Anti money laundering laws exist to protect consumers, investors, and businesses from nefarious or criminal acts.
While such laws undoubtedly serve an important purpose by keeping money laundering at bay, they also require businesses to comply with certain regulations and reporting structures.
Soon, the Corporate Transparency Act, widely considered to be a landmark anti money laundering law, will go into effect. This potentially affects more than 32 million business entities, making it crucial for all businesses to brush up on this law and determine if and how it may affect them.
What is the Corporate Transparency Act?
Let’s start with some history. The Corporate Transparency Act was enacted in January 2021 with the stated intention of combating financial crimes. These crimes encompass money laundering, tax fraud, and other types of corporate misconduct.
At the most basic level, it requires all qualifying businesses to comply with certain reporting requirements. If your business qualifies, you need to provide information about the ownership structure of your company.
That brings us to the next question. Which companies actually need to be concerned with this law?
Who is required to report under the Corporate Transparency Act?
All foreign and domestic reporting companies must file under the Corporate Transparency Act. Here’s what that category encompasses:
Domestic reporting companies: Any US corporation, LLC, and other business entities created by filing documents with the Secretary of State or a similar office.
Foreign reporting companies: Any business entity formed under another company’s law and registered to do business in the US by filing documents with the Secretary of State or a similar office.
Which companies are exempt?
While those categories may seem to encompass a pretty wide swath of businesses, there are also businesses that are exempt.
In fact, the Corporate Transparency Act lists a total of 23 business categories that are not counted as reporting companies, meaning they have no legal reporting obligations under this law. It’s worth noting that the act also authorizes the Financial Crimes Enforcement Network to create additional exemptions as needed, meaning that the list can potentially expand to other business categories in the future.
A partial list of exempt business categories includes:
Large operating companies, defined as having more than 20 full-time employees, more than $5 million in annual revenues sourced from the US, and an operating presence in the US
Issuers that are registered with the SEC
Banks, credit unions, and bank holding companies registered with the Financial Crimes Enforcement Network
Registered Commodity Exchange Act entities, investment companies, investment advisers, and venture capital fund advisors
Insurance companies or insurance producers licensed at the state level
Note that most companies are notexempt from this sweeping regulation.
Reporting requirements under the Corporate Transparency Act
If your company is bound by the Corporate Transparency Act, it is in your best interest to familiarize yourself with the reporting requirements.
The reporting regime goes into effect on January 1, 2024, and the time for reporting businesses to start preparing is now.
The due date for the first report depends on when your company was founded. If your business was created or registered before January 1, 2024, you don’t have to file your first report for a whole year; it’s due January 1, 2025. But if you create or register a business on or after January 1, 2024, your first report is due 30 calendar days afterthe creation or registration.
By this point, you’re probably curious about what the actual reporting form looks like. Nobody knows for sure, as the form hasn’t been made public yet. However, the Financial Crimes Enforcement Network has announced that the forms will be accessible to the public well before January 1, 2024.
What goes in the report?
While we don’t know exactly what the form will look like, we know roughly what types of information reporting companies will be asked to provide. For example, companies must report specific information, including its name, current address, and federal tax identification number.
Information about individual beneficial owners must also be provided. What is a beneficial owner, exactly? The law defines a beneficial owner as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such report company.”
Your report must provide several data points about each beneficial owner, including full legal name, date of birth, current address, and an identifying number (such as passport or driver’s license).
Note that there are a few exceptions to the “beneficial owner” definition, including minor children and creditors acting on behalf of the reporting company. Also, employees, with the exception of senior officers, are excluded.
What are the penalties for failing to report?
Failure to comply with the Corporate Transparency Act may result in civil or criminal penalties. Every day of non-compliance carries a fee of up to $500 and a potential for two years in jail. Naturally, you’ll want to take these deadlines pretty seriously.
It’s widely expected that the Financial Crimes Enforcement Network will deploy a number of sophisticated solutions like anti money laundering software to scour their data for any non-compliance.
How companies can prepare to report under the Corporate Transparency Act
There are a number of practical steps that businesses can take to prepare for their reporting responsibilities. Here are some general guidelines:
Review your corporate structure
First, verify whether your corporate structure requires you to file under this law. Whether you have an LLC in Texas (among the best states to form an LLC) or a corporation in New York, you’ll have reporting requirements under the Corporate Transparency Act. Nearly every business owner in the US, or those with US LLCs or corporations, will be considered a beneficial owner.
Create a directory of beneficial owners
To save time for future reports, you may create a complete directory of the beneficial owners associated with your company, also compiling some of the basic contact information and documentation required for each one. Consider putting processes into place to help you keep this information accurate and up to date.
Stay up to date on changes to the law
Be mindful that this is a relatively new law and remains subject to updates, revisions, and expansions. Stay in the loop, perhaps by asking an attorney or doing a little research on your own.
Enlist help from a business attorney
Given some of the complexities of this law and the severity of some of the penalties, it may be wise to enlist the help of a business attorney. This is especially helpful if you have specific questions and want to speak to an expert.
Make sure key decision makers are aligned
Finally, remember that all decision makers within your organization must understand this law, grasp its implications, and be aware of the internal policies to ensure compliance. Scheduling a regular meeting about Corporate Transparency Act compliance is recommended.
Ensuring compliance is vital
The Corporate Transparency Act is not bureaucracy just for bureaucracy’s sake. The law was created as a response to shady organizations and bad actors using “shell companies” and other legal structures to obscure their money laundering or tax fraud. Ultimately, this law exists to promote financial justice and provide transparency for consumers, investors, and business owners alike.
The law is noble, but that doesn’t mean its requirements aren’t a bit burdensome. Becoming familiar with the law and putting processes in place to ensure compliance can help your company can stay ahead of the curve. Make this a regulatory priority in the coming year, and don’t forget to stay abreast of changes in the law.
Matt Horwitz is the founder of
LLC University, a website that teaches people how to form LLCs. Matt is the leading authority in LLC education and is featured in CNBC, Yahoo Finance, and Entrepreneur Magazine. LLC University® was the first company to create free LLC courses in all 50 states.
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