It’s About to Get Much Harder to Launder Money

Sean McBride

Associate Editor

Loyola University Chicago School of Law, JD 2025

In January 2021, Congress passed the Corporate Transparency Act (CTA) as part of the Anti-Money Laundering Act of 2020. The CTA requires entities to list names and addresses connected to both the company and beneficial owners. Ultimately, the goal is to reduce the ease at which shell companies can be formed and used to launder money.

What’s Happening?  

The CTA was included as part of the Anti-Money Laundering Act of 2020. Culminating over a decade of congressional efforts to acquire beneficial ownership information, the CTA directs the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) to create a database to house beneficial ownership information and allow the government to identify more individual owners of privately held assets. The CTA was passed – in part – because of the ease at which shell companies could be formed to launder money for criminal and terrorist organizations. These shell companies were often created with little to no information about the actual owners.

Who Needs to Report?

The rules passed by the Treasury apply to Corporations, Limited Liability Companies (LLC), or similar entities that are created by filing with a U.S State, Indian Tribe, or are formed in a foreign jurisdiction and registered to do business in the U.S.

There are some entities exempt from filing, such as those that are subject to sufficient state or federal oversight. For instance, public companies registered with the Securities and Exchange Commission (SEC) do not need to file.

Notably, entities are exempt if they employ more than 20 employees full-time in the U.S, have filed a federal income tax the prior year with more than $5 million in gross receipts, and operate from physical office premises in the U.S. Meaning that many larger businesses need not report, even if they are privately held.

What Must be Reported?

Entities required to report must include the following Beneficial Owner Information (BOI):

  1. Individual name
  2. Individual date of birth
  3. Individual address
  4. A unique identifying number (ex. a driver’s license number)
  5. The image from which the unique number was obtained (Ex. a picture of the driver’s license)

Who is Considered a “Beneficial Owner?”

Individuals are considered beneficial owners if they – directly or indirectly – exercise substantial control over the entity or own / control at least 25 percent ownership interest.

A notable source of potential litigation is the use of the phrase “substantial control” which could have indefinite interpretations. The Treasury attempts to clarify the meaning by defining substantial control as: “Having direction or substantial influence on the reporting company including acting as a senior officer or having authority to appoint or remove any senior officer or a majority of the board.”

What are the Alternatives to Reporting BOI?  

Entities who do not wish to file BOI directly can request a FinCEN Identifier. A FinCEN Identifier is a unique number assigned to an individual or entity and can be used in lieu of BOI. Entities will still need to submit BOI to FinCEN to obtain this FinCEN Identifier. However, the reporting documents will have the FinCEN Identifier listed, rather than BOI.

Play by the Rules or Pay the Price

Failure to comply with the new rules risks criminal and civil penalties. If an entity is found to be willfully non-compliant, they could face up to a $500 fine for each day of non-compliance (up to $10,000) and two years in prison.

Next Steps for Businesses

As with all new regulations, timelines are important. Applicable entities formed or registered on or after January 1, 2024, must report to FinCEN within 30 days of formation or registration, with an extension of up to 90 days if certain requirements are met. If an applicable entity was formed or registered before January 1, 2024, that entity has up to one year to make the necessary filings.

Mentioned earlier, larger entities are mostly exempt from these new requirements. Unfortunately, smaller entities tend to have less organized and standardized compliance practices to document rule following procedures. Therefore, there is a substantial risk that smaller entities will be subjected to the majority of the fines issued.

It is important that applicable entities create policies, procedures, and other compliance documents that detail their reporting protocol. Especially the procedures in place to ensure reporting is updated when beneficial ownership changes. Having such documentation can help entities establish that any non-compliance was not willful.

These reporting changes will be particularly important for LLCs. There are over 20 million LLCs registered in the U.S and many are relatively small entities. LLCs are composed of members who are the beneficial owners. LLCs that are “Manager Managed” often appoint a manager who is the face of the LLC, but the members can (and many do) choose to remain private. Manager Managed LLCs should be careful to ensure they are meeting the reporting requirements and take appropriate steps to ensure they do not fall out of compliance.