January 7, 2021

Congress passes the Corporate Transparency Act to prevent money-laundering in US and international commerce

The US Senate recently joined the US House of Representatives in passing the Corporate Transparency Act (CTA), HR 2513, in a bipartisan effort to address and combat money-laundering.  The CTA became law as part of the larger National Defense Authorization Act for Fiscal Year 2021 (NDAA) on January 1, 2021, after the Senate voted to override a Presidential veto.

The CTA was enacted to protect interstate and international commerce from wrongdoers, who seek to anonymously use shell corporations to avoid detection during and after the commission of various crimes, including money-laundering, terrorism and other financial misconduct.  The Act will require certain private corporations or limited liability companies to file a report with the Financial Crimes enforcement Network (FinCEN) that identifies the beneficial owner(s) of a company, at the time the company is registered with the State in cases of newly formed entities; or identifies the current beneficial owner(s) and any changes in beneficial ownership during the previous year, for existing entities as part of an annual filing requirement.  

The reporting requirement has certain exceptions, but will generally apply to any entity that is formed by filing documents with a secretary of state, or any entity formed under the laws of a foreign country and is registered to do business in the US by filing documents with a secretary of state.  Exceptions will apply to businesses with more than 20 full-time employees in the US, that file income tax returns with more than $5,000,000 in gross receipts or sales, and has a physical address within the US.  There are also exceptions for credit unions, insurance companies, investment companies, public accounting firms and public utility companies, to name a few.

A beneficial owner is any natural person who exercises substantial control over a company, owns 25 percent or more equity interest in a company, or receives substantial economic benefit from the company’s assets.  Under the CTA, a company must provide the beneficial owner’s full legal name, date of birth, residential or business address, and unique identifying number, from a document such as a non-expired personal identification card, driver’s license or passport.  

FinCEN will use the information provided by reporting companies to compile a confidential database that will only be available to local, Tribal, State and Federal law enforcement agencies.  FinCEN will also be required to establish strict procedures that agencies must adhere to in order to ensure that access is limited to appropriate agencies for an approved purpose.

Penalties for failing to report or knowing provide false information to FinCEN, include a monetary civil penalty not to exceed $10,000 as well as fines under Title 18 of the US Codes, and imprisonment not to exceed 3 years, or both.  The regulations will not go into effect until the Treasury Department issues the regulations, that will likely occur no later than January 1, 2022, or one year after the CTA’s enactment. 

HR 2513 – Corporate Transparency Act of 2019