The Corporate Transparency Act (CTA) was enacted Jan. 1, 2021, as part of the National Defense Authorization Act, representing the most significant reformation of the Bank Secrecy Act and related anti–money laundering rules since the U.S. Patriot Act.
The CTA is intended to address and guard against money laundering, terrorism financing, and other forms of illegal financing by mandating certain entities (primarily small- and medium-sized businesses) to report “beneficial owner” information to the Financial Crimes Enforcement Network (FinCEN).
The CTA authorizes FinCEN, a bureau of the U.S. Treasury Department, to collect, protect and disclose this information to authorized governmental authorities and to financial institutions in certain circumstances.
Below are some of the key CTA provisions and significant issues, critical unknowns, and potential risks facing accounting firms.
Entities required to comply with the CTA include corporations, limited liability companies (LLCs), and other types of companies created by a filing with a Secretary of State or equivalent official. The CTA also applies to non-U.S. companies registered to do business in the United States through a filing with a SOS or equivalent official. Since the definition of a domestic entity under the CTA is extremely broad, additional entity types could be subject to CTA reporting requirements based on individual state law formation practices.
There are a number of exceptions to who is required to file under the CTA. Many of the exceptions are entities already regulated by federal or state governments and as such already disclose their beneficial ownership information to governmental authorities.
Another notable exception is for “large operating companies,” defined as companies that meet all of the following requirements:
As currently promulgated, the CTA has an exemption for “any public accounting firm” registered in accordance with Section 102 of the Sarbanes-Oxley Act of 2002 (firms registered with the Public Company Accounting Oversight Board). However, other public accounting firms could be deemed reporting companies subject to compliance with the CTA.
A beneficial owner is any individual who, directly or indirectly, exercises “substantial control” or owns or controls at least 25% of a reporting company’s ownership interests.
An individual exercises “substantial control” if the individual serves as a senior officer of the company; has authority over the appointment or removal of any senior officer or a majority of the board; or directs, determines or has substantial influence over important decisions made by the reporting company. Thus, senior officers and other individuals with control over the company are beneficial owners under the CTA, even if they have no equity interest in the company.
In addition, individuals may exercise control directly or indirectly, through board representation, ownership, rights associated with financing arrangements, or control over intermediary entities that separately or collectively exercise substantial control.
CTA regulations provide a much more expansive definition of “substantial control” than in the traditional tax sense, so many companies may need to seek legal guidance to ultimately determine who are deemed beneficial owners within their organization.
As currently promulgated, the CTA’s reporting requirements will be phased in in two stages:
Penalties for willfully violating CTA reporting requirements include civil penalties of up to $500 per day that a violation is not remedied, a criminal fine of up to $10,000, and/or imprisonment of up to two years. A safe harbor from the penalty is available to reporting companies that file corrected reports with FinCEN no later than 90 days after submission of an inaccurate report.
With the CTA introducing new and expansive reporting, entities should now assess the new rules’ implications on their organizations. As they begin this evaluation, they should consider the following (not all-inclusive) questions:
There has been much discussion and debate within the accounting community about whether CPAs are in a position to provide guidance and advice to their clients regarding whether an exemption applies or to ascertain whether legal relationships constitute beneficial ownership. The overarching concern is that CPAs and non-attorney tax professionals providing assistance to clients in this arena could be deemed engaging in the unauthorized practice of law (UPL). As each state has its own definitions of what services are considered UPL, this is an area of some risk to the accounting profession. As of the date of this writing, no state has yet to provide clarity as to whether providing advice to clients regarding the CTA would, or would not, be viewed as UPL.
From a risk management best practices perspective, CAMICO strongly encourages CPAs to tread carefully as it relates to advising clients regarding the CTA and the filing of beneficial ownership reporting, and instead, advise clients to seek guidance from qualified legal counsel.
CAMICO policyholders with questions regarding this communication or other risk management questions should contact the Loss Prevention Department at lp@camico.com or call our advice hotline at (800) 652-1772 and ask to speak with a loss prevention specialist. CAMICO is a preferred provider of the VSCPA.
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