in 20 years.

It is important to note that reporting under the CTA will not begin until the Treasury has adopted regulations under the CTA, which are mandated by January 1, 2022. So while the impact to American businesses isn’t immediate, it is something owners should be aware of and prepare for.

CTA imposes its reporting obligations on corporations, LLCs, or other similar entities that are created by filing a document with the Secretary of State or a similar office under the law of a state or Indian Tribe, or formed under the law of a foreign country and registered to do business in the United States.

The statute does not apply to publicly traded companies, companies already subject to close U.S. Federal regulation or supervision (e.g. banks or investment advisers), and larger companies with at least 20 full-time employees that reported at least $5 million of gross receipts on previously filed U.S. federal income tax returns. There are additional exempt categories of companies and the Treasury has been authorized to exempt additional categories.

Beneficial owners

The CTA requires that companies that are not exempt file with FinCen the full legal name, date of birth, current residence or business address, and unique identifying number from an acceptable document (passport, driver’s license, etc.) of “beneficial owners.” A beneficial owner is an individual who directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise:

  • Exercises substantial control over an entity, or
  • Owns or controls no less than 25 percent of the ownership interests of an entity.

The reported information will be accessible to national security and law enforcement agencies. Through a consent procedure, financial institutions may be permitted access to these reports, possibly taking the place of some of the current anti-money laundering and know-your-customer disclosure procedures.

These requirements are not immediately effective. At this time, implementation is staggered. Existing entities have to report within two years of the effective date of the regulations (January 1, 2022), and entities formed after the effective date of the regulations will be required to report at the time of formation. In addition, companies will be required to report a change in information no later than one year after the change.

Companies should stay diligent about their reporting requirements. Violation of the statute provides for both civil and criminal penalties. Failure to report complete or updated beneficial ownership information or willfully providing false or fraudulent information is subject to a civil penalty of up to $500 for each day the violation continues and criminal fines of up to $10,000, imprisonment for up to two years, or both.

At this time, no concrete, definitive action is required by companies. However, if you believe this may be applicable to your company, you have any questions on whether the CTA is applicable to you, or you plan on opening a company in the future, you should consider a more in-depth analysis. As always, Wright Connatser is here to help.