Since January 1, 2024, the Corporate Transparency Act (CTA) clock has begun for compliance with the Beneficial Ownership Information (BOI) Reporting Rule.

Issued in 2022, the Reporting Rule implements Section 6403 of the CTA, directing who has to file BOI reports, when they have to file them, and what information must be provided.

Why This Is Happening

When it comes to corporate transparency, the United States has been a long-time outlier compared to the rest of the world. The CTA and Reporting Rule seek to address that deficiency.

The U.S. is a member of the Financial Action Task Force (FATF), an international organization that works to establish global standards for financial crimes compliance. As part of their work, FATF sends experts to countries all over the world to assess their efforts to curb money laundering and fight corruption.

When they reviewed the United States, FATF found the U.S. deficient in two areas. The first was in the country’s required reporting on the part of its gatekeepers, namely attorneys and accountants. In other countries, they are required to report suspicious activity. This is not the case in the U.S. The Enablers Act, which was meant to address this deficiency, did not pass Congress.

The second area of deficiency in the U.S. was in regard to corporate transparency — who the true owners are of a given company. In the U.S., it’s easy to set up a shell corporation. The CTA was designed to address this issue by capturing more information regarding the ownership of specific entities operating in or accessing the U.S. market.

The CTA establishes a non-public, national database of effectively all small businesses and will be under the oversight of the Financial Crimes Enforcement Network (FinCEN), housed within the U.S. Treasury. Of note, the federal registry does not eliminate state-by-state corporate registrations.

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Small Businesses Must Register

Large and medium-sized businesses will most likely be exempt, but small businesses created or registered on or after January 1, 2024, must register in the federal database within 30 calendar days.

Any small business created or registered prior to January 1, 2024, has a full calendar year to meet the reporting requirements.

What Qualifies as a Small Business?

The FinCEN BOI Small Entity Compliance Guide outlines the various scenarios under which you may or may not have to file.

The biggest exception to the Reporting Rule is those companies and their subsidiaries that meet all of the following:

1. Employ more than 20 people.
2. Filed in the previous year a tax return demonstrating more than $5 million in gross receipts or sales.
3. Have an operating presence at a physical office within the United States.

The best advice for handling this new requirement is simple: Be prepared. “This is going to create some chaos,” said Tim Dunfey, Managing Director of Alhambra Compliance Consultants, a consulting firm specializing in regulatory risk management for a wide range of financial institutions. “Ask yourself: What is your reason for having to go in and file, or what is your reason for not having to file in the coming year?”

The Penalties for Non-Compliance Are Severe

The scale of this effort is enormous, and thus, there is an expectation that there will be some level of confusion and delay on the part of small businesses. However, the penalties for not filing or for providing false or inaccurate information are severe: a fine of $10,000 and up to two years in prison.

Of note is the CTA safe harbor provision from civil and criminal liability for the submission of inaccurate information. This applies if the person who submitted the report voluntarily and promptly corrects the report within 90 days. Be sure to consult the FinCEN Small Entity Compliance Guide for guidance.

The national database the CTA creates is accessible to federal law enforcement agencies; state, local and tribal law enforcement agencies if authorized by a court order; a federal agency on behalf of a foreign country; or a financial institution for customer due diligence purposes.

Regarding your financial institution’s access, this is only true if they are authorized by the reporting company, i.e., you. If you are a bank onboarding new customers after January 1, 2024, be sure you’ve updated your forms to be able to request that information.

Coming into Alignment with the World

With the enactment of the Corporate Transparency Act and issuance of the BOI Reporting Rule, the U.S. is in line with the global standard. Why is this important? The dollar is the default currency in the world, and the U.S. is the country where the majority of payments and global transactions are processed. With such an extensive level of financial activity comes a responsibility to prevent and detect financial crime.

“The U.S. had a gaping hole in its regime for corporate transparency,” said Dunfey. A fact that was well-known throughout the world. “We were out of alignment with the rest of the world, and FATF nailed us for it in their evaluation,” he said. “The Corporate Treasury Act and Reporting Rule addresses that deficiency and puts us in line with other countries.”

What This Means for Treasury

Most likely, KYC documentation onboarding new clients could include a check box for CTA compliance along with the company’s approval to check the database to do so. From a procurement/accounts payable perspective, it will likely require onboarding suppliers to provide validation of CTA compliance.  From a customer/accounts receivable standpoint, making sure proper due diligence in prudent credit support could be included as well.

The fact that financial institutions will have access to the database will most likely result in having conversations around CTA compliance for current customers; however, this should only be a one-time occurrence.