The Corporate Transparency Act (CTA) was enacted by Congress on January 1, 2021 as part of the Anti-Money Laundering Act of 2020. The goal of the CTA is to stop money laundering and the proliferation of other illegal activities concealed by anonymous shell corporations. Entities subject to the CTA must comply with disclosure obligations concerning ownership and control of the entity. Many other countries have already developed regulations with a similar purpose.

Since the enactment of the CTA, the Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of the Treasury, has issued proposed rules for the implementation of the CTA, with more guidance to follow. Although the rules are still in flux and are not set in stone yet, it is important to understand how the CTA may affect your business and what you can do to prepare for its implementation.

Who does this concern?

Generally speaking, the CTA will affect a large number of businesses, across sectors and ranging in size. The CTA is targeted at “reporting companies,” a term defined within the Act. This broadly includes any entity that is created by filing a document with a secretary of state or other similar office, or foreign entities registered to do business in the United States. Companies that are already subject to similar reporting obligations, such as banks and those entities registered with the Securities and Exchange Commission, are exempt from compliance with the CTA. Also exempt are 501(c) organizations and what FinCEN defines as “large operating companies.”

What is required of these “reporting companies”?

Each reporting company must disclose information about the company itself, its beneficial owner(s), and its company applicant(s). A beneficial owner is “an individual who, directly or indirectly, . . . (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” Entities will have to determine who these individuals are, and provide personal information including their date of birth, address, and a copy of an acceptable identification document bearing a photograph of the individual, such as a passport or driver’s license. Similar identifying information will need to be provided for all company applicants, which may include someone outside of the company who files formation documents on behalf of the company, such as a paralegal or attorney. This information will need to be updated as it changes from time to time.

Where will this information be stored? FinCEN has yet to unveil the online system where entities will file all of the required information. FinCEN’s next proposed rulemaking will address this topic and further clarify who will have access to this information. However, they have made it clear that this information will not be publically accessible. This information may be accessible to various state and federal agencies depending on the circumstances of their requests. Strict penalties will be imposed on those who misuse this information.

When must companies comply?

FinCEN has not yet determined the CTA’s effective date. Prior to its effective date, FinCEN must release additional rulemakings, allow time for public comment, and configure a secure online system to house this information. Once the CTA is effective, existing entities will have one year to comply. Companies formed after the effective date will have 14 days from the date they file their formation documentation.