Overview of the Corporate Transparency Act of 2024
December 18, 2023
Korea Law Times
Types : Bylined Articles
The Corporate Transparency Act of 2024 (CTA), established in January 2021, is set to be implemented on January 1, 2024. This federal law is designed to investigate and penalize unlawful activities, such as tax evasion and money laundering, which exploit the gaps in or relaxed corporate ownership information requirements under existing U.S. state laws. A significant component of the CTA will impact a vast number of small and medium-sized enterprises (SMEs) must now register Beneficial Owner Information (BOI) with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury.
1. Key Provisions of the CTA
- The CTA obligates every U.S. corporation, LLC, LLP, and other similar entities, except those qualifying for specific exemptions, to disclose their beneficial owners to FinCEN.
- A beneficial owner (BOI) is defined as any individual who either directly or indirectly exercises ‘substantial control’ over the company, or owns or controls more than 25% of the company’s equity.
- Exemptions are provided for entities that are either already under governmental regulation (eg. banks or financial institutions), or maintain more than 20 employees and $5 million in annual revenue, and operate a physical office within the U.S.
2. Background and Rationale
- The CTA emerges from a longstanding concern by not only the U.S. Treasury Department regarding inadequate regulations but also the complaints by other countries, particularly in Europe that are somewhat well known to implement stricter rules and policies to require more information about owners or controlling persons of businesses in order to curb illegal practices among SMEs.
- According to the U.S. Small Business Administration’s 2023 report, there are over 33 million small and medium-sized enterprises. Alarmingly, a substantial proportion of these entities, approximately 27 million or 82% of them, fall into the category of ‘non-employment companies.’ These are businesses operating without any employees, which significantly contributes to the prevailing issue of inadequate corporate transparency across the sector.
- Consequently, the principal objective of the CTA is to combat and regulate financial malpractices such as tax evasion and money laundering, primarily focusing on non-employee businesses and SMEs that have historically concealed owners or controlling interests. This somewhat contrasts with the existing regulatory framework for larger corporations and financial institutions in the United States. The CTA’s enactment underscores a concerted effort to thwart the concealment of financial assets and to discourage, and if necessary, to penalize such illegal financial activities..
3. Reporting Requirements
- Companies are required to report four specific types of BOI: full legal name, date of birth, current residential or business address, and a personal identification number.
- Reporting can be done through the FinCEN website (https://www.fincen.gov/boi), with the platform becoming operational starting January 1, 2024.
- The reporting obligation extends to trusts and other similar entities.
- The Act broadly interprets controlling interests to include shareholders, directors, and individuals impacting the company’s business or financial decisions.
- Established businesses prior to January 1, 2024, must comply within one year, while new entities have 30 days post-establishment to report to FinCEN.
4. Penalties for Non-Compliance
- Failure to adhere to the CTA may result in significant fines ranging from $500 to $10,000 per day and potential imprisonment of up to two years.
5. Frequently Asked Questions
- The guide answers critical queries about the scope of ‘actual control,’ the classification of employees, fluctuating annual sales impacts, and the inclusion of overseas revenue in financial calculations.
- Changes in BOI post-reporting must be updated within 30 days.
6. Conclusion and Implications
- The broad drafting and interpretation of the CTA’s provisions suggest that it will significantly impact almost all SMEs in the U.S.
- BOIs will be accessible to various government agencies but remain confidential from the general public and private entities.
- The implications for Korean SMEs and startups in the U.S. are profound, necessitating meticulous preparation from the incorporation stage.
* Reference: U.S. Treasury Financial Crimes Enforcement Network (FinCen) Guide https://www.fincen.gov/boi