The ELA is proud to welcome our newest member firm: LOGOS  in Iceland!
The ELA is proud to welcome our newest member firm: LOGOS  in Iceland!


The US Corporate Transparency Act

Submitted by Firm:
Firm Contacts:
Sarah Lea Tobocman
Article Type:
Legal Article

We are pleased to introduce an in-depth exploration of the Corporate Transparency Act (CTA) in the United States, a landmark legislative measure designed to penetrate the corporate veil in an effort to thwart money laundering and bolster transparency within the business sector. Featuring distinguished insights from Kevin Levy and Natali Reyes of Gray Robinson, this article aims to elucidate the implications of the CTA for both individuals and their businesses, providing a comprehensive understanding of its impact.

The Corporate Transparency Act Explained

"Every business in the United States is about to feel the impact of the Corporate Transparency Act," Kevin begins, setting the stage for a deep dive into one of the most significant legislative changes to hit the American business landscape in recent years. Passed by Congress in 2021, the Corporate Transparency Act (CTA) marks a pivotal shift in the way business ownership is reported and monitored in the United States.

This landmark legislation mandates that the vast majority of U.S. businesses, along with certain foreign entities operating within the country, submit detailed ownership information directly to the Financial Crimes Enforcement Network (FinCEN). The overarching goal? To clamp down on money laundering activities that have, until now, been masked by the opaque nature of business ownership structures. By compelling companies to unveil the individuals behind the corporate veil, the CTA aims to enhance transparency across the board.

"Think of it as the government wanting to know who's behind the curtain," Natalie adds, painting a vivid picture of the CTA's primary objective. In a world where the anonymity afforded by corporations and limited liability companies (LLCs) can be exploited for illicit purposes, the CTA seeks to shine a light on the true owners and controllers of these entities. It's a move designed to cut through the complexity and secrecy that have historically enabled money laundering, tax evasion, and other financial crimes to flourish under the radar of regulatory bodies.

The necessity of the CTA can be traced back to a growing recognition of the United States as a favorable environment for those looking to launder money through seemingly legitimate business operations. The ease of forming a company in the U.S., coupled with minimal reporting requirements, has long been an attractive proposition for individuals looking to disguise the origins of illicit funds. By requiring detailed disclosures of beneficial ownership information, the CTA represents a concerted effort to dismantle the financial secrecy that has made such activities possible.

The implications of the CTA are far-reaching, affecting not only the way businesses are formed and operated but also the legal and regulatory landscape they navigate. For companies, compliance with the CTA means a new layer of administrative responsibility — gathering the necessary ownership data, ensuring its accuracy, and submitting it to FinCEN in a timely manner. For legal professionals, it heralds a shift in advisory services, as they guide clients through the intricacies of the new reporting requirements and help them understand the ramifications of non-compliance.

In essence, the Corporate Transparency Act heralds a new era of corporate accountability in the United States. By peeling back the layers of ownership anonymity, the Act not only targets the mechanisms of money laundering and financial crime but also contributes to the creation of a more transparent, responsible, and ethical business environment. As Kevin and Natali summarize, the CTA is more than just a regulatory requirement; it's a transformative force poised to reshape the corporate world.

Who Needs to Report?

The Corporate Transparency Act (CTA) doesn't tiptoe around its intentions; it comes in swinging, aiming to cover as much ground as possible to ensure transparency is not just a buzzword but a reality in the corporate domain. Kevin delves into the specifics, unraveling the broad scope of the Act with a focus on who exactly falls under its expansive umbrella.

Domestic and Foreign Reporting Companies

"The CTA casts a wide net, capturing two main types of entities: domestic and foreign reporting companies," Kevin explains, highlighting the inclusive approach of the legislation. At its core, the CTA is not just interested in entities born and bred on American soil but also casts a scrutinizing eye on foreign entities that have planted their flags in the U.S. marketplace.

For domestic entities, the rule is straightforward: If you're a corporation or a limited liability company (LLC) that has come into being through a state filing process, congratulations, you're on the hook for reporting. The criteria encapsulates a vast majority of the business structures operating within the United States, ensuring that few can slip through the regulatory net the CTA casts.

Foreign reporting companies are not left out in the cold, either. The CTA demands transparency from foreign corporations and LLCs that have made the strategic decision to register and do business within the United States. "It's a global marketplace, and the CTA acknowledges that by holding foreign entities to the same standard of transparency as domestic ones," Natali points out, emphasizing the Act's comprehensive reach.

The Essence of Reporting

Natali further clarifies, "It's all about who's creating these entities. If you're filing documents to start a company, you need to report." This statement underscores a pivotal aspect of the CTA: its focus on the genesis of business entities. From the moment the foundational documents are filed with a state office, the clock starts ticking on the reporting obligations under the CTA.

This emphasis on the formation stage of a company is a strategic move designed to capture information at the source. By mandating reporting at this initial phase, the CTA aims to build a comprehensive database of ownership information right from the get-go, making it harder for individuals with nefarious intentions to hide behind layers of corporate anonymity.

The Broad Implications

The implications of these requirements are broad and multifaceted. For one, they signal an end to the era where businesses could be formed with little to no disclosure about the individuals pulling the strings behind the scenes. This shift not only affects the business owners but also places a significant responsibility on the legal professionals and advisors who assist in the formation of these entities. They, too, must be well-versed in the nuances of the CTA to ensure compliance from day one.

Moreover, the Act's reach extends beyond the mere act of filing to start a company. It also encompasses the ongoing responsibility of updating ownership information should there be any changes. This dynamic aspect of the reporting requirement ensures that the information held by FinCEN remains current and reflective of the true ownership structure at any given time.

In essence, the "Who Needs to Report?" section of the CTA is a cornerstone of the legislation's effort to peel back the curtains on corporate ownership in the United States. By defining its scope to include both domestic and foreign entities, and by focusing on the formation stage of businesses, the CTA lays the groundwork for a more transparent, accountable corporate environment.

Reporting Requirements and Procedures

When it comes to the Corporate Transparency Act (CTA), the devil truly is in the details. Kevin and Natali unravel the complexities of what businesses, beneficial owners, and involved parties must submit to the Financial Crimes Enforcement Network (FinCEN), stressing that this goes far beyond mere checkbox compliance. The Act mandates a level of detail and precision in reporting that is unprecedented for many businesses.

Comprehensive Details Required

Kevin starts by outlining the broad strokes of the reporting requirements. "Companies must provide comprehensive details, from legal names to unique identifying numbers," he explains. This isn't just about stating who owns a business; it's about creating a clear, unambiguous record of ownership and control. For corporations and LLCs, this means reporting not only the business name and address but also the tax identification numbers (TINs) and, crucially, detailed information about the beneficial owners.

"Beneficial owners" refers to individuals who, directly or indirectly, exercise substantial control over a company or own a significant percentage of it — typically 25% or more. Identifying these individuals and providing accurate information about them is a cornerstone of the CTA's objectives. It closes loopholes that have previously allowed money laundering and other illicit activities to thrive under the guise of corporate anonymity.

Beyond Companies: A Wider Net

Natali emphasizes that the reporting obligations extend well beyond the corporate entities themselves. "And it's not just companies," she interjects, "Beneficial owners and those involved in company formation are also required to disclose their information." This broadens the reporting net to include individuals who may not traditionally have been considered under such scrutiny, such as lawyers, accountants, and other agents who facilitate the creation of these entities. For these professionals, compliance with the CTA means ensuring that their role in company formation is transparent and on record.

The Utility of a FinCEN Number

One piece of advice that Kevin and Natalie both highlight as critical in navigating the CTA landscape is the utility of obtaining a FinCEN number. This unique identifier serves as a sort of compliance shortcut for individuals who regularly form or control multiple entities. "Obtaining a FinCEN number simplifies the process," Kevin notes, explaining that it allows for a more streamlined submission of information for those who find themselves repeatedly within the reporting ecosystem of the CTA.

The process of obtaining a FinCEN number involves submitting a set of identifying information to FinCEN a single time, after which the individual is assigned a unique number. This number can then be used in lieu of resubmitting detailed personal information with every new entity formed or controlled. "It's a practical measure that can save a significant amount of time and reduce the redundancy of information submission," Natali adds.

Practical Considerations for Compliance

As businesses and their advisors prepare to meet these detailed reporting requirements, several practical considerations come to the forefront. Firstly, the importance of accurate and timely data collection cannot be overstated. Companies and their beneficial owners must ensure that the information they provide to FinCEN is not only comprehensive but also up-to-date. This may require implementing new internal processes or checks to gather and verify the required details.

Secondly, the role of legal and financial advisors in this process is pivotal. These professionals must be well-versed in the nuances of the CTA to guide their clients through the reporting process effectively. This includes advising on who qualifies as a beneficial owner, how to obtain a FinCEN number, and what changes in company structure or ownership necessitate an update in reporting. Lastly, the introduction of the FinCEN number as a tool for simplifying reporting underscores a key theme of the CTA: while the reporting requirements are stringent, there are mechanisms in place to streamline compliance for those who engage with the system thoughtfully and proactively.

In sum, the reporting requirements and procedures under the CTA represent a significant shift in how companies and their owners interact with the federal regulatory framework. By demanding detailed disclosures and extending reporting obligations to a wider circle of individuals, the CTA aims to peel back layers of corporate opacity, promoting a more transparent and accountable business environment.

Deadlines and Penalties for Non-Compliance

The Corporate Transparency Act (CTA) is not just a set of guidelines; it's a mandate with strict deadlines and severe penalties for those who fail to comply. Natali and Kevin lay out the critical timelines and the consequences of non-compliance, emphasizing the importance of adherence to ensure businesses don't find themselves on the wrong side of the law.

Understanding the Deadlines

Natali spells out the deadlines with clarity: "From January 1st, 2024, new entities have 90 days to report, while existing ones have until January 1st, 2025." This distinction between new and existing entities provides a phased approach, allowing businesses some time to adjust to the new regulations. However, the clock starts ticking the moment an entity is formed or the law takes effect, highlighting the urgency of understanding and acting on these requirements.

For new entities formed after January 1st, 2024, the 90-day window to report is relatively short, necessitating swift action to gather and submit the required information. Existing entities, on the other hand, have a grace period extending through 2024, but this should not be viewed as a reason to procrastinate. The earlier businesses can align with CTA requirements, the better positioned they will be to avoid penalties.

The Steep Penalties for Non-Compliance

Kevin doesn't mince words about the consequences of missing these deadlines. "We're talking $500 a day fines and even jail time," he warns, illustrating the severe penalties that can accrue for businesses that lag in their reporting duties. These fines are not just nominal fees but substantial penalties that can quickly add up, potentially crippling a business financially.

Moreover, the possibility of jail time for egregious violations adds a layer of personal risk for individuals responsible for compliance. This underscores the CTA's intent not just to encourage but to enforce transparency in business operations, making it clear that the law takes the disclosure of ownership information seriously.

Exemptions and Special Considerations

While the CTA casts a wide net, it does recognize that not all entities pose the same risk or need for transparency. Natali highlights this by pointing out, "There are 23 categories of exempt entities," noting that banks, credit unions, and accounting firms are among those exempt. This exemption is based on the premise that such entities are already subject to rigorous regulatory scrutiny and transparency requirements, reducing the need for additional reporting under the CTA.

However, Kevin's caution is well-placed: "Assume you're regulated first, then see if an exemption applies. The stakes are too high to assume otherwise." This advice serves as a critical reminder for businesses to not take exemptions for granted. The burden of proof for qualifying for an exemption lies with the entity itself, and assumptions without thorough verification can lead to unintentional non-compliance.

The exemptions and special considerations built into the CTA provide a nuanced understanding of the law's reach, recognizing that a one-size-fits-all approach does not apply to the diverse landscape of U.S. businesses. However, this complexity also demands careful attention and due diligence from businesses to determine their obligations accurately.

Navigating Compliance

The deadlines and penalties outlined in the CTA, along with the exemptions and special considerations, form a comprehensive framework designed to enhance transparency in the business sector. For entities navigating this landscape, the message is clear: understanding your obligations under the CTA is not optional, and the penalties for non-compliance are too steep to ignore.

Businesses, especially those without extensive legal resources, may find this daunting. However, by taking proactive steps to understand their reporting requirements, seeking legal advice when necessary, and acting well within the prescribed deadlines, entities can ensure compliance and avoid the significant penalties for non-compliance. The key lies in not underestimating the seriousness of the CTA's mandates and recognizing the importance of transparency in today's business environment.

Conclusion: Staying Ahead of the Curve

The Corporate Transparency Act is more than a regulatory hurdle; it's a shift towards greater transparency and accountability in the business world. By understanding its requirements, deadlines, and exemptions, businesses and legal professionals can not only comply but also contribute to a more transparent global economy.

"Thank you for joining us on this deep dive into the CTA," Holly Goodman, our host, concludes. "Remember, knowledge is power, especially when it comes to navigating new legal landscapes." Whether you're a business owner, legal professional, or just keen on the subject, staying informed and proactive is key to mastering the art of transparency in today's corporate world