A sweeping new federal regulation requiring small businesses, nonprofits and other entities to disclose their ownership information to the government took effect January 1, mandating unprecedented financial transparency in the name of fighting financial crime.
Over 100,000 entities file reports as deadline passes
As of last week, over 100,000 companies had filed beneficial ownership reports to comply with the new Corporate Transparency Act (CTA) rule, according to Treasury Secretary Janet Yellen.
The CTA, passed by Congress in 2021 as part of the National Defense Authorization Act, requires corporations, LLCs and other entities to report identifying information on their underlying owners or face penalties. This represents a major expansion of anti-money laundering enforcement.
“This database will make it harder for criminals and corruption to hide behind anonymity,” Yellen said last week.
Pushback from small business groups
While supporters say the registry will help law enforcement crack down on financial crimes, the mandate has sparked backlash from small business advocates warning of privacy risks. Critics argue everyday business owners will bear the compliance burden.
“This unprecedented data collection program begun by the federal government systematically targets your small business to send private information about your finances and operations to bureaucrats in Washington DC,” wrote small business leaders in a Fox News op-ed.
The leaders urged Congress to revoke the “dangerously misguided” program before the January 1 deadline. But with the deadline now passed, companies who fail to comply could face financial penalties when enforcement begins in January 2025.
One-year transition period expected
Under the final FinCEN rule issued in September 2022, new entities formed after January 1 must report ownership details at formation while existing entities have one year to file reports.
Although roughly 100,000 reports were filed as the rule kicked in January 1, some anticipation companies will wait until closer to the January 2025 enforcement deadline to comply based on a perceived lack of urgency.
“I doubt most companies are rushing to provide this,” wrote one attorney. “The obligation was effective January 1st, but I think companies probably have the sense there’s no hurry.”
The one-year transition period allows time for further guidance on exemptions and compliance procedures many say remains unclear.
Lingering uncertainty over exemptions
While the CTA legally exempts some entities like publicly traded companies, confusion persists around exceptions for holding companies, family farms, and sole proprietorships with over 20 full-time employees.
In December, the Treasury issued additional frequently asked questions clarifying exemptions. But many say questions remain. For example, certain single-member limited liability companies (LLCs) may qualify for exceptions if they meet employee thresholds.
Which business structures are exempt from CTA reporting?
|Publicly traded companies
|Companies with over 20 full-time employees
|Single-member LLCs under ownership thresholds
“There’s still some ambiguity on who has to file and small companies don’t have the resources to sort through this,” said tax attorney Kelly Phillips Erb in Forbes last week.
Calls for more Congressional clarity
While Treasury has worked to clarify policy and reporting procedures under the CTA mandate, pressure continues on legislators to address unresolved issues.
“Congress needs to revisit this issue and provide more precise definitions on who must comply with this reporting mandate and who is exempt,” wrote agriculture policy analyst Jerry Hagstrom.
Database security and privacy concerns
As beneficial ownership reporting expands, advocates warn cyber vulnerabilities in the FinCEN database could expose sensitive information.
While Treasury has issued security protocols limiting data access, watchdogs counter that no network is impenetrable. FOIA litigation could also potentially unseal records. Last month, 30 Congressional Republicans sent a letter to FinCEN requesting details on database protections.
Balancing transparency initiatives and data privacy remains an ongoing challenge for legislators. Striking the right balance could impact the long-term efficacy of the CTA ownership registry.
Outlook for money laundering enforcement
Beneficial ownership disclosures under the CTA will significantly bolster visibility into entities otherwise obscuring ownership behind shell companies. While details remain unresolved, the transparency initiative represents a milestone in anti-money laundering policy likely to spur further Congressional action.
With midterm elections looming, legislative efforts to amend corporate reporting requirements appear imminent. How policymakers adapt to address concerns around scope, security, and unintended compliance costs could ultimately determine outcomes of this grand experiment in financial transparency.
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