With just six months to go before the Corporate Transparency Act’s (CTA) reporting requirements take effect, federal lawmakers are sounding the alarm over just how far reaching – and poorly constructed – the rules are.
A quick primer for those new to the issue: the CTA requires smaller businesses and other entities to annually report the personal information of their “beneficial owners” to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN). According to FinCEN, “beneficial owner” includes individuals with at least a 25-percent stake in the business, as well as those who serve on the entity’s board, helped organize the entity, play a significant consulting role, or meet the vaguely-worded standard of exercising “substantial control” over the company (i.e. senior staff, officers, and minority owners).
Covered entities are businesses, charities, and other legal structures with under $5 million in gross revenue or fewer than 20 employees, meaning the new requirements directly target the small business community. By FinCEN’s own estimates, more than 30 million such entities will be affected, a number that will grow significantly as new ones are formed each year.
The stated goal of the reporting regime is to crack down on money laundering, tax fraud, and other illicit activity. But as we’ve written previously, it’s hard to imagine a scenario in which bad actors will volunteer accurate, detailed information of their criminal enterprises to the federal government. Instead, the CTA will create a massive database that’s too large to effectively manage or monitor for law enforcement purposes, and house it all at an agency with a spotty track record of safeguarding sensitive personal information. What could go wrong?
So starting next year, millions of businesses and individuals will get a letter in the mail from an agency they’ve never heard of, telling them they need to comply with a new anti-terrorism law. The plumber who just incorporated his business, or the privacy-conscious homeowner who registered their dwelling under an LLC, will probably throw the notice away. Little do they know that doing so could yield hefty fines at best (up to $500 per day), two years of jail time, or both.
With the clock ticking on the CTA’s January 2024 effective date, members of Congress are coming to grips with the pending disaster and they have some questions. Last week, House Financial Services Committee Chairman Patrick McHenry (R-NC) sent a letter to Treasury Secretary Janet Yellen that raises concerns over the scheduled rollout. It begins:
As you know, the impending Beneficial Ownership Information collection rule will go into effect January 1, 2024. It is concerning that with six months until its effective date, FinCEN has yet to lay out a clear plan for engagement. It is highly unlikely that the 32 million small business owners know what FinCEN is let alone know to look for a press release on FinCEN’s website. As a result, there is a real possibility that these small businesses could be held civilly or criminally liable for noncompliance.
The Chairman also introduced legislation this week which would delay the reporting regime’s January 1, 2024 effective date until FinCEN finalizes two other CTA-related regulations. The agency is still working on the “Access Rule,” which specifies who can access the database and for what purposes, as well as an updated “Customer Due Diligence Rule” which applies to financial institutions. The notion that FinCEN plans to start collecting information en masse in just a few months without any clear rules in place is absurd, and this legislation would ensure that doesn’t happen.
But while these are important fixes, they fail to address the underlying issue: that the Corporate Transparency Act will do little to combat money laundering and illicit activity even as it targets millions of law-abiding Americans with expensive reporting requirements, fines, and jail time.
That’s why S-Corp and its allies strongly support the National Small Business Association’s lawsuit challenging the constitutionality of the CTA. The CTA is clearly a law enforcement exercise, yet neither the bill’s sponsors nor FinCEN have made any attempt to establish why they have the right to the personal information of millions of law-abiding business owners, their consultants, or their employees. A favorable ruling would stop the reporting requirements from taking effect and put this harmful statute to rest. The case has been proceeding quickly, and with all the necessary filings from both sides now submitted, we anticipate a ruling sometime this summer.
In the meantime, S-Corp is hearing rumblings of a possible House Financial Services Committee hearing on the CTA next month. That would present an ideal opportunity to raise both concerns about CTA implementation and begin a real conversation about repealing the law should the lawsuit fail. We will keep S-Corp readers apprised as the issue develops.