The Corporate Transparency Act (CTA) is a law that will increase transparency and the prevention of financial crimes such as money laundering.
The CTA is a law passed in the United States in 2020. It aims to provide greater transparency at the federal level for the owners of companies, especially joint stock companies. According to the law, the beneficial owners of companies must be registered in a federal database, and this information must be held by the Security Exchanges Commission (SEC).
The law aims to better trace the identities of company owners in order to prevent crimes such as terrorist financing, money laundering and tax evasion. In addition, making this information accessible to certain state and federal agencies will help prevent illegal activities and manage companies in a more transparent manner.
This law can be seen as an example of a broad effort in the United States aimed at making the ownership structure of companies more transparent.
Why Transparency is important for Anti-Money Laundering (AML)?
Local and international financial regulations, which differ in each country, include various transparency laws to ensure transparency. These practices play an important legal and regulatory role. One of the reasons for emphasizing transparency is the possibility of abusive manipulation if financial disclosures are incomplete. These omissions and misleading statements can lead to financial crime, money laundering, terrorist financing and tax evasion worldwide.
With the advent of mechanisms such as mandatory International Financial Reporting Standards (IFRS), transparency laws have become a mandatory requirement. As transparency has emerged as one of the IFRS ethics, organizations such as the The Financial Action Task Force (FATF) set international anti-financial crime standards and aim to prevent money laundering and terrorist financing.
AML and CTF requires various practices and regulations not only at the international level but also within countries. Similar or different regulations are in place in different countries and are generally aimed at collecting and sharing transparent ownership information.
How Does the CTA Work?
As the CTA aims to make corporate ownership more transparent in the United States, it generally works as follows:
Identification of Beneficial Owners
- Incorporated companies must be registered in a federal database under the law.
- These records are used to identify the real owners of the company. Beneficial owners are the people who directly or indirectly control the company.
Information Updates
- When there are changes to the ownership structure of the company, these changes must be recorded in the federal database.
- In this way, the real owners of the company are tracked and recorded in an up-to-date manner.
Access by Federal Agencies
- At the federal level, the SEC and certain other agencies have access to this database.
- By reviewing information on company ownership, these agencies seek to prevent illegal activities and financial crimes.
Money Laundering
- An incorporated company is used to launder illegally obtained funds.
- Through CTA, the real owners of the company can be identified, and the people associated with this crime can be reached.
Tax Evasion
- Company owners create complex company structures to evade taxes.
- CTA can be effective in combating tax evasion by identifying the real owners of such companies.
Terrorism Financing
- A company is used to provide financial support to terrorist organizations.
- CTA supports counter-terrorism efforts by identifying the real owners of the company.
Who is Not Required to Follow the CTA?
Some of these legal organizations are subject to 23 exemptions and exceptions listed in the CTA, including:
- Issuers who report securities.
- Authority in government.
- Financial institutions.
- Credit unions.
- Holding corporations for depository institutions.
- Financial services companies.
- Securities dealers or brokers.
- Clearing houses or securities exchanges.
- Other entities registered under the Exchange Act.
- Financial advisory firms or investment corporations.
- Consultants to venture capital funds.
- Insurance providers.
- Producers of insurance with state licenses.
- Registered entities under the Commodity Exchange Act.
- Accounting companies.
- Public service providers.
- Utilities for the financial market.
- Investment vehicles that are pooled.
- Entities free from taxes.
- Organizations supporting tax-exempt organizations.
- Large businesses in operation.
- Subsidiaries of several exempt organizations.
- Inert creatures.
How to Comply with the CTA?
There will be differences in the reporting timelines for new and existing companies even though the new standards will take effect in early 2024. Companies incorporated after January 1, 2024, will have only 30 days to file their initial report with Financial Crimes Enforcement Network (FinCEN); companies that have previously been established must submit it by January 1, 2025.
The regulation stipulates that those who intentionally give incorrect or fraudulent information or disregard the reporting obligations may face criminal and civil penalties of up to $10,000 and two years of imprisonment, respectively.
FinCEN's BOI compliance guide is another resource smaller firms can consult for more information on how to comply with the CTA.
Simplifying Compliance Efforts
At the same time as the incidence of financial crime and money laundering are increasing, the regulations and laws of governments and global organizations are becoming more comprehensive. In particular, the finance, banking, and payments sectors may unintentionally harbour such crimes and thus be held accountable for new practices such as CTA and stringent controls. While this can be frustrating for businesses, they can reduce their burden by leveraging technology and consuming AI and automation-based tools.
Sanction Scanner gives you the ability to monitor your customers' transactions 24/7 with Ongoing Monitoring tools based on AI and automation and set alerts for suspicious transactions. This way, you can comply with the new standards that will come into force at the beginning of 2024 without disrupting your timeline. Your compliance with FinCEN's BOI will also be simplified.
