Businesses Still Fuzzy About Corporate Transparency Act Compliance as Deadline Looms

The deadline for companies to comply with a federal law aimed at curtailing corruption and money laundering is fast approaching, but a new study from global compliance firm Corporation Services Co. (CSC) suggests that many corporate leaders are unprepared to handle its reporting requirements.

Among the 200 general counsel, corporate secretaries, and other senior leaders that CSC surveyed, 83 percent said they are concerned about their organization’s compliance with the Corporate Transparency Act (CTA), which took effect on January 1.

The respondents represent a broad range of businesses in Asia, Europe, the U.K., and the United States, although respondents themselves are either based in the U.S. or have entities registered in the U.S.

The Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, wants to know who ultimately owns and controls all the private corporations and limited liability partnerships (LLPs) registered to do business in the United States, mainly for law enforcement purposes.

While 93 percent of those surveyed by CSC said they are aware of the law, just under 40 percent said they know about its strict reporting deadlines and only 33 percent have some level of awareness of its myriad exemptions.

The respondents cited a litany of concerns regarding their organization’s CTA compliance. Topping their list was a lack of guidance around what organizations outside the United States need to do to comply (62%), followed by an expectation that their organization is exempt from the rule (48%), and high fees and costs associated with compliance (38%). Another 38 percent said their company doesn’t understand the penalties, and 34 percent cited a lack of understanding about the CTA’s requirements.

“The extent to which businesses are still feeling unfamiliar or uncomfortable about their organization’s ability to comply with the CTA is worrying but unsurprising,” said Julie Dallmann, a director at CSC, in a statement. “It’s clear the subjectiveness of the CTA, including ambiguity around exemptions and the question of who within an organization meets the definition of being a ‘beneficial owner,’ is causing uncertainty as to its provisions.”

Determining beneficial ownership can indeed be complicated. Individuals with at least 25 percent ownership, or with substantial control over a company’s decision-making, are considered beneficial owners. Though 60 percent of covered organizations have a single beneficial owner, defining ‘substantial control’ might be difficult.

“That’s where it gets murky in terms of who has the control. FinCEN has not given a lot of clarity on that question,” former Internal Revenue Service (IRS) attorney Milan Solarz-Patel told Law.com earlier this year.

Companies formed before January 1 have until the end of this year to file an official report on the FinCEN website listing the full names of all of their beneficial owners, those owners’ home addresses, and some form of official identification, such as a passport or driver’s license.

Companies will also need to file a report with FinCEN for up to two “company applicants” who were involved in the creation of the company.

The deadline for newer businesses is much tighter. If your company was created or registered in 2024, it’s 90 days. And it becomes 30 days for organizations created or registered after January 1, 2025.

The CTA applies to about 33 million private companies, many of them small businesses and startups, as well as foreign entities with primary locations in the United States. Public companies, banks, credit unions, insurance companies, venture capital advisers, and tax-exempt entities are exempt. Fines for noncompliance can be as much as $500 per day for each day the violation continues, and willful noncompliance can bring criminal fines of $10,000 and possible jail time.

Businesses with more than 20 U.S.-based employees that report $5 million or more in U.S. income on their taxes qualify for a “large company exemption.”

FinCEN has since published a list of frequently asked questions on its website, and the agency clarified in July that if a company is created in 2024 or later and then shuts down before it is required to submit its first report about who owns the company, it still needs to submit that report.

“In a perfect world, this would all be black and white,” CSC senior director David Jefferis said in the report. “But there are two areas that are open to interpretation. There’s some ambiguity about exemptions, and we’re seeing certain scenarios where clients are unsure about a particular ownership structure and whether it applies to them.”

From: Corporate Counsel