Congress tends to bury some of its most repressive legislation in the fine print of bills supposedly intended for other purposes. The Corporate Transparency Act (CTA) is just one of the more recent examples of many.
Another is the exit tax imposed on Americans who want to escape Uncle Sam’s coercive global taxation scheme. It was woven into a noble-sounding bill called the Heroes Earnings Assistance and Relief Tax Act of 2008.
Or the infamous Foreign Account Tax Compliance Act (FATCA.) It was part of an otherwise innocuous 2010 initiative named the Hiring Incentives to Restore Employment Act.
In this case, it all started in December 2020 when Congress passed the National Defense Authorization Act for Fiscal Year 2021 over President Trump’s veto. Hidden in Title LXIV of this law was the Corporate Transparency Act measure. It represents the most significant change to US anti-money laundering legislation in 35 years.
The Corporate Transparency Act is a farce… but at least it’s more fair.
As we’ve pointed out many times, the War on (Some) Money Laundering has historically been a farce. It’s led to a double standard favoring the richest and most powerful countries. Smaller countries have been forced to implement strict “know your customer” standards requiring all corporate entities to be linked to a beneficial owner.
What’s more, the main targets of America’s draconian money laundering laws have been individuals and small businesses – not the financial institutions that facilitate the laundering of trillions of dollars each year.
Yet until the Corporate Transparency Act, the United States had no such requirement in place. That means states like Delaware could offer far greater secrecy than is available in jurisdictions such as Nevis, Panama, and Switzerland – countries the mainstream media labels as “tax havens.”
But the CTA requires companies formed in any US state to disclose their true, beneficial owners when law comes into effect, or when a new company is formed. Companies must disclose the names, addresses, and birthdays, along with government-issued photo IDs, of the company’s beneficial owner(s), to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
The Act will affect a huge number of US companies…
There are at least 45 million LLCs in the United States along with untold millions of corporations, limited partnerships, and other business entities. Almost all of these will need to comply with the new regulations.
There are some exceptions, most notably for publicly traded companies, banks, credit unions, insurance companies, and governmental entities. In addition, business entities with more than 20 employees that operate at a physical office in the United States and have annual revenues that exceed $5 million are exempted from the reporting requirements.
The only good news is that the Corporate Transparency Act didn’t take effect immediately. But the time’s now up. On January 1, 2024, the law takes effect. Existing domestic companies have until the end of 2024 to disclose this data to FinCEN on what the agency is calling a beneficial owner information report (BOIR).
After that, FinCEN will begin imposing fines of up to $500 per day to non-compliant companies. You can even be imprisoned for up to two years if you report false or fraudulent beneficial ownership information to FinCEN or fail to update that data.
Here’s how the CTA will work
The law introduces the term “reporting company” as an entity that must identify its beneficial owners. A reporting company is a domestic corporation, LLC, or “other similar entity.”
If you are the manager, director, or officer in any reporting company, you must file a BOIR with FinCEN, even if you have no ownership interest in it. And if you own 25% or more of a reporting entity, you must report that ownership.
That sounds simple enough, and we think that for the majority of reporting companies, compliance with these rules will be relatively painless.
But there are a host of potential issues that we foresee could result in needless hassles. Perhaps you have an LLC you use to hold a rental property and you’ve named a son, daughter, parent, or grandparent as a 25% or greater owner so they can generate some extra income. If so, they’ll need to file a BOIR.
Then there’s the matter of information sharing. Proponents of “corporate transparency” pushed for a public register of beneficial ownership that would be accessible to anyone as part of the Corporate Transparency Act. Thankfully, that provision wasn’t included in the final version of the bill.
Instead, the data FinCEN collects will be shared with federal and state law enforcement and regulatory agencies. With your consent, banks and other financial institutions will also have access to it.
And make no mistake – your bank will insist that you consent to such disclosure. If you don’t – or if you “forget” to file your BOIR, your account could be closed. Such “de-risking” is already a huge problem, as we’ve talked about before.
And it won’t necessarily just be banks that are doing the de-risking. Thanks to the CTA, payment services like ApplePay, Venmo, and PayPal could shut down your account if you fail to comply.
In most cases, when a financial institution (especially a bank) closes your account, it won’t inform you by phone or email. Instead, you’ll receive a letter sent to the residential address on record. If you moved after you set up the account, and your mail isn’t forwarded, the first sign you might have that anything’s wrong is when you try to make a payment and discover you’re locked out.
Oh, and get this…if anything about your reporting company changes, you must inform FinCEN, or suffer the aforementioned penalties. If Granny who owns 25% of your LLC passes and someone inherits her membership interest, you must file a revised BOIR within 30 days. Likewise, if you name a new officer, member, shareholder, director, or manager, or if the address of the company or any of these individuals change, you must inform FinCEN.
About the best we can say of the Corporate Transparency Act is that it could rejuvenate interest in offshore LLCs and corporations. They’re not for everyone and come with their own IRS compliance obligations. But for the most part, such disclosures will be part of your tax return, and not generally shared with state or federal police or regulatory agencies.
Forming and administering these entities happens to be one of our specialties, so if you’d like to know more, book in a free no-obligation consultation with one of our Associates..
