Corporate Transparency Act – Big Brother Cometh!

In 2021, a little-known federal law went into effect called the Corporate Transparency Act (“CTA”).   The CTA was part of a larger legislative action known as the Anti-Money Laundering Act of 2020 (“AMLA”).  As the name implies, the AMLA seeks to create a rubric of provisions to clamp down on the proliferation of illegal money laundering activities.  The CTA is intended to help the federal government track anonymous shell companies, which are often used by terrorists and criminals to obscure their illegal money laundering activities.  Prior to the implementation of the CTA, the burden of collecting beneficial ownership information fell on financial institutions, which are required to identify and verify beneficial owners through the “know your customer” due diligence requirements.  The CTA shifts the reporting compliance burden from financial institutions to the actual “reporting companies,” imposing stringent penalties for willful non-compliance and unauthorized disclosures.       

The CTA’s name is a bit of misnomer as it applies to numerous entity structures, such as corporations, limited liability companies, limited partnerships, and other similar entity types.  The CTA does not apply to a number of entities which include, among others, to publicly traded entities, investment companies, accounting firms, pooled investment vehicles, and entities that (a) employ more than 20 employees, (b) file federal income tax returns reflecting more than $5 million of gross receipts and (c) have an operating presence in the United States.   While the CTA is intended to focus on shell companies used to obscure the ownership and control of entities engaged in illegal activity, it is clear that many legitimate small businesses will be required to report to the federal government information identifying (i) the individuals that are the beneficial owners (looking through any upper tier entities, trusts, etc.) who own 25% or more of such reporting entity’s equity interests, or (ii) the individuals who directly or indirectly control or manage such entity (such as officers, directors, managers, etc.)

As the specific reporting mechanisms are being developed by the Department of Treasury, the reporting requirements and due dates have not yet been determined as of February 1, 2022. Any person violating the reporting requirements of the CTA may be liable for civil penalties of not more than $500 for each day that the violation continues and criminal penalties of imprisonment of up to two years and fines of up to $10,000.

The reported information is collected in a database to be maintained by the Financial Crimes Enforcement Network within the Department of Treasury (“FinCen”).   While the database will not be publicly available, FinCen is authorized to share the database with a variety of U.S. federal law enforcement agencies, and other enforcement agencies with court approval.

For more information on the Corporate Transparency Act or if you have any questions on other legal matters, please contact Bob Gorman or one of the other professionals at Levun, Goodman & Cohen, LLP.