How the CTA Plans to Hinder Money Laundering

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Perpetrators of criminal acts such as fraud, drug and human trafficking, and terrorism often hide behind businesses, using anonymous or shell companies to launder ill-gotten funds and avoid prosecution. Companies come in handy because criminals can control the entities’ operations without exposing their own identity. Until now.

On January 1, the Corporate Transparency Act (CTA) became the latest law designed to help law enforcement tackle financial crime. Part of the National Defense Authorization Act, the CTA requires certain entities to disclose the identities of those who own or control it. The law’s effective date depends on the Treasury Department, but Treasury must publish regulations by January 1, 2022, at the latest. Here’s what you need to know in the meantime.

Insight into Criminal Identity

By removing anonymity from business ownership, the CTA makes it harder for criminals to hide their identities and engage in criminal activity such as laundering their ill-gotten gains. Forcing disclosure of an entity’s beneficial owners enables members of law enforcement to improve their understanding of what may be going on behind corporate walls. This insight should help them prevent and detect financial crime and gain the evidence necessary to prosecute alleged offenders.

New York Federal Reserve research suggests that the CTA will reduce criminal transactions. In its study of the Financial Crimes Enforcement Network’s (FinCEN’s) program, the New York Fed found that “After anonymity is no longer freely available to domestic and foreign investors, all-cash purchases by corporations fall by approximately 70 percent.”

Beneficial Owners Defined

Unlike other laws designed to combat financial crime (such as the Know Your Customer regulations financial institutions follow), the CTA is relatively simple and straightforward. To comply, certain companies must disclose their “beneficial owners” to FinCEN. Most covered companies are small, privately owned, for-profit corporations or limited liability companies.

The Act defines a beneficial owner as a natural person who 1) exercises substantial control over the entity, or 2) owns 25% or more of the entity. People may also qualify as beneficial owners if they receive substantial economic benefits from an entity’s assets. When adopted, the regulations are expected to provide further instruction on how to measure business ownership and control.

If you qualify as a company’s beneficial owner (or work for the beneficial owner) of a new entity, submit the owner’s name, address and date of birth to FinCEN. Existing companies that are covered should provide ownership within two years of the law’s effective date. Also provide proof of identity, such as a valid driver’s license or passport.

You aren’t required to submit financial information or details about your company’s operations. And once you’ve disclosed ownership, your company isn’t required to provide regular updates to FinCEN unless ownership changes. Registry information will typically remain private. But regulators are allowed to share it with government agencies — including law enforcement agencies that inquire.

Exceptions and Potential Consequences

The act provides exceptions to the beneficial ownership classification. For example, though the rules could change when the regulations are adopted, the following generally aren’t considered beneficial owners at this time:

  • Minor children,
  • Individuals acting as nominees, intermediaries, custodians or agents on another person’s behalf, and
  • Individuals whose only interest in an entity is through a right of inheritance.

Not all entities are required to report, either. Publicly traded companies, depository institutions, insurers and larger companies with at least 20 full-time employees and $5 million in gross receipts usually are exempt.

However, beneficial owners who are covered by the law must disclose required information or potentially face civil and criminal penalties. These include a $10,000 fine and up to three years in prison.

Facilitating Justice

The anonymity of perpetrators has long been one of the biggest obstacles in money-laundering investigations. Without knowing who’s behind an alleged illegal act, it’s impossible to bring that person to justice. The CTA knocks down that barrier. You can help facilitate justice by complying with the law.

CTA reporting is expected to increase administrative work for covered companies. So you should start preparing now to submit required information when the regulations are adopted by January 22, 2022. Contact us for help.

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