New U.S. Treasury Department regulations set to take effect next year aim to keep criminals from using businesses as fronts for fraud or money-laundering.
The rules represent the realization of the Corporate Transparency Act, which was passed several years ago, which requires over 30 million U.S. small businesses and corporations to submit a Beneficial Ownership Information report identifying individuals who directly or indirectly own or control organizations.
“When conducting money laundering investigations (and some fraud investigations), many organizations fail to address the identities of businesses and other legal entities,” said Jennifer Pitt, Senior Fraud & Security Analyst at Javelin Strategy & Research. “Until the Corporate Transparency Act of 2021, small businesses were not required to provide beneficial ownership information.”
“When setting up an LLC and obtaining an employer identification number (EIN) with the IRS, some businesses would list only one person (such as an attorney) as the statutory agent,” she said. “No one was able to determine who had a vested interest or beneficial ownership in the business. Money launderers used this lack of required transparency to create LLCs with vague ownership to conduct or facilitate illicit activity.”
Threatening Viability
Though the new framework is expected to reduce the use of anonymous corporations for illegal activities, the new rules could also have substantial effects for law-abiding small business owners.
If they fail to submit their ownership data to the Treasury Department by January 1, they could face significant fines. According to FinCEN, businesses that don’t file their report on time may incur civil penalties of up to $591 per day, while owners could face criminal penalties of up to $10,000 and up to two years in prison.
These fines could quickly mount and threaten the viability of many small businesses at a time when so many are under financial pressure and scrambling for financing. According to CNBC, many organizations are unaware of the new rules—as of December 1, only roughly a third of companies have filed their reports.
Following the Developments
The Treasury Department has insisted that the regulations—and the accompanying penalties—aren’t designed to punish small businesses. FinCEN said that businesses who correct a mistake or an omission within 90 days of the January 1 deadline can avoid penalties. In addition, larger companies and financial institutions are exempt from the rule, as they already report ownership data to the government.
The new regulations have faced some legal pushback, most notably in Texas. However, in most states, small businesses will still be required to file their BOI reports in the coming weeks. While small businesses may undoubtedly experience some pain points in the months ahead, the new regulations could ultimately have a positive impact on banks.
“For financial services providers, the Corporate Transparency Act of 2021 allows them to more effectively conduct know-your-business (KYB) checks and assess the risk of banking their business customers,” Pitt said. “With the newly required information, financial services providers can conduct research on each person listed as a beneficial owner, searching sanctions and watchlists—as well as known criminal history—and understand their behaviors.”
“This business transparency does have some concerned about privacy and government overreach, as exemplified by the Texas federal court ruling,” she said. “It will be interesting to follow the developments with the Corporate Transparency Act, and Javelin will be creating a KYB scorecard that will focus on the need to understand beneficial ownership.”
