Beyond the Corporate Transparency Act: Assessing the Impact of Beneficial Ownership Reporting in the US

Regulatory loopholes in beneficial ownership disclosure have global repercussions, allowing illicit financial flows (IFFs) to thrive beyond national borders. These gaps create opportunities for money laundering, corruption, and tax evasion, as illicit actors take advantage of jurisdictions with high levels of privacy. 

IFFs often facilitated through opaque corporate structures and tax havens are estimated to total trillions each year. A report by the Tax Justice Network estimated that financial assets stored in tax havens ranged from $21 trillion to $32 trillion.

In the Global South, these practices cause $416 billion in annual tax losses, worsening poverty and depriving vulnerable populations of important resources. The Corporate Transparency Act (CTA), effective January 1, 2024, is an important step in addressing this crisis. 

The CTA mandates Beneficial Ownership Information (BOI) reporting to close regulatory gaps, enhance financial transparency, and reinforce global AML efforts. Businesses will need to understand and fulfil these requirements to remain compliant with the legislation.

That’s what you need to know about the Corporate Transparency Act and maintain proper anti-money laundering compliance in your organizations.

Who Is A Beneficial Owner?

A beneficial owner is the real, living individual who ultimately owns or controls a company or asset or materially benefits from the company's assets. Direct or indirect control can be achieved through intermediaries, nominees, or contractual agreements. 

It can involve majority ownership, significant voting power, authority to appoint or remove board members, or holding convertible shares.

It is important to distinguish between legal ownership and beneficial ownership. Legal ownership refers to the person or entity officially listed as holding the title to an asset, whereas beneficial ownership identifies the individual who truly controls or benefits from the asset. 

In most legitimate cases, these roles are the same. However, in illicit practices, legal and beneficial ownership are deliberately separated to obscure the identity of the true owner. This separation often involves complex cross-border ownership chains, nominees acting as directors or shareholders, or professional intermediaries shielding identities.

Traditionally, corporate registries have focused on collecting basic information but many jurisdictions increasingly require beneficial ownership details to improve transparency. 

Ownership thresholds often trigger disclosure requirements. For example, the European Anti-Money Laundering Directives use a 25% ownership interest as the standard, though some regulations require disclosure at thresholds as low as 5%, or even impose no minimum threshold to ensure broader coverage.

Corrupt actors manipulate hidden corporate structures to obscure beneficial ownership. They create complex ownership layers across jurisdictions with weak transparency laws, appoint nominees or proxies as directors or shareholders, and use professional intermediaries to shield their identities. 

These mechanisms create barriers for investigators to uncover the true beneficiaries behind corrupt schemes. Beneficial ownership transparency is essential for addressing vulnerabilities and improving accountability in global financial systems.

The Beneficial Ownership Data Standard (BODS)

Legal and beneficial ownership information includes data on individuals, companies, legal entities, and arrangements and their relationships. Accurately identifying these elements requires multiple data points, and making this information accessible requires publishing it in a standardized format across jurisdictions.

A group of experts in anti-money laundering, company data, and data standardization created the Beneficial Ownership Data Standard (BODS) to meet these needs. This framework is designed to help policymakers create beneficial ownership disclosure systems that achieve transparency and accountability while balancing data protection and privacy.

BODS organizes information about people, companies, and their relationships into structured data. These data are expressed as statements that can be connected to a "claim about beneficial ownership made by a particular source at a particular point in time." The elements needed to establish a beneficial ownership relationship include:

• Data about individuals like names, dates of birth, nationalities, identification documents, and whether they act on behalf of another party or have a controlling interest.
• Data about companies such as registration numbers, jurisdictions of incorporation, and addresses.
• Data about relationships that describe the type and nature of relationships, such as voting rights, direct ownership, or indirect control through other entities.

BODS ensures clarity and transparency across all data categories. For example, missing data points, whether from non-reporting or exemptions, are flagged to alert law enforcement and policymakers.

Challenges in Implementing Beneficial Ownership Transparency

While policymakers increasingly recognize the importance of beneficial ownership transparency, implementing it effectively presents several challenges. 

Here are some key challenges encountered in the development and implementation of beneficial ownership disclosure systems.:

Verifying Disclosed Information

Criminals and corrupt actors often lie to protect their anonymity, using sophisticated methods to evade detection. Registries based on company self-reporting are highly susceptible to inaccuracies. 

Many corporate registries are archival and cannot verify beneficial ownership information in real time.

Securing Political Support and Sustaining Momentum

Beneficial ownership transparency involves multiple stakeholders, government agencies, and legal frameworks. While global standards provide a foundation, incremental reforms are often necessary to maintain momentum and scale up transparency tools over time.

Addressing Legislative and Technical Complications

Effective systems require strong regulations, mechanisms for reporting discrepancies, and enforceable sanctions for non-compliance. The technical infrastructure must also enable users to interact with data which requires a collaborative and data-driven approach involving multiple stakeholders.

Balancing Privacy and Transparency

Beneficial ownership data includes sensitive personal information, requiring reformers to balance disclosure objectives with privacy obligations to prevent potential misuse.

Fighting Corruption While Supporting Ease of Doing Business

Disclosure systems create administrative challenges for companies and intermediaries. Policymakers must balance combating corruption with promoting business-friendly environments.

For instance, while fast company incorporation may enhance the ease of doing business, it can also enable the misuse of anonymous structures.

Customizing Systems to Specific Risks

The FATF’s 40 Recommendations (2012) require all jurisdictions to identify and assess the money laundering/terrorist financing (ML/TF) risks for their country and adopt a risk-based approach to mitigating risks. 

Risk assessments should inform the design of disclosure systems, focusing on risks like elite exploitation and the misappropriation of public funds.

Enforcing Sanctions for Violations

Weak enforcement of penalties for non-compliance undermines the credibility of disclosure systems. For example, the UK’s Companies House registry has faced criticism for poor verification and a lack of enforcement which led to unreliable data.

Anticipating Unintended Consequences

Transparency reforms can prompt criminals to exploit regulatory loopholes or move operations to jurisdictions with weaker regulations. Without proper enforcement and cross-border cooperation, transparency measures may unintentionally increase the scale of the challenge.

Key Data Questions for Policymakers to Consider

The effectiveness of beneficial ownership transparency reforms relies on how accessible and usable the data is for law enforcement, tax authorities, procurement agencies, and civil society. The data must be reliable, detailed, and accessible in practical formats. 

Consequently, considerations regarding data reliability and user needs must be central to policy design from the outset. Decisions about what data will be available, where it will be stored, and in what format must be made during the drafting of laws and regulations, as retroactive changes can be challenging.

Some jurisdictions address this challenge by embedding general principles in legislation while leaving specific data requirements to regulations, which are easier to modify as governments learn from implementation.

Efforts like the UK-led Beneficial Ownership Leadership Group aim to establish such norms through Disclosure Principles based on OpenOwnership’s "Five Characteristics of Effective Beneficial Ownership Data." 

As policymakers design these systems, they must consider the following key questions:

• What types of legal entities and natural persons will be covered by the policy?
• What format will the data be published in, and what levels of access will the public and other stakeholders have?
• What definition of beneficial ownership will be used, and what thresholds of control (e.g., percentage ownership) will trigger disclosure requirements?
• Will intermediate companies, positioned between the beneficial owner and the reporting entity, need to be disclosed?
• How will records of previous beneficial owners be stored and made available?
• Are there reliable identifiers (e.g., unique IDs) for both legal entities and natural persons?
• What penalties will be applied to legal entities or beneficial owners for non-compliance or false reporting?
• What measures will be taken to verify submitted information, and how will suspicious submissions be flagged for investigation?

Understanding the Corporate Transparency Act

The Corporate Transparency Act (CTA) is part of the Anti-Money Laundering Act of 2020, which targets the use of shell companies in illegal financial activities. The core objective of the CTA is to enhance financial transparency by requiring businesses to disclose Beneficial Ownership Information (BOI) to help regulators better track ownership and control of companies operating in the United States.

However, the CTA stands out by maintaining a secure, private database, which is managed by FinCEN (the Financial Crimes Enforcement Network), ensuring that the information is kept confidential while still being accessible to regulators.

Who Must Report?

The CTA imposes reporting requirements on various entities focusing mainly on smaller companies that are susceptible to misuse. These reporting obligations extend to domestic reporting companies, including corporations, LLCs, and other entities formed through state or tribal authority, as well as foreign reporting companies entities registered to conduct business in the United States. 

The company's formation or registration date initiates the reporting obligations. For example, if a domestic LLC is formed on February 15, 2024, it must submit its initial report within 90 days of formation.

However, there are notable exemptions from these requirements. Regulated entities, including publicly traded companies, banks, and investment advisors, are excluded since they are already subject to strict regulatory oversight. 

Additionally, large operating companies such as those with over 20 full-time employees, a physical U.S. office, and more than $5 million in gross receipts are exempt from the CTA’s reporting requirements. 

Similarly, subsidiaries of exempt entities are also excluded. This focus on smaller, privately held companies highlights the CTA’s effort to target entities most at risk of being used for illicit purposes.

What Information Must Be Reported?

The reporting company must disclose several key pieces of information, including its full legal name, doing business as (DBA) name, physical address, and Taxpayer Identification Number (TIN).

Equally important is the requirement to disclose information about the company's beneficial owners, including individuals who have significant control or ownership. The company is required to provide the full legal name, date of birth, and residential address of each beneficial owner.

Businesses must keep their reports up to date. Any changes, such as a new beneficial owner or address update, require the company to file an update within 30 days. Similarly, if inaccuracies are found in previous reports, corrective updates must be filed.

The CTA’s broad reporting requirements will impact millions of existing and newly formed entities, including those in specialized sectors like aviation, where LLCs and trusts are often used for asset ownership. Companies will need to set up systems to track ownership changes, verify the information, and ensure updates are promptly submitted to FinCEN.

Larger organizations may have the infrastructure to handle these costs but smaller businesses will need efficient solutions to ensure compliance without overextending their resources.

How Businesses Can Prepare

To prepare for the CTA, businesses should identify all entities under their control and determine if they are subject to the reporting requirements. It’s also important for companies to adopt AI-powered tools that can streamline data collection and ensure the accuracy of the information reported. 

These tools can help businesses stay on top of regulatory deadlines and ensure that they comply with all reporting requirements. Training staff on the requirements of the beneficial ownership information (BOI) and reporting procedures is also essential. 

The penalties for non-compliance with the CTA are substantial. Civil penalties can amount to $500 per day for non-compliance, while criminal violations could result in fines of up to $10,000 and potential imprisonment for willful violations.

How Lucinity's Tools Help with Corporate Transparency Act Compliance

Lucinity’s suite of tools aligns seamlessly with such regulatory efforts, supporting organizations in achieving compliance and operational excellence in the following ways:

1. Enhanced Investigative Efficiency

Lucinity's Case Manager centralizes all financial crime-related data, providing a single source of truth for compliance teams. It integrates signals from third-party systems, customer data, and other relevant sources, allowing investigators to manage cases effectively and uncover potential discrepancies or suspicious activities tied to beneficial ownership.

2. Automated Data Analysis and Reporting

The Luci Copilot, powered by Generative AI, reduces manual work by summarizing complex financial crime cases, highlighting risk indicators, and generating clear, actionable insights. This automation is especially valuable in analyzing the ownership structures of businesses and flagging inconsistencies, ensuring that compliance efforts meet the rigorous demands of regulations like the CTA.

3. Transparent and Auditable Processes

Lucinity's tools emphasize transparency and auditability. For example, every action taken within its platform is logged and accessible through comprehensive audit trails, which regulators may require under compliance frameworks. The Luci Studio enables configuration of workflows to align with specific organizational compliance requirements, ensuring clear documentation and adherence to best practices.

4. Integrated Risk Assessments

With Customer 360, Lucinity provides a dynamic and comprehensive view of customer interactions, including transaction trends and patterns. This helps in assessing the risk profile of entities and individuals, ensuring compliance teams have a clear picture of potential ownership risks without being bogged down by operational silos.

5. Streamlined Regulatory Reporting

Lucinity supports seamless regulatory reporting processes, such as the generation of Suspicious Activity Reports (SARs) and other documentation required to comply with regulations like the CTA. By automating the creation and submission of reports, the platform reduces the time and cost typically associated with compliance.

6. Scalable and Configurable Compliance Support

Lucinity's tools are designed for adaptability, integrating effortlessly into existing systems without requiring costly overhauls. This ensures that financial institutions of all sizes can quickly deploy Lucinity’s solutions to strengthen their compliance posture while maintaining flexibility to meet evolving regulatory requirements.

Lucinity empowers compliance teams to meet the obligations of regulations like the Corporate Transparency Act by automating key processes, enhancing transparency, and ensuring audit-ready workflows. 

Wrapping Up

The Corporate Transparency Act (CTA) represents a significant step toward improving financial transparency and combating illicit financial flows (IFFs). The CTA aims to reduce opportunities for money laundering, tax evasion, and other illicit financial activities by requiring businesses to disclose beneficial ownership information (BOI).

As businesses prepare for compliance with the CTA, it is important to understand the reporting obligations, exemptions, and potential penalties for non-compliance.

Here are the key takeaways from this blog:

1. IFFs total $21 trillion to $32 trillion in tax havens annually, with $416 billion in tax losses from the Global South.
2. Businesses must disclose beneficial ownership details like legal names, dates of birth, and identifying numbers of individuals controlling the company.
3. Non-compliance can lead to $500/day civil penalties and criminal fines up to $10,000, including potential imprisonment.
4. Lucinity’s AI-powered tools like Case Manager, Luci Co-Pilot, and scenario-based monitoring help businesses efficiently track and report beneficial ownership.
5. The CTA enhances international AML efforts, contributing to a more transparent and equitable global financial system.

For more information on how Lucinity can help you comply with the Corporate Transparency Act, visit Lucinity.

FAQs

1. What is the Corporate Transparency Act (CTA)?
   The CTA requires U.S. businesses to report beneficial ownership information (BOI) to combat financial crime.
2. What information must be reported?
   Businesses must report the company’s name, address, TIN, and the name, date of birth, and identifiers of beneficial owners.
3. Who is exempt from the CTA?
   Publicly traded companies, banks, and large enterprises (with over 20 employees and $5 million in revenue) are not subject to the requirements.
4. What are the penalties for non-compliance?
   Non-compliance can result in $500/day civil penalties, $10,000 criminal fines, and possible imprisonment.