In a recent SKO Insider, we provided a quick introduction to the now-effective Corporate Transparency Act (“CTA”) and promised more information about this new law. Before going into the CTA’s requirements, we have fielded many questions that come down to “Why the CTA?” So let’s get that out of the way.
In recent years the news has been full of stories about “shell companies” used for nefarious purposes. Members of the Financial Crimes Network of the Department of the Treasury (“FinCEN”), along with other prosecutors and regulators, have long complained that while investigating crimes, they would often encounter a corporation or an LLC, or sometimes a chain of entities, whose ownership was unknown.
Congress, in passing the CTA, wrote:
(3) malign actors seek to conceal their ownership of corporations, limited liability companies, or other similar entities in the United States to facilitate illicit activity, including money laundering, the financing of terrorism, proliferation financing, serious tax fraud, human and drug trafficking, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption, harming the national security interests of the United States and allies of the United States;
(4) money launderers and others involved in commercial activity intentionally conduct transactions through corporate structures in order to evade detection, and may layer such structures, much like Russian nesting “Matryoshka” dolls, across various, secretive jurisdictions such that each time an investigator obtains ownership records for a domestic or foreign entity, the newly identified entity is yet another corporate entity, necessitating a repeat of the same process.
Thus, the CTA is intended to preclude bad actors from hiding their identities behind the business organizations they organize to carry out unlawful activities.
There is also a less recognized purpose of the CTA. Under the Bank Secrecy Act, banks and other lending organizations must have a customer due diligence function (sometimes referred to as “Know Your Customer”) to collect, among other things, information about who owns and controls business entities seeking to open an account.
The CTA provides that banks, with customer consent, may access the new beneficial ownership database in meet the portion of their “Know Your Customer” obligations relating to their clients’ ownership. For that reason, the banks were significant supporters of the CTA. If you have recently opened a bank account on behalf of a business, you have probably reviewed the bank’s “boilerplate” account agreement and consented to the bank’s use of the CTA database to obtain beneficial ownership information about your business. For pre-existing accounts, you should not be surprised when the bank requests a CTA consent amendment.
You may decide for yourself whether the costs of the CTA are justified against these rationales for its adoption. Regardless, it is the law, and compliance is not optional; there are significant penalties for non-compliance, which will be covered in an upcoming SKO Insider.
Please do not hesitate to contact your contact attorney at SKO or a member of the CTA Practice Group to help you in getting ready for these new filing requirements.
