The Not-So-Transparent Implications of the Corporate Transparency Act

By: Brett Mastrangelo, Class of 2026

Background

The Corporate Transparency Act (“CTA”)[1], enacted by Congress in 2021 as part of the National Defense Authorization Act, targets the use of domestic and foreign “shell” companies for money laundering, terrorist financing, tax fraud, and other illegal purposes.[2] Under the CTA, which takes effect on January 1, 2024, “reporting companies” are required to report “beneficial ownership information” (“BOI”) to the Financial Crimes Enforcement Network (“FinCEN”) of the Department of the Treasury.[3] A reporting company is a “corporation, limited liability company, or other similar entity” that is formed under State or Indian Tribe law, or formed under a foreign country’s law and registered to do business in the United States under State or Indian Tribe law.[4] The CTA contains twenty-four categories of reporting companies exempt from CTA compliance, such as banks, insurance companies, public accounting firms, securities issuers, and credit unions.[5] Furthermore, a beneficial owner is a person who has “substantial control over the entity” or holds at least twenty-five percent of entity “ownership interests.”[6] As for companies formed in 2024 or later, information on “company applicants” must also be reported to FinCEN.[7] A company applicant is a person who either filed or held the most responsibility for filing the formation application for a reporting company.[8] Finally, civil and criminal penalties for CTA non-compliance may range from a daily five-hundred dollar fine up to a two-year prison sentence.[9]

CTA Implications

Over thirty-two million companies and an additional five million new companies per subsequent year are expected to be subject to CTA reporting requirements.[10] Much of this impact should be seen on smaller companies, as the CTA exempts companies that (1) employ over twenty people, (2) have gross income exceeding five million dollars, and (3) operate at a physical location in the United States.[11] However, as 2024 quickly approaches, CTA awareness is strikingly low.[12] According to a Wolters Kluwer survey of seven hundred companies (in which half are subject to CTA compliance), twenty-six percent of those reporting companies were aware of the CTA.[13] The same survey also found CTA awareness at fifty-four percent for law firms and Certified Public Accountants (“CPA”), a worrisome statistic given the ability of lawyers and CPAs to advise reporting companies on CTA considerations.[14]

Arguably the most burdensome CTA component for reporting companies is the requirement to notify FinCEN of any changes in BOI within thirty days.[15] Reporting companies may have trouble adhering to this requirement given the difficulty and cost of identifying and reporting BOI changes in a timely fashion.[16] One potential solution would require companies to establish a process in which CTA reporting requirements are actively tracked, monitored, and communicated to company management.[17] By doing so, the risk of overlooking or missing reportable BOI changes can be minimized.

Another CTA compliance issue relates to privacy concerns.[18] The CTA requires reporting companies to report the personal identifying information (“PII”) of its beneficial owners and company applicants to FinCEN, including name, date of birth, home address, and photograph.[19] This is problematic because domestic officials, foreign officials, and financial institutions can access BOI, including PII, if requests to access BOI “relate to national security, intelligence, and law enforcement.”[20] Concerns over PII security will likely persist despite heavy sanctions against unauthorized disclosure of such data.[21]

Conclusion

Given the CTA’s arduous compliance requirements and intrusive privacy implications, Congress made clear the CTA is not to be taken lightly.[22] Time will tell whether Congress’ anti-shell company and national security objectives will be achieved through the CTA.[23] In the meantime, companies should determine whether they are subject to the CTA and, if so, prepare to become and stay CTA compliant. [24]

[1] 31 U.S.C. § 5336 (2021). [2] Joyce Mazero, The Corporate Transparency Act: Franchisors And Franchisees Need To Comply With New Federal Reporting Obligation Effective January 2024, Forbes (Oct. 9, 2023, 1:41 PM), https://www.forbes.com/sites/joycemazero/2023/10/09/the-corporate-transparency-act-franchisors-and-franchisees-need-to-comply-with-new-federal-reporting-obligation-effective-january-2024/?sh=74ae0c1d7d98; Matthew F. Erskine, Update on the Impending Corporate Transparency Act, WealthManagement.com (Oct. 20, 2023), https://www.wealthmanagement.com/high-net-worth/update-impending-corporate-transparency-act#menu. [3] Id. Reporting companies formed before 2024 must file a BOI report to FinCEN by January 1, 2025. Baker & Hostetler LLP, Corporate Transparency Act: An Overview, JD Supra (Oct. 9, 2023), https://www.jdsupra.com/legalnews/corporate-transparency-act-an-overview-3316856/. New reporting companies formed in 2024 or beyond must file a BOI report to FinCEN no later than thirty days after formation. Id. However, FinCEN recently proposed to extend the reporting deadline for new reporting companies from thirty to ninety days to ease the burden of CTA compliance. Erskine, supra note 2. [4] 31 U.S.C. § 5336(a)(11)(A)(i)–(ii) (2021). [5] 31 U.S.C. § 5336(a)(11)(B)(i)–(xxiv) (2021). [6] 31 U.S.C. § 5336(a)(3)(A)(i)–(ii) (2021). The CTA does not define “substantial control.” However, a “senior officer” will likely have substantial control. Baker & Hostetler LLP, supra note 3. [7] Ballard Spahr LLP, A Roadmap to the CTA’s Game-Changing Reporting Requirements, JD Supra (Oct. 26, 2023), https://www.jdsupra.com/legalnews/a-roadmap-to-the-cta-s-game-changing-4052933/. [8] Id. [9] Id. [10] Russ Rosler, Corporate transparency is coming: 7 things business owners should know, Columbus Business First (Oct. 1, 2023), https://www.bizjournals.com/columbus/news/2023/10/01/things-to-know-corporate-transparency-act.html. [11] 31 U.S.C. § 5336(a)(11)(B)(xxi)(I)–(III) (2021). [12] Hugo Guzman, Many Businesses Blindsided by New Anti-Money-Laundering Law, Law.com (Oct. 10, 2023, 8:39 AM), https://www.law.com/corpcounsel/2023/10/10/many-businesses-blindsided-by-new-anti-money-laundering-law/. [13] Id. [14] Id. [15] Rosler, supra note 10. [16] Id. [17] Id. [18] Mazero, supra note 2. [19] Id. [20] Ballard Spahr LLP, supra note 7. [21] Mazero, supra note 2. [22] Rosler, supra note 10. [23] Mazero, supra note 2. [24] Rosler, supra note 10.