Category: Thought Leadership

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The NSBA Lawsuit: An Overview

The National Small Business Association (NSBA), a small business advocacy group, has taken a stand against the Treasury Department’s newest mandate which requires over 30 million small businesses to disclose detailed information about their owners and beneficiaries.

Called the Corporate Transparency Act (CTA), the regulation is aimed at putting a stop to the misuse of anonymous shell companies for criminal activities. Filed on November 15 in the U.S. District Court for the Northern District of Alabama, the NSBA lawsuit argues that this regulation disproportionately burdens small enterprises, infringes on constitutional rights such as the right to privacy, association, and free speech, and encroaches upon states’ authority over business governance. The Treasury Department has defended the necessity of this database, citing its importance in unveiling sources of criminal behavior, particularly in the context of sanctioning Russian oligarchs and associates of Russian President Vladimir Putin amid the Ukraine conflict. While Treasury Secretary Yellen hailed the rule as a means to impede criminals from concealing identities and laundering money through financial systems, the NSBA contends that existing federal regulations on money transfers render this new requirement excessive and intrusive for small businesses. “The CTA is a poorly thought out and heavy-handed federal mandate that will be a bureaucratic nightmare for small-business owners,” said NSBA President and CEO Todd McCracken. “If implemented, small businesses will be forced to spend millions of hours and billions of dollars on paperwork instead of creating jobs and helping grow our economy.” [See Related: NSBA.biz | CTA Lawsuit Update] In its complaint, the NSBA highlights that the estimated 32.6 million companies subject to this regulation encompass various entities ranging from small family businesses, franchisees, manufacturers, online retailers, to service providers like plumbers, restaurateurs, electricians, lawyers, architects, dentists, healthcare professionals, fitness studios, and landscapers, among others. They also brought to light that the CTA also encompasses entities not involved in commercial activities, including non-profit entities lacking federal tax-exempt status, entities formed solely to hold private property, and local private social clubs without intent to pursue federal tax-exempt status. They describe the CTA as an extensive law enforcement tool imposed on law-abiding citizens and permanent residents who own or oversee small businesses in the U.S., without any established legal or regulatory justification for demanding such personal information. Moreover, the NSBA argues that this regulation infringes upon states’ authority in chartering and regulating businesses under state law, asserting that the federal government lacks constitutional authority to impose additional requisites on entity formation or dictate conditions for entity charters under state laws. In conclusion, the clash between the Treasury Department’s push for enhanced disclosure through the CTA and the NSBA’s lawsuit highlights the complex balance between combating illicit activities and safeguarding the rights of small business owners. The dispute raises critical questions about privacy, governmental overreach, and the regulatory burdens placed on businesses. As this legal battle unfolds, it serves as a focal point emphasizing the need for a nuanced approach that addresses concerns of national security while respecting the legitimate worries of small enterprises about intrusive mandates.

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The implementation of the Corporate Transparency Act (CTA) in the United States has led to widespread curiosity about the reasons and methods behind gathering data on businesses and their proprietors. Interestingly, several other nations have had requirements for reporting beneficial ownership information (BOI) for quite some time now. BOI reporting in different countries varies significantly, reflecting unique legal and regulatory frameworks. These requirements are typically designed to increase transparency, prevent money laundering, and combat financial crimes.

BOI Reporting in Different Countries

Here’s an overview of beneficial ownership reporting requirements in various countries outside the United States:

1. European Union (EU): The EU has implemented the Fifth Anti-Money Laundering Directive (5AMLD), which requires member states to maintain beneficial ownership registers for companies and trusts. These registers are partially or fully accessible to the public. Companies must identify and verify the identity of their beneficial owners and report this information to the relevant national register.
2. United Kingdom: The UK has established a public register of beneficial ownership known as the “People with Significant Control” (PSC) register. Companies, LLPs, and eligible Scottish partnerships are required to identify and record the people who have significant control over the company and report this information to Companies House. Also, changes to beneficial ownership information for companies required to register with the UK Registry must be reported within 15 days of the change.
3. France: France adopted requirements for the identification and registration of beneficial owners in May of 2015. The information reported by required companies is accessible, without restriction, to judicial authorities, the national financial intelligence unit, agents of the customs administration, authorized agents of the public finance administration responsible for tax collection and control, and certain supervisory authorities. Companies and certain other types of associations and groups must file updates to beneficial ownership information within one month of the update.
4. Canada: Canada has enhanced its beneficial ownership transparency measures. Federally incorporated companies are required to maintain a register of individuals with significant control. Provinces and territories have also been updating their legislation to introduce similar requirements.
5. Australia: Australia is in the process of enhancing its beneficial ownership transparency. While there is no public register yet, companies are required to keep records of their beneficial ownership and control.
6. India: India mandates companies to maintain a register of significant beneficial owners and file returns with the Registrar of Companies. The definition of a significant beneficial owner includes individuals holding a certain percentage of shares or voting rights.

Switzerland, Singapore, Hong Kong, and a variety of other countries require companies to maintain records of beneficial owners and significant controllers and disclose information upon request, however this information is not publicly accessible. These regulations are part of a global trend towards greater financial transparency and are often aligned with recommendations from international bodies like the Financial Action Task Force (FATF). It’s important to note that the specifics of these requirements can change, and companies operating internationally should stay informed about the regulations in each jurisdiction where they do business.

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Debunk CTA Misconceptions: Introduction

The Corporate Transparency Act (CTA), enacted January 1 of 2021, marked a significant shift in the legal landscape for businesses in the United States. Intended to target illicit activities often facilitated by opaque corporate structures, the Act aimed to end the use of “shell” companies in money laundering, terrorist financing, and fraudulent practices. However, misconceptions about its scope, impact on small businesses, constitutionality, and potential consequences persist among business owners. With the CTA comes the Beneficial Ownership Information (BOI) reporting rule, which needs to be on the radar for professionals and business owners in the United States.

Small Business Exemption

Many small business owners assume they are exempt from the CTA’s purview. However, the Act casts a broad net and specifically includes small businesses to prevent criminals from hiding behind corporate veils. Compliance is essential unless the business qualifies for an exemption (for example, certain large businesses are exempt).  There are 23 types of entities that are exempt from filing a BOI report (BOIR). To put this in perspective, of all existing entities in 2024, 88.9% of them are not exempt and will need to file a BOIR.

Influence of Industry Lobbyists

Some believed industry lobbyists would prevent the Act’s passage. However, despite historical attempts to block similar legislation, the CTA was passed, showcasing bipartisan support and a commitment to combatting illicit activities. There have been proposed rulings to extend deadlines and requests to clarify certain definitions, but make no mistake, the CTA is finalized and effective.

Constitutional Concerns

Questions about the Act’s constitutionality persist. There has been one major lawsuit filed against the Treasury.

Filed on November 15, 2022, in the U.S. District Court for the Northern District of Alabama, the National Small Business Association (NSBA) lawsuit argues that this new regulation disproportionately burdens small enterprises, infringes on constitutional rights such as the right to privacy, association, and free speech, and encroaches upon states’ authority over business governance. There hasn’t been any recent news about the complaint since it was filed, but with the CTA effective today, it’s still uncertain what will come of the lawsuit.

Ignoring Reporting Obligations

Some business owners contemplate non-compliance. However, overlooking reporting obligations could lead to significant repercussions, including fines of up to $10,000 per violation, criminal penalties, and even imprisonment.

Disregard for Fiduciary Duties

Business owners with substantial control over reporting entities must understand their fiduciary duties. Failure to comply can breach these duties, leading to legal repercussions, potential personal liabilities, and even criminal sentences. Those who meet the definition of a beneficial owner (even individuals with no financial stake in the entity can fall under the CTAs definition of a beneficial owner), must be reported on a reporting company’s BOIR. If you know that you will need to be reported on a BOIR, now’s the time to talk to your senior officers and/or management to ensure filing is completed.

The Road Ahead

Despite initial shockwaves, the CTA is a reality that demands attention. With its implementation deadline passed, businesses need to prepare for compliance. Waiting for clearer guidelines from FinCEN is not a viable strategy. Each entity must take steps to comply with reporting requirements. The CTA has disrupted traditional norms in beneficial owner reporting and its enforcement mechanisms will leave no room for evasion. Secure Compliance can provide you with the tools you need to file your BOIR efficiently and quickly. Whether you’re a CPA, lawyer, or business owner, there is a platform tailored just for you.

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What Is the CTA Impact on Banks and Financial Institutions?

The Corporate Transparency Act (CTA) goal includes changing the way financial institutions operate, creating a new era of transparency and due diligence. This federal statute, passed as part of the Anti-Money-Laundering Act of 2020, will require most privately held U.S. companies to report the names of their beneficial owners to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Treasury Department. This new reporting requirement complements the existing obligations under FinCEN’s Customer Due Diligence Rule and presents several significant implications for banks and other financial institutions.

Enhanced Organizational Due Diligence

Beginning on January 1, 2024, new entities will have a 30-day window (a 90-day extension in 2024) to file a beneficial ownership information report (BOIR) to FinCEN. Existing entities, unless exempt, must file a BOIR by January 1, 2025. For financial institutions, the BOIR will serve as a valuable tool. Lenders will cross-check this information with operating agreements and resolutions to ensure accuracy before closing transactions.

Permissions and Requests

Financial institutions must obtain permission to access the BOIR. Including this permission in a bank’s commitment letter can streamline the process, reducing the need for separate requests. This permission should cover both the borrowing entity and any upstream entities associated with the borrower.

Impact on Opinion Letters

The BOIR’s provision of verified information about borrowers may make certain opinion letters, especially authorization opinions, less necessary, reducing paperwork and complexity.

Reps, Warranties, and Covenants

If a company that didn’t have to report its ownership info before now has to, or if anything changes within the ownership of the company, they should inform their lender ASAP and must report it to the government within 30 days (an extension to 90-days was granted for 2024). The company also must promise that the information they gave before getting the loan is accurate and complete. This helps the lender make sure they have the right details to manage any risks.

Periodic Checking

Lenders may consider periodically checking the most updated BOIRs of borrowers after closing. The permission to access BOIRs should encompass future reports at different times. This could be incorporated into the loan agreement, requiring borrowers to provide this permission upon request.

Exemptions and Advocacy

The American Bankers Association (ABA) and the Bank Policy Institute (BPI) have made significant contributions to the conversation. The ABA and the BPI recommend aligning the CTA with the existing CDD Rule to minimize future burdens on banks and their customers. Both groups support adding exemptions already included in the CDD Rule, such as exemptions for state-chartered banks and trust companies, and they emphasize the need to make the CTA consistent with the existing rule.

Are You Prepared To File?

In summary, the CTA is designed to enhance transparency and anti-money laundering efforts, but it also introduces new regulatory complexities for financial institutions. Advocacy from industry groups like the ABA and the BPI seeks to ensure that the transition is as smooth as possible and that the rules align with existing practices, reducing the burden on financial institutions and their customers. Staying informed and preparing for the CTA’s full implementation will be crucial for banks and financial entities as they adapt to the evolving landscape of financial compliance and due diligence.

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Introduction

The Corporate Transparency Act (CTA) is bringing significant changes to several key industries, including law enforcement, real estate, and healthcare. Enacted to combat money laundering, tax fraud, and illicit activities, the CTA imposes reporting requirements and responsibilities on businesses. Here, we explore how it will affect these diverse sectors.

CTA Impact on Law Enforcement

The CTA equips law enforcement agencies with a powerful tool to uncover financial wrongdoing. It mandates that reporting companies disclose beneficial ownership information. Beneficial owners are individuals with significant control over the company or who own at least 25% of its ownership interests.Federal and state agencies engaged in national security, intelligence, or law enforcement activities, will have access to this information. It helps them track down those attempting to hide behind shell companies for illegal purposes.

Noncompliance with CTA reporting requirements carries civil and criminal penalties, which include fines of up to $10,000 and imprisonment of up to 2 years. This not only deters illicit activity but also fosters collaboration between businesses and law enforcement.

CTA Impact on Real Estate

The real estate sector faces notable compliance challenges under the CTA. Many real estate businesses, particularly those with numerous legal entities owning and operating properties, will be impacted. The Act captures many real estate limited liability companies and partnerships formed for property ownership.

Entities must disclose information about beneficial owners and company applicants, creating potential privacy and security concerns. However, the CTA aims to enhance transparency and prevent abuse of real estate for illicit purposes. The availability of the FinCEN identifier streamlines reporting for individuals with interests in multiple entities.

CTA Impact on Healthcare

The healthcare sector, including small to medium-sized practices, faces additional paperwork due to the CTA. Medical and dental practices must register as reporting companies, resulting in more administrative burdens.

The Act requires them to provide comprehensive information on beneficial owners and company applicants, with potential penalties for noncompliance. Reporting requirements under this new rule commence in 2024, and practices may need to adjust to the 30-day reporting window for updates (or a 90-day extension in 2024).

Are You Prepared to File?

In conclusion, the Corporate Transparency Act impacts a wide range of industries, from law enforcement to real estate and healthcare. While it brings challenges and additional administrative work, its overarching goal is to promote transparency, reduce illicit activity, and improve cooperation between businesses and regulatory authorities.

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The key filing exemptions for the new 2024 BOI ruling

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What Are the Primary FinCEN BOI Exemptions?

The Corporate Transparency Act (CTA) introduced new beneficial ownership reporting requirements set to be effective in 2024. Administered by the Financial Crimes Enforcement Network (FinCEN), these requirements aim to provide clarity on individuals who have significant control over reporting companies or possess substantial ownership interests. However, it’s crucial to recognize that certain entities are exempt from these reporting obligations. Here, we delve into the top five FinCEN BOI exemptions:

Large Operating Companies

These are companies that employ over 20 full-time employees in the U.S., maintain a physical operating presence within the country, and report gross receipts exceeding $5,000,000 on their federal income tax return for the previous year.

Inactive Entities

These refer to companies that were established on or before January 1, 2020, and are not actively engaged in business. They should not be owned by foreign individuals and must not possess any assets. Additionally, they should not have undergone any ownership changes or received funds exceeding $1,000 in the previous calendar or fiscal year.

Tax-Exempt Entities

Generally, these are entities described in Section 501c of the Internal Revenue Code (e.g., charitable organizations, churches and religious organizations, private foundations, political organizations, and/or other nonprofits).

Subsidiaries of Certain Exempt Entities

These entities have their ownership interests controlled or wholly owned, either directly or indirectly, by one or more entities, specifically:

Securities reporting issuer, governmental authority, bank, credit union, depository institution holding company, money services business, broker/dealer in securities, securities exchange or clearing agency, other Exchange Act registered entity, investment company or investment adviser, venture capital fund adviser, insurance company, state-licensed insurance producer, Commodity Exchange Act registered entity, accounting firm, public utility, financial market utility, tax-exempt entity, and/or a large operating company.

Accounting Firms

These are large public accounting firms with more than $5 million in gross receipts and 21 or more full-time employees, and public accounting firms registered with the Public Company Accounting Oversight Board (PCAOB).

Are You Prepared to File?

Overall, while the new BOI reporting requirements aim to enhance transparency and combat financial crimes, it’s essential for entities to assess their status and determine if they fall under any of the exemptions. If uncertain about your company’s obligations, consult with an attorney for a comprehensive assessment.

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