The Diligent team

GRC trends and insights

The Corporate Transparency Act: Understanding reporting requirements and overcoming compliance challenges

The Corporate Transparency Act (CTA) came into effect January 1, 2024, representing a significant milestone in enhancing corporate transparency and combating illicit financial activities. Under the CTA, companies are now required to report beneficial ownership information for some of their entities, revealing the individuals who ultimately own or control them. This reporting requirement ensures owners of certain entities behind corporate structures are exposed, promoting accountability and ethical business practices.

The CTA’s impact extends beyond legal compliance, as it was established to promote good corporate governance by fostering unprecedented transparency. Shedding a light on beneficial ownership, the CTA acts as a deterrent against financial crimes and strengthens due diligence.

Here, we delve into:

• What the Corporate Transparency Act is and who it applies to
• Corporate Transparency Act reporting requirements
• How to file with the CTA, reporting deadlines and penalties for noncompliance
• CTA reporting challenges and how to overcome them

What is the Corporate Transparency Act and what are its reporting requirements?

The CTA addresses critical issues related to money laundering, tax evasion, fraud and other financial crimes. Its central mechanism is the establishment of a beneficial ownership reporting requirement. The CTA defines a “beneficial owner” as an individual who directly or indirectly exercises significant control over an entity or owns at least 25% of its ownership interests. This definition encompasses officers, directors and shareholders.

Recently, a U.S. District judge in Alabama ruled the Corporate Transparency Act unconstitutional, but this doesn't mean the end of beneficial ownership reporting and that corporations can decrease their focus on this area. Strong supporters back the CTA and its reinstatement. As FinCEN complies with the injunction, the government is expected to appeal. Given current sentiment, the appeal is likely inevitable, and once the CTA's provisions are reinstated, its strict filing deadlines, some as short as 30 days, will resume.

The CTA applies to a broad range of entities, including corporations, limited liability companies (LLCs) and other similar entities that are formed or registered in the United States. It's important to note that there are 23 exemptions from the CTA. Organizations qualifying for an exemption are not subject to the Corporate Transparency Act's reporting requirements. However, it's essential for affected organizations to understand which entities are subject to the Act.

A notable CTA exemption are large operating companies. Under the CTA, an organization must meet the following criteria in order to qualify as a large operating company and qualify for the exemption:

1. Number of employees: The entity must employ more than 20 full-time employees in the United States. A full-time employee is generally one who averages at least 30 hours of service per week with the employer.
2. Physical presence in the US: The organization should have an operating presence at a physical office within the U.S.
3. Financial threshold: The entity must have filed a U.S. federal income tax return or information return for the previous year, demonstrating more than USD $5 million in gross receipts or sales (net or returns and allowances), excluding gross receipts or sales from sources outside the U.S.

Key requirements of the Corporate Transparency Act

• Beneficial ownership information: Covered entities must disclose information about beneficial owners, defined as individuals with substantial control over the entity or ownership of at least 25% of the entity. The required information includes the beneficial owner's full legal name, birth date, address, and a unique identifying number such as a passport or driver's license number.
• Formation or registration: Covered entities must file a report with the FinCEN registry within 14 days of forming or registering with a state authority. This report must contain the entity's legal name, business address, and the names and contact details of its directors, managers, or other individuals with significant managerial responsibilities.
• Updates and changes: Covered entities must update their beneficial ownership information within 30 days of any changes, such as changes to the beneficial owners' personal details, changes in ownership percentages, or changes in the entity's management structure. Additionally, covered entities must file an annual report confirming the accuracy of their previously submitted information.

Complying with the CTA's reporting requirements is essential for covered entities to avoid penalties and protect their reputation. Companies must establish robust systems and processes to ensure timely and accurate reporting, and seek legal advice to navigate the complexities of the CTA's requirements.

How to file with the Corporate Transparency Act

Entities required to comply with the CTA must register with FinCEN and file beneficial ownership information. The process involves submitting a Form FinCEN 114, which can be completed electronically through FinCEN's online filing system. When preparing to file a report using the form, it is important to consult the FinCEN regulations and instructions to ensure accuracy and completeness.

The form necessitates various details about beneficial owners, including:

• Full name
• Date of birth
• Residential or business address
• A unique identification number like a social security number for U.S. citizens and a passport number for non-U.S. citizens

Additionally, the form may require information about any intermediary owners, such as trusts, that hold ownership on behalf of another entity. Beneficial owners with multiple citizenship should provide all such citizenships.

To facilitate the filing process, the CTA provides a 14-day grace period for corporations and LLCs formed prior to the effective date of the regulations. They must file their beneficial ownership information within this period to avoid any potential repercussions. It is advisable to initiate the process promptly to meet the deadline and comply with the CTA requirements.

Penalties for CTA non-compliance

Failure to file the form within the specified timeframe or providing incomplete or inaccurate information can lead to penalties. These may include financial penalties, criminal prosecution or both. Moreover, non-compliance can impede an entity's business operations, as it may face difficulties in opening bank accounts, obtaining licenses or engaging in certain financial transactions.

• Criminal penalties: Intentionally providing false or misleading information may result in criminal penalties, including fines of up to $10,000 and imprisonment for up to 2 years
• Civil penalties: Failing to report can lead to civil penalties of up to $500 per day

The challenges of complying with the Act

Complying with the Corporate Transparency Act presents several challenges for businesses. These challenges include:

1. Identifying beneficial owners: One of the primary challenges is accurately identifying and determining who qualifies as a beneficial owner. The CTA requires businesses to disclose individuals who own or control 25% or more of the entity's ownership interest. This can be complex, especially in cases where ownership is held through multiple layers or involves intricate ownership structures.
2. Gathering and verifying information: The CTA mandates businesses to provide detailed information about beneficial owners, including their full legal names, addresses, dates of birth, and unique identifying numbers. Gathering and verifying this information can be time-consuming and challenging, particularly when dealing with international entities or individuals residing in different jurisdictions.
3. Ensuring data accuracy and up-to-date information: The CTA requires businesses to provide accurate and up-to-date information about beneficial owners. This poses a challenge for organizations that rely on manual systems, such as spreadsheets or paper files, as it becomes difficult to track changes in ownership or personal details. Maintaining data accuracy and ensuring timely updates can be a significant challenge without a centralized entity management system.
4. Navigating global jurisdictions: The CTA applies not only to U.S. businesses but also to foreign-based companies with qualifying operational locations in the United States. This adds complexity to compliance efforts, as businesses must navigate different legal and regulatory frameworks across multiple jurisdictions. Ensuring compliance with both U.S. and international reporting requirements can be a daunting task.
5. Meeting filing deadlines: The CTA imposes strict filing deadlines for submitting BOI reports. Businesses must adhere to these deadlines, which can be as short as 30 days in some cases. Meeting these timelines requires efficient processes and systems to gather, verify and submit the necessary information within the specified timeframe.
6. Data security and privacy: The CTA requires businesses to disclose sensitive information about beneficial owners. Ensuring data security and privacy becomes crucial to protect this information from unauthorized access or misuse. Implementing robust data protection measures and complying with relevant privacy regulations adds another layer of complexity to compliance with the Act.

To overcome these challenges, businesses can leverage technology solutions like centralized entity management systems. Software can streamline the processes of:

• Identifying beneficial owners
• Gathering and verifying information
• Maintaining data accuracy
• Updating data maintained and filed for directors’ or entities’ personal data
• Meeting filing deadlines

By implementing a centralized corporate record that houses essential business information, you can enhance your operational efficiency, alleviate administrative burdens and ensure regulatory compliance across various global jurisdictions.

Complying with the Corporate Transparency Act can bring positive change to your organization

The Corporate Transparency Act is designed to have a significant impact on corporate governance by enhancing transparency and accountability. By requiring the disclosure of beneficial ownership information organizations will need to streamline their entity management processes. But creating these efficiencies could have a net positive effect, as shareholders, investors and other stakeholders will gain the ability to make more informed decisions about the entities they engage with.

While the penalties for infractions can be significant, compliance with the Corporate Transparency Act doesn't have to be a burden, with robust software solutions to centralize your corporate record for more streamlined processes, improved accuracy and time savings.