In order to reveal or “crack down” anonymous shell companies Congress passed the Corporate Transparency Act. The Act became effective on January 1, 2021, due to Congress’ override. This act requires certain business entities (“reporting companies”) to file, in the absence of an exemption, information on their beneficial owners with the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of Treasury. FinCen is authorized to disclose information: to U.S. federal law enforcement agencies, with court approval to certain other enforcement agencies, to non-US law enforcement agencies, prosecutors or judges based upon a request of a U.S., federal law enforcement agency, and with consent of the reporting company, to financial institutions and their regulators. This Act was to shift the collection burden from financial institutions to the reporting companies. Additionally. it was to impose stringent penalties for willful non-compliance and unauthorized disclosures. More than 32 million entities were estimated to be affected by this Act and required to file.
The filing required the business name, current address, state of information, and tax identification number for each entity. Furthermore, the filing required the name, birth date, address, and a government-issued photo ID. A driver’s license or a passport of every direct and indirect owner sufficed. Since the indirect owners were included in this Act, it created a broad range of who would qualify as an indirect owner and the requirement of their personal information. High penalties were issued to those that failed to comply.
On March 1, 2024, the Corporate Transparency Act was ruled unconstitutional in the U.S. District Court of Alabama. This act was seen as already complicated because it applied to both direct ownership and beneficial ownership. The Plaintiffs in this case were the National Small Business Association (NSBA). One concern about the CTA was that private information is required to be filed such as a driver’s license or passport, home address, and a social security number which can lead to identity theft. Second, there was a short deadline. For example, the time frame for a change including a minor who turned 18 and was an owner of shares must be reported within 30 days. Compliance with the CTA caused a burden on small businesses and large and public businesses were exempt. The high penalty fines for failure to comply included a $500 daily civil penalty, fines of up to $10,000, and a two-year prison term for those that did not submit or update ownership information with FinCen. Furthermore, if parties knowingly failed to comply, that triggered a $500 per day civil penalty, $250,000 in fines, and a five-year federal prison sentence.
The recent ruling only affects the CTA compliance and filing requirements for NSBA members. The CTA still requires that law firms and other professionals that form business entities to file under the CTA. The severe penalties are still intact and business entities should analyze the law and comply with its requirements.