The enactment of the US Corporate Transparency Act (CTA) has had a significant impact on the private equity sector and portfolio companies. Even though the Act provides ample exemptions for financial services and investment institutions, it creates friction for many organizations developing their portfolios and creating new entities.
While regulators plan to engage in more rulemaking with the goal of full CTA implementation, businesses feel even more pressure to ensure compliance with the Act. Here is more about the challenges created by the CTA and how entity management software can help address those challenges and achieve greater corporate transparency.
What Are the Challenges Created by the CTA for Asset Managers?
The CTA has introduced new rules which require the disclosure of information about beneficial owners and company applicants to the Financial Crimes Enforcement Network (FinCEN). The final rule of the CTA was published on September 30, 2022, applying to all domestic or foreign corporations, LLC companies and other entities (aka reporting companies) which are formed or registered for doing business in the US with several exceptions.
What Does CTA Entail for Entity Creation?
According to the Act, the reporting companies have to submit information about themselves and their beneficial owners who exercise substantial control over the reporting company or own or control at least 25% of ownership interests. In addition, the disclosure should include information about so-called company applicants who file documents for creating the reporting entity, for example, lawyers and third-party providers.
Thus, information about the beneficial owners should include their full legal name, date of birth, current address, unique identifying number and an image of the identifying document. So even a smaller organization with no more than 10 entities and 2 beneficial owners per entity will have 100 data points that have to be collected, stored, updated and reported according to the CTA Act.
Exempt Entities under Corporate Transparency Act
The Final Rule of the Corporate Transparency Act does not apply to those financial institutions that already report to the SEC, FDIC or other agencies. Other exemptions include:
- companies with a physical presence in the US with more than 20 full-time employees and annual gross income above $5 million,
- publically traded companies,
- tax-exempt entities,
- inactive entities.
What Are the Timelines and Penalties for Non-Compliance?
The CTA sets stringent timelines for reporting beneficial owners and company applicants. While entities created or registered before January 01, 2024, have one year to file their information, new entities formed after this date have only 30 days to comply. Meanwhile, both existing and new entities have only 30 days to update their beneficial ownership information in case of any changes.
The act makes it unlawful to willfully provide or attempt to provide false or fraudulent information on beneficial owners or fail to report beneficial owner information to FinCEN. While in some rare cases, penalties may be waived, the entities and beneficial owners will be held accountable in most situations. A failure to report beneficial owner information is subject to civil penalties at $500/day and criminal penalties, including fines of up to $10,000 and/or prison time.
Future Enactments under the CTA
In addition, FinCEN plans to continue its rulemaking to implement the Corporate Transparency Act. The future rules are expected to regulate access to beneficial ownership information, its purposes and safeguards required to protect these data. More rules on FinCEN customer due diligence are expected as well to align it with the requirements of the CTA.
How Can Software Ease Friction with the CTA When Creating New Entities?
The sheer scope of affected legal entities, the complexity of investment portfolios and the number of data points, which must be processed and reported, call for the application of digital technologies. Today, asset managers need automation of entity management processes and reporting to ensure compliance and manage corporate transparency.
Automate Reporting of Beneficial Owners
In Athennian, the process of creating database entries for beneficial owners is streamlined and intuitive. The platform provides fields for data which must be reported under the CTA, including identification data, information about the percentage of ownership and other specific ownership details.
The software automates the process of managing information about beneficial owners, which can be auto-populated in various reports. After the beneficial owners' information is entered into the system, it can be pushed into documents, shared internally, sent for eSignature, filed or downloaded using pre-formatted templates.
Provide for a Central Storage and Real-Time Updates
When the beneficial owners' data is entered into the entity management software, it is automatically reflected in the entire database. A central repository for entity data allows updating information on beneficial owners across all affected entities, which excludes manual errors and saves considerable time.
Today, organizations with diversified entity structures and complex ownership relationships can only ensure compliance and corporate transparency when they leverage cloud-based entity management software. A centrally-stored database is instrumental in ensuring collaboration, providing instant access to information in real-time and enabling a seamless flow of information across processes.
As the number of new entities is constantly increasing, organizations can no longer rely on manual processes to ensure compliance and timely filings. The teams need automated reporting and reminders available with entity management software to ensure timely reporting of the entity data, beneficial ownership information and their updates.
Learn More About How Technology Can Help with CTA Compliance
With the increased pressure for greater corporate transparency, organizations need modern entity management software to comply with applicable regulations, including the requirements for reporting beneficial owners introduced by the Corporate Transparency Act. For more information about how digital technologies can help businesses streamline compliance and efficiency, please don't hesitate to contact the Athennian team for a free consultation and demo.