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USA- The Corporate Transparency Act

USA- The Corporate Transparency Act

The National Defense Authorization Act for the new fiscal year of 2021 includes the Corporate Transparency Act. The purpose of this Act is to curb illicit financing through anonymous shell companies. The Act is the first significant update to anti-money laundering laws in the US in 20 years.

The Act's fundamental aim is to identify beneficial owners of a company, which means, disclosure of information by filing reports that provide names, date of birth, addresses, identification numbers, and so on, to the FinCEN, a bureau of the US Treasury Department. All such information is required to be updated to annually to avoid irregularities and reflect changes.

The CTA applies to existing corporations, LLCs and other such new entities that may be formed. Specific companies that are either heavily regulated, large corporations or companies that have already provided information about a government agency are exempted from these requirements. The reporting requirements apply to;

  1. Companies that employ more than 20 people and report revenues exceeding the $5 million threshold on tax returns having a physical presence in the US.
  2. Financial service institutions such as, investment, accounting, securities trading, banks, credit unions etc. that report to, and are regulated by government agencies such as the SEC, FDIC, the Office of the Comptroller of Currency.
  3. Churches, charities and other non-profit organizations

The CTA provides certain exceptions to the persons who fall under the ambit of the term beneficial owner. There are five exceptions to the term beneficial owner;

  1. An individual acting in the capacity of a nominee, intermediary, custodian or agent on behalf of another individual
  2. An individual acting as an employee who derives control due to his employee status
  3. An individual whose interest in the company arises from his right to inheritance
  4. A creditor of an entity, unless he possesses all such qualities of a beneficial owner
  5. A minor

A beneficial owner is an individual who exercises substantial control over an entity, directly or indirectly through a contract, arrangement, understanding or otherwise, and in case he owns or controls at least 25% ownership interest in the said entity.

A company must file all such information about beneficial ownership at the time of forming or registering such company. In the case of an existing company, such information must be provided in a timely fashion, not later than two years after the regulations' effective date. If the beneficial owner has changed, the company shall immediately provide such information to the FinCEN as soon as practicable.



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