FinCEN Issues New Guide on Corporate Transparency Act Compliance

Effective from January 1, 2024, the Corporate Transparency Act requires filing concerning certain domestic and foreign entities operating within the United States with respect to disclosing information concerning their beneficial owners to FinCEN.

It was enacted to prevent the abuse of anonymous shell companies for illegal financial activities, among other things, such as money laundering and terrorist financing. Despite FinCEN’s efforts to clear up confusion with a Small Entity Compliance Guide and over 100 FAQs about BOI, much remains unclear. Violating the Corporate Transparency Act can result in harsh penalties or even imprisonment. This update shall outline some of the pending challenges arising in 2024, particularly about those matters for which there seems to be no clear guidance by FinCEN.

On March 1, 2024, the United States District Court for the Northern District of Alabama held that the CTA was unlawful because it was not included in Congress’s authority. However, FinCEN maintains that all other reporting entities are still obligated to follow the law until ongoing litigation is resolved.

There are a total of 23 exclusions for businesses that are already heavily regulated by either the federal or state governments, in addition to the “large operating company” exemption. Nevertheless, the exemption does not apply to single-member LLCs that are considered disregarded entities for tax purposes since they cannot file their own tax return or consolidate employees or gross receipts with affiliated entities.

According to the Corporate Transparency Act, any reporting firm whose ownership stakes are fully controlled or held by an exempted body is spared. However, FinCEN has not explained the meaning of “control” in this respect, which is vaguely comprehended. Primarily, it affects entities with management incentive interests or joint ventures with non-exempt entities. In order to avoid falling into a potential trap, the reporting company may file CTA reports even in cases where it is not quite sure whether it is exempt or not.

More importantly, it is the call of the hour to ensure that rules do not violate existing agreements. An extremely fast fact-sensitive approach is required to comply with the Corporate Transparency Act, and FinCEN guidance is still in development. The entities falling under the purview of the Corporate Transparency Act shall remain vigilant and get professional advice to keep themselves compliant.