Federal District Court declares CTA unconstitutional — but entity management still matters
The year so far has been an eventful one for entity management. Mere weeks after the Corporate Transparency Act (CTA) went live and corporations started reporting beneficial ownership data to the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), a U.S. District judge in Alabama ruled the act unconstitutional.
Does this mean the end of beneficial ownership reporting and that corporations can decrease their focus on this area?
Far from it. Here’s our view of the landscape and what we recommend for general counsel, chief legal officers, paralegals and legal operations.
Watch the courts
The National Small Business Association, a powerful lobby, led the legal challenge against the CTA, citing an argument of governmental overreach. But even more powerful forces support the CTA and its resumption.
“Congress overwhelmingly voted to enact the bipartisan (CTA)… to crack down on illicit shell companies and combat financial crime,” a Treasury official told Reuters. The same article quoted a former FinCEN official as saying he does “not find the court’s opinion persuasive.” Reuters also pointed out that another small business group, Main Street Alliance, partnered with the nonpartisan FACT Coalition and Transparency International U.S. to file an amicus brief in support of the CTA.
While the next steps are still in progress, and FinCEN is complying with the injunction, the government is expected to appeal. Based on current sentiment, the appeal seems more a matter of when than if. And as the CTA’s provisions are reinstated, its tight filing deadlines will return as well — as short as 30 days in some cases.
Keep collecting BOI
But the seemingly inevitable return of FinCEN reporting isn’t the only reason to keep efforts moving in the area of beneficial ownership information (BOI) collection and management.
All of the work you’ve put into CTA compliance has not been in vain. As we declared in a previous blog post, the CTA’s impact extends beyond legal compliance and promotes good corporate governance. The motivating purpose behind this act is to crack down on money laundering, tax evasion, fraud and other financial crimes — all risks your organization wants to avoid.
Think of FinCEN reporting as anti-money laundering (AML) monitoring by another name. By collecting detailed ownership data for entities and subsidiaries across jurisdictions and keeping this information current, you’re maintaining a sharper eye on who you’re doing business with. And that’s an important mission in today’s world of rising crime and corporate growth through mergers and acquisitions.
Loosen the reins in this important area, and your organization may face difficulties in opening bank accounts, obtaining licenses or engaging in certain financial transactions.
Use technology to wrangle the details
Collecting information on who owns a subsidiary or entity seems straightforward on the surface. But GCs, CLOs, paralegals and legal departments immersed in this work know that the reality of entity management is far more complicated.
Under CTA requirements, a beneficial owner is any individual with substantial control over 25% or more of an entity — which could mean several data points for each subsidiary. And the owner’s name is just the beginning of the information you must collect. You’ll also need date of birth, a residential or business address and a social security or passport number. After all of this information is gathered, it needs to be verified, stored securely and reported in whatever format a regulatory agency like FinCEN, a local jurisdiction or your board and executive leadership require.
Foreign-based companies with qualifying operational locations in the United States add even more complexity to the task. Within these troves of information, red flags could be lurking that could put your organization at severe financial, reputational and/or legal risk.
Buy yourself and your team a little convenience and a lot of peace of mind. If you’re still using manual systems, such as spreadsheets or paper files, now is the time for a change. A centralized entity management system can help, streamlining the task of gathering and verifying information, updating it as needed, maintaining data accuracy and meeting filing deadlines.
Whatever happens in the courts and Treasury department regarding the constitutionality of the Corporate Transparency Act, keep your reporting CTA- and AML-ready. Schedule a demo of Diligent Entities today.
