Compliance with the Corporate Transparency Act
Nov 7, 2023
In January 2021, the Corporate Transparency Act became law as part of the National Defense Authorization Act for Fiscal Year 2021. This act aims to enhance anti-money laundering efforts and combat illicit financial activities by requiring certain business entities, known as reporting companies, to disclose beneficial ownership information. In this article, we will delve into the critical aspects of compliance with the Corporate Transparency Act, providing a step-by-step approach to help businesses navigate this new regulatory landscape.
Understanding the Corporate Transparency Act
The Corporate Transparency Act is designed to create a federal database of beneficial ownership information within the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. The purpose of this database is to crack down on anonymous shell companies that have been used for money laundering, terrorism financing, and other criminal activities.
Who is a Reporting Company?
A reporting company is defined as a corporation, limited liability company, or similar entity that is created or registered under state or foreign law to do business in the United States. However, certain entities are exempt from the reporting requirements, including publicly traded companies, financial institutions, and entities subject to strict federal or state regulation. Additionally, large operating companies that meet specific criteria related to employees, physical presence, and financial performance may also be exempt.
What is Beneficial Ownership?
Beneficial ownership refers to individuals who have significant control over or ownership of a reporting company. The Corporate Transparency Act defines beneficial owners as individuals who exercise substantial control over the company or own or control at least 25% of its ownership interests. However, there are certain exceptions to this definition, such as minors, nominees, employees, individuals with future interests through inheritance, and creditors.
Key Reporting Requirements
To comply with the Corporate Transparency Act, reporting companies must gather and report specific information about their beneficial owners and applicants. Let's explore the key reporting requirements in detail.
Collecting Beneficial Ownership Information
Reporting companies need to collect the following information for each beneficial owner and applicant:
Full legal name
Date of birth
Current residential or business address
Unique identifying number from an acceptable identification document (e.g., passport or driver's license) or a FinCEN identifier
The reporting company or applicant only needs to report the name of an exempt entity if it has a direct or indirect ownership interest in a reporting company.
Filing Reports with FinCEN
Reporting companies must submit their beneficial ownership information reports to FinCEN electronically through a filing system on FinCEN's website. The reports should be filed within the specified deadlines, which vary depending on the formation or registration date of the reporting company. For companies formed or registered before the effective date of the regulations, the deadline is within two years of the effective date. Any changes to the reported information must be updated within one year of the change.
Exemptions and Exceptions
While many entities are subject to the reporting requirements of the Corporate Transparency Act, there are several exemptions and exceptions that businesses should be aware of.
Certain entities are exempt from the reporting requirements, including:
Publicly traded companies
Entities subject to strict federal or state regulation
Entities owned or controlled by exempt entities
Entities that exclusively provide financial assistance or hold governance rights over tax-exempt entities
Entities with an operating presence at a physical office in the U.S., employing over 20 full-time employees and demonstrating over $5 million in gross receipts or sales
Exceptions to Beneficial Ownership
The definition of beneficial ownership has exceptions, including:
Minors (though the parent or guardian's information must be reported)
Nominees, intermediaries, custodians, or agents acting on behalf of another individual
Employees whose control or economic benefits are derived solely from employment
Individuals with future interests through inheritance
Creditors, unless they exercise substantial control or own/control at least 25% of the ownership interests
Implications for Law Firms
The Corporate Transparency Act has significant implications for law firms, particularly in scenarios where they may be considered reporting companies or assist clients in creating or registering entities. Let's explore the key considerations for law firms.
Law Firms as Reporting Companies
Law firms may be classified as reporting companies if they meet the criteria outlined in the act. In such cases, they must file their beneficial ownership information reports within the specified deadlines. However, law firms that qualify as large operating companies may be exempt if they meet particular employee, physical presence, and financial criteria.
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Advising Clients on Compliance
Law firms should inform their clients about the Corporate Transparency Act's reporting requirements and advise them on how to comply. This includes reaching out to existing clients who have formed or registered business entities before January 1, 2024, to notify them of the reporting obligations. Law firms need to familiarize themselves with the act and its reporting rules to provide accurate guidance to their clients.
Filing on Behalf of Clients
Law firms may choose to file beneficial ownership reports on behalf of their clients or advise clients to file directly. To effectively assist clients, law firms should revise internal policies and processes, including new client intake procedures and collecting beneficial ownership information. They may also consider obtaining a FinCEN Identifier for clients to streamline the filing process. Traact helps you make this process quick and easy.
Accounting Firms and Compliance
Accounting firms play a crucial role in assisting their clients, often subject to the Corporate Transparency Act's reporting requirements. Let's explore how accounting firms can help their reporting company clients comply with the act.
Education and Policy Review
Accounting firms should stay updated on the latest developments related to the Corporate Transparency Act and ensure that their clients are aware of the act's implications. They should review and update their anti-money laundering (AML) and know-your-customer (KYC) policies and procedures to align with the act's requirements. Training staff on the act and AML/KYC compliance is also essential.
Risk Assessment and Mitigation
Accounting firms should conduct a risk assessment to identify potential risks associated with their reporting company clients. They should implement appropriate controls and procedures to mitigate these risks and ensure compliance with the act. This includes developing a process for gathering and securely handling beneficial ownership information.
Filing and Monitoring
Accounting firms can support their reporting company clients by assisting them in filing their beneficial ownership reports with FinCEN. They should also monitor their clients' ongoing compliance with the act and guide any changes or updates to the reporting requirements.
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The Importance of Compliance
Compliance with the Corporate Transparency Act is crucial for businesses to avoid penalties and reputational damage. By complying with the act's reporting requirements, businesses contribute to the fight against money laundering, terrorism financing, and other illicit activities. Additionally, compliance enhances transparency and trust in the business environment, leading to a more secure and resilient economy.
All-in-One Solutions for Compliance
As businesses navigate the complexities of compliance with the Corporate Transparency Act, it is essential to leverage efficient tools and resources. Traact, an all-in-one solution for legal and administrative functions, offers comprehensive features to streamline compliance processes. From collecting and managing beneficial ownership information to generating accurate reports, Traact simplifies compliance tasks, allowing businesses to focus on their core operations.
Compliance with the Corporate Transparency Act is a critical step for businesses to contribute to the fight against money laundering and illicit financial activities. By understanding the reporting requirements, exemptions, and exceptions, businesses can fulfill their obligations and ensure transparency in their operations. Law firms and accounting firms play instrumental roles in guiding their clients through the compliance process. Leveraging innovative solutions like Traact can further streamline compliance efforts, enabling businesses to meet regulatory requirements efficiently and effectively. Embracing compliance not only safeguards businesses but also strengthens the integrity and stability of the financial system.
Interested in learning more about how our platform can help you stay in compliance? Schedule a free demo today.