Corporate Transparency Act Ushers in a New Era for U.S. Beneficial Ownership Disclosure
The Corporate Transparency Act has moved U.S. ultimate beneficial owner (UBO) reporting into a new era.
The act, which went into effect Jan. 1, 2024, requires certain companies doing business in the U.S. to report their entity and UBO information to the Financial Crimes Enforcement Network (FinCEN). Companies formed prior to Jan. 1 were given a year to report, but businesses incorporated after the date were required to register the information immediately.
Anonymous shell companies, which are complex ownership structures that often make it difficult to identify true company ownership, have posed challenges for Anti-Money Laundering efforts in different U.S. states. The act was designed to overcome those challenges by superseding all state-based UBO reporting obligations.
While regulated entities in the U.S. must identify and verify beneficial owners of business customers at the time a new account is opened, the act expands the responsibility by requiring many of those businesses to report their beneficial ownership information.
U.S. UBO and Entity Reporting Requirements
The Corporate Transparency Act can be categorized as a registry approach. Each reporting company must give FinCEN four pieces of UBO information.
- Full legal name
- Birth date
- Current residential or business address
- A government-issued number from an identification document, such as a passport or driver’s license, and an image of the document
The act defines a UBO as someone who has substantial control over a corporation or limited liability company, owns 25% or more of its equity interests and receives substantial economic benefits from its assets. Providing fraudulent UBO information carries penalties up to $10,000 and two years in prison.
Each reporting company also must submit four pieces of entity information.
- Legal, trade and “doing business as” names
- Address of the principal place of business or where the company conducts business in the U.S.
- Jurisdiction of company formation or registration
- IRS taxpayer identification number, including an employer identification number, or an equivalent number issued by a foreign jurisdiction and the name of the jurisdiction if the company does not have an identification number
The act’s registry will not be available to the public, but law enforcement or financial institutions, with customer consent, can access it. The act does provide reporting exemptions for certain types of companies.
Elevating AML Diligence
The act provides a tool to pierce anonymous shell companies and investigate potential money laundering, fraud and tax evasion.
“A well-resourced and proactive company registry holding beneficial ownership information can be an effective mechanism because it provides a useful basis for competent authorities to access such information,” according to a best practices report by the Financial Action Task Force (FATF), an intergovernmental organization focused on global money laundering and terrorist financing.
But the FATF also notes the UBO information in the registry must be verified and monitored to ensure success.
The Advantages of Using a FinCEN ID
FinCEN has taken steps to accelerate and simplify CTA reporting by offering a unique identification number to UBOs and entities. Beneficial owners provide only their name and FinCEN ID to the reporting company.
When UBOs have to update their information, they do so only once with FinCEN instead of with multiple companies.
Corporate Transparency Act in 2024
FinCEN’s final rule on access to beneficial ownership information went into effect in February 2024. It establishes which agencies, regulators and financial institutions can access the information.
The act is in force, but there have been legal challenges.
In March 2024, a U.S. District Court judge in Alabama ruled the CTA unconstitutional on the grounds that it exceeds Congress’ enumerated powers, but the ruling applied only to the National Small Business Association, which was the plaintiff in the case. The U.S. government appealed.
In March 2024, the FATF upgraded the U.S. from noncompliant to largely compliant with Recommendation 24, which focuses on the transparency of beneficial ownership.
