Overview of the CTA
Congress passed the CTA in 2020 as part of a larger effort to combat terrorism financing, money laundering, tax fraud, and other illegal activities through the Anti-Money Laundering Act of 2020, part of the National Defense Authorization Act for fiscal year 2021.
Starting January 1, 2024, the CTA will require non-exempt privately owned companies to report BOI to FinCEN each year about individuals who have substantial control or own 25% or more of a company. If you’re a small business owner, it’s crucial to get ready for the CTA to ensure you’re in compliance, as failing to meet the compliance regulations may lead to some serious consequences.
Purpose of the CTA
The CTA’s primary purpose is to combat money laundering and financing of illicit activities through shell companies in the U.S. Before the enactment of the CTA, there were no BOI-type reporting requirements in the U.S. This made it more than a little challenging for law enforcement to investigate entities that posed as front and shell companies covering for illegal financial activities. Under the CTA, with access to BOI and the reporting system FinCEN regulates, federal and law enforcement agencies will have the means to check into these types of suspicious entities.
What’s the Advantage of the CTA?
One of the main advantages of the CTA is that it should be harder for criminals to hide their activities and individual identities under anonymous corporations and business entities. You may think of it as protection against shadow companies and black-budget operations. Even though the regulations can seem difficult for many business owners and trustees to observe, the CTA specifically aims to prevent criminal activities within the U.S. financial system.
Millions of businesses form every year with the potential to create new jobs and stimulate the economy. With the enactment of the CTA and collection of BOI, law enforcement and investigating authorities will have the tools to identify criminals who commit fraud, hide illegally obtained wealth, evade taxes, and otherwise hurt millions of law-abiding business owners through their use of shell companies.
Who Are Beneficial Owners?
Under the CTA, beneficial owners are individuals who have a high level of control over a corporate structure or LLC. You’re also subject to compliance if you receive economic benefits from a corporation’s or LLC’s assets or own 25% or more of its interests. However, several types of people are exempt from these guidelines, including:
Minors, if parents or legal guardians otherwise report ownership information appropriately.
Nominees, intermediaries, custodians, or agents acting on behalf of someone else.
Employees whose control in a company’s activities is solely because of their employment.
Entity creditors, unless they otherwise meet the criteria of a beneficial owner.
Individuals who gain interests in a company solely through inheritance.
Because the law is so far-reaching, it would be in your best interest to work with a legal and financial advisor to ensure proper compliance if you fall under the CTA.
Reporting Companies
A reporting company under the CTA refers to a corporation, LLC, or other entity that’s registered to do business in the U.S. If your business qualifies as a reporting company, you must follow the FinCEN reporting requirements for filing BOI. However, there are exemptions to reporting under the CTA, so it’s important to check with your advisor to see if your business falls within the exempt categories.
Company Applicants
Company applicants under the CTA include individuals who file an application to form a business in the U.S. or register foreign entities to do business in the U.S. There are no specific definitions of filing or registration under the CTA, which can be challenging if you’re establishing a new business. However, FinCEN should provide additional guidance on these key areas as the CTA’s enforcement date gets closer.
What Are the Exemptions Under the CTA?
According to the provision, exemptions exist for certain corporations, LLCs, and other entities registered to do business in the U.S. Some of these include government authorities, public utilities, banks and credit unions, insurance companies, accounting firms, tax-exempt entities, and inactive entities. In addition, money services institutions, securities brokers, securities exchange, and other Exchange Act-registered entities are exempt under the CTA. In all, there are 23 exemptions that fall under the Corporate Transparency Act.