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BSA/AML Hot topics: The Corporate Transparency Act and what it means for financial institutions

By Jennifer Broskie, BSA/AML Investigator

On January 1, Congress passed the National Defense Authorization Act for Fiscal Year 2021, which includes the Anti-Money Laundering Act of 2020 (AMLA). One of the AMLA’s provisions is the Corporate Transparency Act (CTA). The AMLA is regarded as the most comprehensive set of reforms to the anti-money laundering laws in the U.S., and the CTA is the biggest anti-corruption step the U.S. has taken since the USA PATRIOT Act was passed in 2001.

What is the purpose of the CTA?

The CTA targets anonymous shell companies and enhances financial institutions’ capabilities when it comes to gathering required beneficial ownership information.

First, let’s look at what an anonymous shell company is. An anonymous shell company is a corporate entity that has disguised its ownership, meaning the true beneficial owner of the company is unknown. This makes shell companies very appealing to criminals, money launderers, and terrorists because these companies allow such individuals and networks to operate while concealing their financial activity.

Did you know that the U.S. is one of the easiest places to form an anonymous shell company? Surprisingly, the U.S. has been named the second most financially secretive jurisdiction (after the Cayman Islands but ahead of Switzerland). Few U.S. states require companies to disclose their true owners while other states, such as Delaware, allow corporations to remain anonymous.

To combat the establishment of anonymous shell companies, the CTA will require new companies created in the U.S. to immediately disclose the identities of beneficial owners by filing a report with the Financial Crimes Enforcement Network (FinCEN).

A beneficial owner is defined as any individual who exercises substantial control over the company or owns or controls no less than 25 percent of the ownership interests of the company. The report for FinCEN must contain personal information about each beneficial owner including name, birthdate, address, and government ID numbers. The CTA would also require that existing companies divulge beneficial ownership information to FinCEN within two years.

Ultimately, FinCEN would use the data gathered from these companies to create a beneficial ownership registry. This registry would serve as a private database for law enforcement and financial institutions. The CTA will become effective within one year of enactment.

Exceptions for certain entities

It should be noted that there are multiple entities that will either not be required to submit these beneficial ownership reports to FinCEN or will otherwise be exempt under the CTA. These entities include the following:

  • Entities that are already closely regulated (e.g. credit unions, bank-holding companies, registered money transmitting businesses, broker-dealers, exchanges and clearing agencies, investment advisors, private funds, banks, insurance companies, and utility companies or telecommunications service companies)
  • Publicly traded companies
  • Dormant entities described in the CTA
  • Tax-exempt entities
  • Taxable entities that meet the following criteria:
    • Have more than 20 full-time U.S. employees,
    • Have a physical office in the U.S.
    • And have more than $5 million in gross receipts or sales (including income or sales by other entities that are (a) owned by such entity, and (b) through which such entity operates)
  • Any entity owned or controlled, directly or indirectly, by an entity that is otherwise exempt
  • Additional entities that FinCEN may determine on an ongoing basis

Penalties for lack of compliance

The CTA also includes penalties for any party that intentionally fails to comply. They would be liable for a fine of $500 each day—up to $10,000 —or a prison term of up to two years. This penalty will also apply to attorneys acting on behalf of a client to help file corporate-registration paperwork.

In addition, any party that unlawfully discloses any beneficial information will be liable for fines of up to $500 per day— up to $250,000— and up to 10 years in prison. The CTA has also included safe harbor rules for any person that submits inaccurate beneficial ownership information provided that such person had no knowledge of the inaccuracy, was not trying to evade the reporting requirement, and corrects the information no later than 90 days after the initial report was submitted.

What does this mean for financial institutions?

Currently, financial institutions are required to identify the beneficial owners of their legal entity customers in accordance with the Customer Due Diligence (CDD) Rule. With the passing of the CTA, financial institutions will have an alternate way to obtain beneficial ownership information by requesting the data from FinCEN’s registry. This change will make compliance with the CDD Rule less burdensome for financial institutions, presumably by removing the requirement that they collect beneficial ownership information. The CTA instructs FinCEN to, within one year of enactment, revise the CDD Rule to conform to this law.

Ultimately, the CTA is important legislation that will make it much harder for criminals to set up anonymous shell companies to be used for illegal activities. It will also help financial institutions get the beneficial ownership information that they need to meet their BSA/AML obligations.