The Corporate Transparency Act (CTA) is a landmark law aimed at increasing corporate transparency in the U.S. to combat financial crimes such as money laundering, terrorism financing, and tax evasion. Passed as part of the National Defense Authorization Act (NDAA) in 2021, the CTA mandates that many U.S.-based companies disclose detailed information about their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of the Treasury.
The act significantly changes the corporate reporting landscape, and businesses must understand their obligations, especially as the law begins to take effect in 2024. Failure to comply can result in serious legal and financial penalties. This blog post outlines the key components of the CTA, reporting requirements, and the importance of timely compliance—particularly for companies with foreign beneficial owners.
What is the Corporate Transparency Act?
The Corporate Transparency Act requires U.S.-based corporations, limited liability companies (LLCs), and other similar entities to report their beneficial owners—the individuals who own or control a significant interest in the company. The aim is to remove the veil of anonymity that has allowed criminals and corrupt actors to misuse corporate structures for illegal activities.
The information collected will be securely maintained by FinCEN and accessible only to authorized entities such as law enforcement, federal regulators, and financial institutions performing due diligence.
Who Needs to File Under the CTA?
Most corporations and LLCs formed in the U.S. will need to comply with the CTA, but there are some notable exemptions. These include:
- Publicly traded companies
- Certain regulated entities such as banks and credit unions
- Companies that meet all three criteria: more than 20 full-time employees, gross revenue exceeding $5 million annually, and a physical office within the United States
Businesses that are smaller, privately held, and have fewer regulatory reporting obligations will likely need to comply with the CTA.
What Information Must Be Filed?
Companies subject to the CTA must report the following details about their beneficial owners:
- Full legal name
- Date of birth
- Residential address
- A unique identifying number from an accepted ID, such as a passport, driver’s license, or other government-issued identification
A beneficial owner is defined as any individual who directly or indirectly owns or controls at least 25% of the company or has substantial control over its activities. This also applies to foreign residents, meaning individuals who own or control a U.S.-based company but reside outside the United States.
What If a Beneficial Owner Is a Foreign Resident?
If a company’s beneficial owner is a foreign resident living outside the U.S., the same reporting requirements apply, with some additional considerations. The foreign resident’s passport number or foreign government-issued ID number must be reported in place of a U.S. identification number.
For example, if your Delaware-based company has a foreign investor who owns 30% of the company and resides in Europe, you will need to report this individual’s name, address, date of birth, and passport number (or another government-issued ID) to FinCEN. Foreign beneficial owners are not exempt from the CTA’s requirements, and businesses must ensure this information is accurately collected and filed.
Why Is Timely Filing Under the CTA So Important?
- Legal Compliance and Avoiding Penalties
Compliance with the CTA is not optional. Businesses that fail to file the required information or provide false information face steep penalties, including fines of up to $500 per day, with a maximum penalty of $10,000. In severe cases, willful violations can result in up to two years of imprisonment.
Timely reporting is critical, as failure to do so could lead to legal liabilities that disrupt your business operations. This is especially important for companies with foreign beneficial owners, as international dealings can sometimes complicate regulatory compliance. - Transparency and Business Integrity
Filing under the CTA demonstrates a company’s commitment to ethical business practices and transparency. This builds credibility with stakeholders, such as investors, partners, and financial institutions. The global push toward transparency in corporate ownership structures means companies that comply with these regulations will be better positioned to attract investment and avoid regulatory scrutiny. - Impact on Business Operations and International Relations
Reporting beneficial owners, whether domestic or foreign, ensures that your business avoids legal obstacles that could arise from being flagged as suspicious by authorities. Furthermore, businesses dealing with international clients or investors will find that compliance with the CTA enhances trust and opens doors to international business opportunities.
Financial institutions that perform due diligence may also access this beneficial ownership data through FinCEN, which means non-compliant companies could face difficulties securing financing or banking services.
The Filing Timeline
The Corporate Transparency Act takes effect on January 1, 2024. Companies formed on or after this date will have 30 days from their incorporation to file their initial report. For companies that were incorporated before 2024, the first report must be submitted by January 1, 2025. After the initial filing, any changes to beneficial ownership must be reported to FinCEN within 30 days of the change.
Conclusion: The Importance of Compliance for All Beneficial Owners
The Corporate Transparency Act is a significant step in increasing corporate accountability and reducing financial crime. Businesses that fail to comply, including those with foreign beneficial owners, risk hefty fines, legal penalties, and reputational damage. To avoid these pitfalls, businesses should start preparing now by gathering the necessary information about their beneficial owners and ensuring their filings are submitted on time.
For companies with foreign investors or owners, it’s particularly important to understand the CTA’s requirements to ensure proper reporting of all relevant information, including foreign IDs. Consulting legal counsel to help navigate this new regulatory landscape is strongly advised to ensure full compliance with the law.