The Corporate Transparency Act (CTA) has been on a roller coaster ride lately. Enacted in 2021 as an anti-money-laundering provision, it requires many companies to reveal to the U.S. Department of the Treasury the individuals who own or control the company. The CTA requires affected companies to report such information to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in an effort to combat money laundering and other financial maneuvers terrorist organizations, corrupt enterprises, and other bad actors often use. Substantial penalties can apply to those who do not comply with the disclosure requirements. However, recent legal filings have resulted in multiple stops and restarts in the implementation of the CTA. If fully enacted, this new regulation would impact investment sponsors' reporting requirements as they onboard investments with self-directed IRA custodians.
The CTA—Briefly
The Corporate Transparency Act is another in a long list of federal laws that seek to shut down schemes by individuals and organizations to disguise their ownership in companies to further their illegitimate ends. Smaller companies may be particularly susceptible to being used for improper purposes because they may be subject to little current oversight or regulation. In response, FinCEN seeks to gather information on such companies to ensure they are legitimate entities, not merely fronts that may insulate others from detection or enforcement of various federal laws.
Originally, affected entities—called “reporting companies”—were supposed to report beneficial ownership information (BOI) to FinCEN by January 1, 2025. Many companies are exempted from the BOI reporting requirements for various reasons. Some businesses, such as publicly traded companies, are already subject to extensive disclosures. Others, like banks and similar financial institutions, are highly regulated. Here are some of the entities that are exempt.
- Governmental authorities
- Banks, credit unions, broker-dealers, and other financial institutions
- Tax-exempt entities
- State-licensed insurance companies
- Large operating companies
Large operating companies are defined as those with more than 20 full-time employees. So, while many relatively small entities are exempt from the BOI reporting requirements, many others are required to report. Companies with 20 or fewer employees apparently align with the profile of enterprises that may be more susceptible to being used for illicit purposes.
What’s the Controversy Surrounding the CTA?
Any time a new law requires additional work, including the time and expense of compiling information, there tends to be resistance. Some sources estimate that over 30 million businesses would be required to file beneficial ownership reports, so this new law certainly has a broad effect. But more important, by many accounts, are the more substantive arguments against the law. Specifically, opponents of the law question its constitutionality. They point to the First Amendment “free association” rights (and Fourth Amendment privacy protections) that the CTA may infringe upon. These concerns have led to a Texas plaintiff suing the federal government to invalidate the CTA.
Where Does the CTA Stand Now?
The last month has been a whirlwind of legal activity in the case of Texas Top Cop Shop v. Garland. On December 3, 2024, the U.S. District Court for the Eastern District of Texas placed a nationwide halt to enforcement of the CTA. Then, a Fifth Circuit appeals court lifted that ban on December 23, 2024. Three days later, a different Fifth Circuit appeals court panel essentially reinstated the original decision to prohibit enforcement of the CTA provisions. In response, FinCEN released this statement.
In light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.
Whether this case finds its way to the U.S. Supreme Court or is abandoned by the incoming administration remains to be seen. For now, at least, the Corporate Transparency Act—with its requirement that many businesses report their beneficial ownership—is on hold. Future articles will let you know whether the CTA resurfaces. Meanwhile, get in touch with the SDIRA experts at STRATA to learn more about how alternative investments can help you save more for retirement.
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