Corporate Transparency Act Efforts to Fight Crime May Impact Small Businesses – Tax
United States: Efforts of the Business Transparency Act to fight crime may impact small businesses
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the National Defense Authorization Act, adopted by the United States House and Senate at the end of 2020, contained a piece of legislation intended to increase the transparency of shell companies in the fight against money laundering and criminal behavior: the Corporate Transparency Act (CTA). CTA will create a massive registry of “beneficial owners” of “reporting companies” with the Financial Crimes Enforcement Network (FinCEN) of the US Treasury Department. A “beneficial owner” is any natural person who owns a 25% stake in a reporting company or exercises substantial control – a term that has not yet been defined – over the reporting company. A “reporting company” is, in layman’s terms (and with a few exceptions excluded for brevity), any small, private, for-profit entity formed or registered in the United States. In particular, companies with (i) more than 20 full-time companies of employees; (ii) over $ 5 million in annual gross sales or revenue; and (iii) an operational presence in a physical office in the United States is excluded from the reporting requirements, as the regulations are intended to provide insight into the ownership of United States companies with small or limited operations. Obviously, however, many small businesses that do not engage in money laundering or criminal behavior will also be swept away by these requirements.
Banks and financial institutions have been forced to investigate the identity of beneficial owners for some time – for example, many readers may be familiar with “know your customer” banking requirements. The CTA, however, shifts the onus of collecting and reporting property information, including name, date of birth, address, and unique identifying number (for example, a driver or passport) to the companies themselves. Companies will need to submit this information during their training, as well as keep it up to date. Registry information will not be public, but can be shared in many cases, such as after an investigation by a law enforcement agency.
Intentional submission of incorrect information to FinCEN is punishable by financial penalties, as well as possible imprisonment. In addition, any business engaging in a separate verification or due diligence process, such as a “know your customer” bank review, will need to ensure that all of the information in the FinCEN ledger matches the information provided to the requesting party.
Regulations implementing the CTA are expected later this year and will hopefully answer many outstanding questions aimed at clarifying who should report and when. In particular, many eagerly await information on how to calculate “ownership” and what will constitute “substantial control”, anticipating that the final rules governing both issues will be long and complex. Furthermore, developing the government infrastructure to collect, store and update this information will in itself be a big undertaking. We are following developments in this area closely, as CTA will likely be the biggest burden (in terms of legal fees required) for our smaller clients.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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