Corporate Transparency Act Compliance: How to Prepare for FinCEN UBO Reporting
What is the Corporate Transparency Act (CTA)?
The Corporate Transparency Act (CTA) is a federal law to increase transparency in corporate ownership. The law takes effect on January 1, 2024, and requires businesses to provide the Financial Crimes Enforcement Network (FinCEN) with Beneficial Owner Information (BOI).
The CTA falls under the Anti-Money Laundering Act of 2002 (AMLA) and is part of the National Defense Authorization Act 2021 (NDAA). The NDAA tasked FinCEN with creating a beneficial ownership registry, requiring an estimated 32 million businesses to file BOI with the US government.
Before the CTA, businesses registered in the US were not obligated to disclose or maintain a record of shareholder names or ultimate beneficial owners (UBOs), meaning anonymous shareholders could effectively control businesses and create shell companies. Congress enacted the CTA to combat money laundering, terrorist financing, tax evasion, and similar activities by providing law enforcement with essential BOI, improving the accessibility and accuracy required for investigations and enforcement efforts.
Who Must Comply With FinCEN BOI Reporting Requirements?
Reporting Companies need to submit information to comply with the CTA. The two types of reporting companies are:
Domestic Reporting Companies: Corporations, limited liability companies (LLC), or otherwise created in the United States by filing a document with a secretary of state or any similar office under the law of a state or native tribe.
Foreign Reporting Companies: A foreign company registered to do business in any U.S. state or native tribe by such a filing. Sole-proprietorships that don’t use a single-member LLC are not considered a reporting company.
Reporting companies must disclose individual beneficial owners and company applicants, collectively called ultimate beneficial owners (UBOs).
Beneficial Owners are stakeholders in reporting companies whose ownership interests include equity, stock, capital or profit interests, convertible instruments, and other forms reflecting a 25% or more stake in the company. Also included are individuals with substantial control of the company, such as senior officers, individuals with appointing authority, key decision-makers, and those with significant influence over the company’s operations or ownership structures.
Company Applicants include individuals who create or register new entities and are responsible for directing or controlling the relevant filing. This only applies to companies created after January 1, 2024.
Who is Excluded from BOI Reporting?
Some organizations are exempt from filing BOI. FinCEN has provided 23 company categories exempt from the BOI reporting. Generally, exempt companies already provide BOI under other state or federal laws.
Reporting Company Exemptions
Insurance companies
State-licensed insurance producers
Commodity Exchange Act registered entities
Accounting firms
Public utilities
Financial market utilities
Pooled investment vehicles
Tax-exempt entities
Entity assisting a tax-exempt entities
Subsidiaries of certain exempt entities
Inactive entities
Securities reporting issuers
Governmental authorities
Banks
Credit unions
Depository institution holding companies
Money services businesses
Brokers or dealer in securities
Securities exchange or clearing agencies
Other Exchange Act registered entities
Investment company or investment advisers
Venture capital fund advisers
Further, a general exemption category also exists for Large Operating Companies that meet all of the following requirements:
Has a physical US office
Employs over 20 U.S. citizens full-time and;
Generates over $5 million annually
At the individual level, exemptions to the BOI Rule include minor children, nominees, agents, non-senior employees, future interest holders, and creditors.
What are Companies Required to Report?
The following information about the Reporting Company must be included in the report to FinCEN:
Legal name and trade names, such “doing business as” or “trading as” aliases
Current address
Jurisdiction of formation or registration
Taxpayer Identification Number (TIN)
The following BOI data must be included for each beneficial owner or company applicant:
Full Name
Date of Birth
Current Residential Address,
Government-issued ID number (including a photocopy of the ID)
If an individual decides to file their information with FinCEN directly, they may be issued a FinCEN identifier, which can be provided on a BOI report instead of the above beneficial owner data.
Why AML Screening Before Reporting to FinCEN is Important?
Screening beneficial owners against global risk databases, such as sanctions, PEPs, and international ownership records, is essential to the Know Your Business (KYB) framework. For companies doing business internationally across sectors, AML regulations include compliance screening. The same AML framework applies to preparing for BOI reporting to FinCEN.
Preventing Unwanted Associations: Accurate UBO screening prevents unintentional business relationships with potentially criminal or fraudulent entities. Given the evolving complexity of financial crimes, thorough UBO checks are a vital safeguard.
Legal Compliance: Failing to comply with AML regulations and the CTA can result in significant penalties, including fines and reputational damage.
Risk Management: Effective UBO identification mitigates fraud and financial risks. It enables companies to navigate the intricacies of international trade and finance with an informed and secure approach.
Reputation Enhancement: Beyond meeting compliance requirements, comprehensive UBO checks enhance a company's reputation as a responsible and transparent business entity. This aspect is crucial as ethical business practices continue to increase in value.
Screening UBOs before FinCEN reporting is not just a regulatory obligation but a strategic necessity. It plays a vital role in ensuring regulatory compliance, managing business risks, and maintaining the integrity of global business operations.
Essential Tools for KYB Compliance Screening
A comprehensive Know Your Business (KYB) strategy before reporting BOI to FinCEN includes ultimate beneficial ownership screening, sanctions screening and adverse media screening. These tools collectively aid in preparing accurate UBO disclosures, ensuring that businesses are compliant across the international regulatory landscape.
Sanctions Screening
Conducting thorough checks against global sanctions lists ensures businesses avoid engaging with entities or individuals flagged by government authorities. Sanctions screening is crucial for mitigating risks associated with inadvertently doing business with sanctioned parties, which can lead to severe legal and financial consequences.
UBO Screening
Screening a global database of beneficial ownership ensures that businesses avoid engaging with shareholder individuals or entities that are linked to financial crime risk abroad, such as ownership or directorship of sanctioned companies, links to forced labor, or links to export controls.
PEPs Screening
Identify whether beneficial owners are politically exposed or linked to politically exposed persons. PEPs may be at a higher risk of engaging in corrupt activities, such as money laundering or bribery, due to their position of power and the potential for conflicts of interest according to the Financial Action Task Force (FATF).
Adverse Media Screening
Screening media sources for adverse information about business partners is vital for reputational risk assessment. It includes searching for news related to financial misconduct, corruption, or other criminal activities to enhance informed decision-making.
Start CTA Compliance Screening Today
Castellum.AI helps companies streamline the FinCEN UBO reporting process with the fastest, most accurate and reliable risk data screening against global sanctions, adverse media, and UBO screening.
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Preparing for CTA Compliance
To effectively prepare for CTA compliance, use this framework:
Review Business Structures: Determine if the businesses you work with are non-exempt reporting companies.
Identify Beneficial Owners: Establish each organization's UBOs and Collect all necessary BOI.
Screen Beneficial Owners: Ensure that each beneficial owner, controlling individual and company applicant is not subject to government restrictions like sanctions or linked to financial crime through their foreign ownership networks.
Continued Compliance: Establish a processes to report updated BOI as needed.
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