Small Businesses Take Action Against New Financial Reporting Requirements

The anti-money laundering Corporate Transparency Act (CTA) was signed into law in December 2020 and will go into effect in a few months. When it does, the CTA will require certain businesses with fewer than 20 employees to disclose beneficial owners’ information to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

Specifically, the federal government will create a national registry that would require small business owners to submit detailed personal information for scrutiny. Existing rules under the Customer Due Diligence framework currently require banks to collect information to provide ownership verification. Under those rules, financial institutions also are required to monitor and report suspicious activities to FinCEN and law enforcement.

The CTA would shift that to small businesses, creating a bureaucratic nightmare for small business owners. According to the National Small Business Association (NSBA), a company’s failure to comply, whether intentionally or not, could result in up to $10,000 in fines and two years in prison — even though the CTA won’t actually reduce or combat money laundering.

In other words: if implemented, small businesses would be forced to spend millions of hours and billions of dollars on paperwork instead of creating jobs and expanding operations.

As such, NSBA filed a lawsuit questioning the CTA’s constitutionality. Specifically, NSBA alleges the law infringes on U.S. states’ sovereign powers over the formation and governance of entities and infringes upon an individual’s rights to apply for, form, own, and provide for the self-governance of entities. Read the suit here.

Even though the CTA would clearly harm small businesses without achieving its stated purpose, federal lawmakers already are considering whether to expand the CTA’s scope. As Connecting the Dots reported in September, the U.S. Senate could soon consider legislation called Establishing New Authorities for Business Laundering and Enabling Risks to Security (ENABLERS) Act, which would dramatically expand CTA reporting requirements.

U.S. House lawmakers have approved the ENABLERS Act as a rider on the annual National Defense Authorization Act (NDAA) and the U.S. Senate could consider the legislation this month.

As Bloomberg, explained, the House bill would require “professional service providers who serve as key gatekeepers to the U.S. financial system [to] adopt anti-money laundering procedures that can help detect and prevent the laundering of corrupt and other criminal funds into the United States.”

Gatekeepers would be defined broadly as any person (except government workers) who provides a corporate or legal entity with formation, trust, third-party payment, or legal or accounting services involving certain financial activities. The bill text makes clear that the rules would apply to any person involved in:

• The formation or registration of a corporation, limited liability company, trust, foundation, limited liability partnership, partnership, or other similar entity;
• The acquisition or disposition of an interest in a corporation, limited liability company, trust, foundation, limited liability partnership, partnership, or other similar entity;
• Providing a registered office, address or accommodation, correspondence or administrative address for a corporation, limited liability company, trust, foundation, limited liability partnership, partnership, or other similar entity;
• Acting as, or arranging for another person to act as, a nominee shareholder for another person;
• The managing, advising, or consulting with respect to money or other assets;
• The processing of payments;
• The provision of cash vault services;
• The wiring of money;
• The exchange of foreign currency, digital currency, or digital assets; or
• Sourcing, pooling, organization, or management of capital in association with the formation, operation, or management of, or investment in, a corporation, limited liability company, trust, foundation, limited liability partnership, partnership, or other similar entity.

These individuals would be required to collect and report beneficial ownership information, report any suspicious transactions, and establish anti-money laundering policies. In terms of enforcement, covered individuals would be subject to U.S. Department Treasury audits initially and then additional enforcement activities after a year.

Millions of business owners would be forced to comply with these new reporting requirements if the Senate acts and President Joe Biden signs the legislation into law.