The new anti-money laundering law creates new reporting obligations for businesses
(Revised January 13, 2022)
In an effort to combat money laundering, Congress passed the Corporate Transparency Act (“CTA”) on January 1, 2021. The CTA is not technically in effect yet. While it was intended to be in effect by January 1, 2022, FinCEN is still seeking public comments on the proposed rule through February 7, 2022. As such, while the timing of these regulations are not clear at this time, “owners” of businesses still need to be aware that this has the potential to become law relatively quickly. The CTA mandates new reporting requirements for businesses through a newly created non-public registry that is designed to track the beneficial, i.e., the “real” owners of the business entity.
Unless one of the limited exceptions applies, all entities (corporations, limited liability companies, or similar entities) will be obligated to submit a report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). They will need to identify each beneficial owner’s full legal name, date of birth, address, and a unique identifying number or FinCEN identifier number. A “beneficial owner” is anyone who exercises substantial control over the entity or who owns or controls no less than 25% of the ownership interest of the entity. The CTA, however, does not define “substantial control.” So, this is an area where potential risk lies.
Entities that existed prior to the enactment of the CTA will be required to submit their report within two years after its effective date. New entities formed after the CTA becomes effective must file their report at the time of formation. Any changes in the beneficial ownership must be reported within a year of the change.
How does the law work?
Here is an example of how the new law would apply: Say you formed a corporation in 2010 and it has two shareholders. Because each shareholder owns 50% (which is more than 25%), they will each be designated under the CTA as “beneficial owners” for which the reporting requirements apply. Thus, they will have to file the applicable report described above within two years of the CTA becoming effective.
Consider another example: You form a new business that has three shareholders – an LLC owns 80% of the outstanding shares, and the other 20% is owned by two individuals A and B, who each own 10%. Shareholder A also serves as the president of the corporation and is solely responsible for all business decisions. While the CTA has not defined what “substantial control” means, in this example it is likely that Shareholder A will meet the definition of “substantial control” and will be subject to the reporting obligations. The LLC, which owns more than 25%, meets the standard of a “beneficial owner” as well.
The information collected is supposed to remain confidential unless requested by law enforcement agencies.
While the exact manner of filing the report is unclear, it appears that this will impact several small business owners. In addition, the failure to report can lead to civil and criminal penalties. That makes this a key reporting requirement to keep in mind. We will be following the CTA and the new guidelines as they are mandated.