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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