RiskWatch: Understanding The Corporate Transparency Act


18-minute listen

In this episode of the podcast, Vcheck Global spoke with Morgan Lewis Partner Kenneth Nunnenkamp about what the Corporate Transparency Act (CTA) is and its implications for deal making and financial institutions going forward.

For years, the Financial Action Task Force (FATF) has noted that countries including the United States need to have better transparency into shell companies that can be used for money laundering purposes. The CTA, enacted by the US Department of Treasury’s Financial Crimes Enforcement Network (FinCen) in January 2021, is the US response to this risk and a starting point to create a better corporate transparency framework to help improve anti-money laundering (AML) compliance.  To support the CTA’s goal of assisting the US government in combatting the use of shell companies for money laundering, the law formally establishes the requirements and mechanisms by which domestic and foreign limited liability companies will report who their beneficial owners are. The beneficial ownership reporting regulations will go into effect on January 1, 2024.

As part of the new framework, certain entities will be required to report their beneficial owners into a private database maintained by FinCen and directly accessible to certain authorized parties such as federal law enforcement, among others. However, while the CTA is a good first step in improving US corporate transparency, the fact that the database will remain private and not directly accessible to others without submitting requests, including financial institutions, may present obstacles to those institutions’ AML and compliance programs. Additionally, questions remain as to how FinCen will decide to enforce the CTA and conduct their own enhanced due diligence given that there are millions of entities registered in the US and FinCen has its own resource limitations.

Lastly, the CTA’s definition of who constitutes a beneficial owner is broad, which may create an unnecessary burden on financial institutions and private market investors to conduct enhanced due diligence on people that would normally not be considered high-risk. While the CTA requires the disclosure of beneficial owners, its initial rollout runs the risk of being a database full of noise. Bad actors will continue to utilize straw men to conceal the true owner and purpose of a shell entity and by keeping the database private, investigators and journalists will be unable to do their magic and uncover those who intend to exploit the US corporate system. Key highlights from the interview:

  • 00:40 – How the Corporate Transparency Act (CTA) will help the federal government in its AML approach
  • 02:45 – How far the CTA goes in catching the US up to other countries in requiring the disclosure of beneficial ownership to combat the use of shell companies for money laundering purposes
  • 05:10 – The logic behind keeping the beneficial ownership database private v. granting access to the public
  • 07:36 – Potential unintended consequences of the CTA
  • 09:03 – How the CTA changes the M&A due diligence process
  • 14:20 – How Fincen could enforce the CTA

You can connect with our team of experts at Vcheck to learn more about how we support financial institutions and private market investors with enhanced due diligence vetting entities and individuals prior to a transaction.

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